David Smith looks at the Tenant Fees Act – Part 2

This is a series of articles originally published on the Anthony Gold blog.

Tenant Fees Act- Optional and Default Fees

The Tenant Fees Act (TFA) restricts fees charged by agents and landlords to tenants. This is the second part of a series of posts on the Act, focusing on optional fees and the issue of default.

The first part of the series can be seen here

Optional Fees

The TFA expressly allows for optional fees. That is a fee which is charged to a tenant but where they have a genuine and reasonable option to avoid the fee.

References

A possible example of this might be to say to a tenant that they can obtain their own references but if they don’t want to the agent will source the reference for the tenant, for a fee.

This, of course, would rely on the tenant being able to obtain a satisfactory reference without cost and without having to enter into a contract with a third party which might be hard. However, this is an evasion commonly used in Scotland and it may also work in England. However, the guidance for landlords does suggest that this cannot be done.

In practice, it is unlikely that most agents will want to rely on a tenant provided reference and so they will use their own referencing provider. A fee can be charged to the landlord for this but not to the tenant.

Contracts with third parties

Equally, it is not permissible to require a tenant to use a specific provider or to enter into a contract with any person as a condition of the tenancy.

So it would not be possible to not charge a fee but to then require a tenant to enter into a contract with a third party referencing provider who charged a fee to the tenant to provide the landlord or agent with a reference.

Offering a choice of deposit scheme

The other example of optional fees which is sweeping the market right now is offering a tenant the choice of a conventional deposit or entering into a deposit scheme whereby the tenant pays a lesser sum to an insurer who will make good damage and rent arrears to the landlord. These are increasingly popular with agents, possibly due to the fact that some of them are paying a commission to the agent.

However, there is a risk inherent in the business model. All these schemes are making presumptions about how the property will be returned when calculating the appropriate insurance premium to charge a tenant. These assumptions may be entirely wrong and tenants who have paid an insurance premium that they know they will not be getting back may be more likely to return a property without cleaning it or with some minor damage.

However, these schemes are lawful under the TFA provided that they are offered as an option as against a permitted fee, such as a tenancy deposit.

Cleaning fees

These limits will restrict other types of fees. For example, it will not be lawful to charge a tenant for cleaning services or gardening, but these costs could be included within the rent, in which case they would be permitted. Likewise, a tenant cannot be forced to incur a fee or enter into a contract with a third party.

So it would not be lawful to require professional cleaning at the end of a tenancy, even where the tenant has a pet, as this would be requiring a tenant to enter into a contract with a third party, in this case a cleaning company.

Rent Increases

However, it is lawful to load fees into the rent. This could include increasing the rent generally so that it is higher throughout the tenancy to take into account lost fee income, provided that the market will bear the increased cost.

More interestingly, there is no reason in principle why a tenancy could not include a rent increase clause which was triggered if a particular breach occurred. So a tenancy could prohibit pets but then state that if the tenant got a pet the rent would increase by 5%. This is permitted because the permitted fees schedule expressly allows for rent increases clauses which are expressly in the tenancy and allow for rent to be changed according to the circumstances. Here the “circumstance” would be the getting of a pet.

Strangely the landlord guidance states that rent increase clauses are only allowed if they also allow for a rent reduction. This is because the paragraph allowing for rent increases states that they are allowed if the relevant tenancy agreement clause allows for “rent under the tenancy to be increased or reduced, according to the circumstances”.

This is a pretty unusual reading of the legislation. It implies that a clause must allow for both an increase and a reduction which is not exactly what the legislation states.

An alternative reading would be that clauses which allow for increases only, decreases only, or movement up or down are all permitted.

Likewise, the guidance states that it is not permitted to charge a higher rent at the start of the tenancy in the first month by way of a fee replacement. Again, the position on this is less than clear. A clause in the tenancy agreement that agrees a higher rent in the first month and then has it reduced going forward could be seen as a clause which allows for rent to be reduced according to the circumstances.

It might be harder to assert a circumstance but this would be for a Tribunal to decide in the end.

Default Fees

These are a tougher area. Paragraph 4 of the permitted fees schedule states that default fees are allowed where the tenant has lost a key or where rent is more than 14 days late. A default fee is a fixed fee payable by the tenant for a specific breach of the tenancy.

In the case of a lost key the amount payable for the default is the cost of replacement, which the landlord or agent will need to prove if asked. In the case of late rent the default is interest on the late payment, calculated daily at 3% above the Bank of England base rate.

Nothing in these limits prevents a tenant being asked to pay damages for a landlord’s reasonable losses incurred due to a breach, which are to be deducted at a later date from a tenant’s deposit or claimed via a court case. The limit only applies to fixed default fees.

This is where things become a bit odd though.

What is a  default fee?

First, there appears to actually be a degree of confusion over what a default fee actually is.

A default fee is nothing more than a pre-estimate of loss. In other words it is a figure placed on damages by contracting parties in advance in order to create certainty in a contract.

So it is really nothing more than a pre-agreed sum for damages.

This is an issue for the TFA, because paragraph 5 of the permitted fees schedule states that a “payment of damages for breach of a tenancy agreement or an agreement between a letting agent and a relevant person is a permitted payment”.

So if a default fee is nothing more than an agreed damages figure then it is presumably permissible.

Caused by confusion?

Part of the confusion may arise from a poor understanding of the sector on the part of the government. The guidance appears to draw a distinction between fees payable by the tenant which are fixed in nature and damages which are to be calculated based on a specific loss.

However, the TFA draws no such distinction and offers no definition of a “default fee” which would change the common law interpretation of a default fee as being a fixed pre-estimate of damages. So it seems that the distinction is between a clause which sets a specific sum for a specific breach (apparently not allowed) and a more general clause which states that something is prohibited and that damages will be payable for the loss (permitted).

Whether this fine distinction will be seen in the same way by the courts in another matter. In the end the difference is minimal, save that tenants will not be able to predict in advance what a specific breach will cost them.

Odd statements

Secondly, the guidance has some very odd statements around the issue fees and damages. This is part of the overall confusion the government has around this issue.

The guidance states that any clause which states that for a breach a sum is payable, even if it is not specified, is an unlawful default fee. But this cannot be the case. A clause which simply says that damages must be paid for a breach is nothing more than a clause clarifying that a tenant must pay damages, something which is unequivocally permitted.

Clauses re Legal fees

The guidance carries this misunderstanding to extremes. It actually states that a clause which requires a tenant to pay a landlord’s legal costs in the event of a breach is an unlawful default fee. The guidance also states that parties are responsible for their own legal costs with the court being free to apportion them in its own way.

This cannot be right. This is pretty clearly a damages clause. The damages being the landlord’s legal costs.

It is in this area that the guidance appears to be heading out of the realms of the legislative purpose and into aspirational attempts to alter the sector and make fundamental changes to the way that legal costs are charged in specific cases.

In fact, such clauses have been common for many years, have been approved by the most senior courts, and nothing in the passing of the TFA suggested any attempt was being made to change this structure.

We will need clarification in the Courts

In fact, some of these disputes are inevitably going to end up being settled in the courts.

As I will discuss later on in a blog on enforcement – it is likely that local authority penalties will be challenged and so will tenant attempts to reclaim monies. In these cases doubt is likely to end up being resolved in the favour of the landlord or agent.