Tenancy Agreements 33 days of tips – Day 19 – Penalty Clauses

Penalty clauses in your tenancy agreement

Penalty clauses are clauses which provide for the tenant to make a payment if they breach the terms of the tenancy in some way.

Great care needs to be taken if these are to be included in a tenancy agreement, to ensure that they comply with the Unfair Terms rules (explained on Days 16 and 17).

Interest on unpaid rent

The most common form of penalty clause is the one saying that the tenant must pay interest on unpaid rent. So long as the interest rate is reasonable, this is a perfectly valid clause and is found in most tenancy agreements.

However, it is often a different case with other types of penalty clause.

The contractual basis for penalty clauses

Under contract law, if someone is in breach of contract, the other party is entitled to claim compensation to put him in the position they would have been in, had the contract been carried out as intended. Therefore a penalty clause will only be fair if it aims to reimburse the landlord for genuine expenses that he has been put to because of the tenants’ failure to comply with the terms of his tenancy agreement.

What is not allowed is for the landlord or his agents to make a profit out of these charges.  For example:

Admin charges need to be fair

So if for example, the tenancy agreement allows the landlord to make a modest administration charge, say £15, to cover his costs of writing to the tenant about his rent arrears, then this may be found to be fair. Particularly if agents are instructed, as they will often charge for this work.

However if the charge was obviously more than the actual cost of the work, say £500, this would clearly be unfair under the Regulations.

There should be no double charging

This often happens where a tenancy agreement provides for interest on unpaid rent AND a penalty charge, for example of a fixed amount every month the rent is unpaid.

You can’t have both of these as they are both for the same thing.  You have to choose one or the other.  If both are set out in the tenancy agreement then it will normally be the one which comes first in the document will be valid.

Tenancy agreement clauses need to be even handed.

For example, often agreements provide for a charge to be made if a tenant fails to make an appointment. This will only be fair if the clause provides for the landlord or his agent also to be liable to the tenant if they fail to attend an appointment.

Landlords financial costs

Landlords sometimes want to claim in the tenancy agreement for any additional bank charges they may incur on their own bank overdrafts if they are unable to meet payments because the tenant has not paid his rent.

Unfortunately, however, these will not be valid.  There is a general rule that a party to a contract cannot claim for losses incurred ‘by reason of his own impecuniosity’.

If this were allowed then it would be most unfair, as two tenants both owing the same amount of money to their landlord, would have to pay different amounts, depending on whether their landlord had a bank overdraft or not.

Next time we will be looking at issues related to the use of the property.