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Landlords are you Ready for the Fees Ban? Here’s What you Need to Know…

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Unless you’ve been hiding from every incarnation of the news ever (I wouldn’t blame you). Then you’ve heard about the Tenant Fees Bill.

The bill came into effect on the 1st June 2019 for all tenancies signed on or after that date.

This new law is attempting to drive down the cost of renting in the private rental sector.

The Tenant Fees Bill is good or bad depending on who’s article you read. But one thing is certain, things have changed for landlords, letting agents and tenants…

Getting your head around new legislation is hard. So, we’ve done the legwork to bring you everything you need to know about the Tenant Fees Bill.

Use the table of contents below to skip to the part you’re interested in or read the whole thing to become an expert.

What is the Tenant Fees Bill?

This is new legislation that aims to make renting fairer for tenants. It applies to all new tenancies formed on or after 1st June 2019.

The Bill predominantly deals with fees charged at the start of a tenancy. But it also covers deposits, renewal fees and check-out fees.

It’s not all bad news though. Landlords can still charge fees where they’ve incurred costs because of the tenant’s actions. These kinds of charges must now have supporting evidence, like invoices.

The government held a consultation on the Fees Bill before the legislation was drafted. The consultation included landlords, tenants and letting agents. Agencies that support these groups like the NLA, RLA and Shelter were also involved.

Why do landlords need to know about the Tenant Fees Bill?

Well, until now, it’s been straightforward. Landlords and letting agents can charge fees to cover the administration costs of the tenancy. These usually come in the form of holding deposits, check-in fees, inventory fees, renewal fees, etc.

Landlords can also make deposit deductions if there is a breach of the tenancy agreement.

Now the Tenant Fees Bill is in effect some of these fees are illegal and others are capped. If you make an illegal charge against the tenant they’ll be able to claim the money back. As a result you could end up being fined or prosecuted under the new rules. The law applies to landlords as well as letting agents, which is why it pays to understand these changes.

Why are tenant fees seen as unfair?

There’s plenty of research to show that tenants often end up paying figures in the thousands to set up a tenancy.

Tenancies that are established via a letting agent usually cost more than those established by a private landlord. Letting agents charge holding deposits, inventory checking fees, administration fees for drawing up a contract, renewal fees, checkout fees, and usually charge per tenant. Landlords tend to charge for referencing and credit checks, and they typically charge less than letting agents.

Agencies that protect the rights of tenants, like Generation Rent, have called for more transparent renting terms. They feel the decision to manage a let via an agent falls to the landlord, the tenant has no choice but to pay these fees if they want to rent the property. Many tenants find that the fees are not advertised up-front, meaning nasty surprises when it comes to starting the tenancy. Agencies often point out that tenants are increasingly taking loans or using credit cards to cover the up-front cost. This makes them a financial risk to the landlord right from the offset of the tenancy.

The unfairness doesn’t just impact the tenant. There’s also an element of unfairness to landlords, with some being double charged. (Sometimes the landlord and the tenant are charged for the same service by a letting agent). It’s safe to say that it’s letting agents who will suffer most as a result of the Bill.

It’s not just the start of tenancy fees we’re talking about here though. Deductions from deposits have also been scrutinised and at times found wanting. That’s not to say deposit deductions are unfair. But there are plenty of horror stories highlighting that deposit abuse is prevalent among rogue landlords.

The tenant rights groups feel that abolishing charges would be fairer for tenants. Many landlords and letting agents feel that this will increase rents in the short term. (Covering any shortfall in revenue lost as a result of the fees ban). While this is a legitimate concern, the government’s response is: “We’ve done our best to close any glaring loopholes.”

It’s clear that there are pros and cons for all involved. But we’re not here to discuss the fairness of the Bill. That will come down to how the Bill impacts you. So let’s look at that in more detail.

What does the Tenant Fees Bill Change About the Fees I can Charge?

Now you know what we’re dealing with, let’s get down to the nuts and bolts of the Tenant Fees Bill.

Fees for Starting a Tenancy

The Tenant Fees Bill makes administration fees illegal. Once the Bill passes you won’t be able to charge for things like inventory checks, credit checks or references. This also applies to administration fees during the tenancy, so you can no longer charge for a tenancy renewal for instance.

There are exceptions, though these come with more rules.

You can charge a tenant if they ask you to make a change to the tenancy. For instance, adding or changing a tenant or ending the rental agreement early. This type of charge is capped at £50 or the amount of reasonable costs if they are higher. If you wish to charge more than £50 you need to provide evidence that you incurred higher costs.

You can’t charge a fee for renewing a tenancy or changing the length of a tenancy.

Holding Deposit

Holding deposits got a shake up too. This isn’t surprising given that letting agents used to charge upwards of £200 for this service. The holding deposit is usually refundable, but some letting agents traditionally operated on a non refundable basis. Sometimes the holding deposit didn’t even guarantee the property would be held. Holding deposits are now capped at a maximum of one week’s rent. They are also subject to rules that the deposit should be repaid if the tenancy does not go ahead.

In the Bill the stipulations set forward for holding deposits are:

  • When a holding deposit is paid the landlord should stop advertising the property
  • Landlords and agents are only permitted to take one holding deposit per property at any one time. You can’t take multiple holding deposits for the same property.
  • When a holding deposit is taken the landlord has 14 days to decide if he wants to accept the tenant’s application. This can be changed if the landlord and tenant agree in writing.
  • You should provide the tenant with clear information about the amount of the holding deposit, agreed rent, specify a date for reaching a rental agreement and any other material terms. This will be important should you decline to return the holding deposit to the tenant.
  • If the tenancy does not go ahead because the landlord has rejected the tenant, or because a rent agreement hasn’t been reached by the stipulated deadline, then the deposit must be repaid within 7 days.
  • If the tenancy does go ahead the holding deposit must be returned in full within 7 days of the start of the agreement. (Unless it is used as part payment against the deposit or rent). 

Under the conditions of the bill the holding deposit can only be retained in the following circumstances:

  • The tenant supplies false or misleading information 
  • A right to rent check is failed
  • A tenant withdraws from the property (unless this was as a result of the landlord or agent breaching the ban or behaving in such a way that it would be unreasonable to expect the tenant to enter into an agreement).
  • The landlord or letting agent take all reasonable steps to form a letting agreement, but the tenant does not.

If you are retaining a deposit you must let the tenant know in writing within 7 days of deciding not to rent to them if this is before the agreed deadline, or within 7 days of the deadline passing. If you don’t stick to this 7 day rule you cannot retain the holding deposit.

If you unlawfully retain a holding deposit the tenant can try to recover it via Trading Standards or First-Tier Tribunal. If you are deemed to have unlawfully retained the deposit the penalty is a civil offence and a fine of up to £5000.

Security Deposit

Tenants usually pay a security deposit at the start of the tenancy to cover any damage caused to the property during their tenure. The Tenants Fee Bill caps the deposit at 5 week’s rent where the annual rent is less than £50,000 or 6 week’s rent where the annual rent is more than £50,000.

For joint tenancies you can’t ask each individual tenant to pay a deposit. If the rent liability is split between tenants, you can still only ask for 5 weeks if the total annual rent payable is under £50,000 or 6 weeks if the total annual rent is over £50,000. Joint tenants can split the deposit if they wish

Deposits for assured shorthold tenancies are still required to be paid into a deposit protection scheme. This is because the deposit protection service provides dispute resolution. Preventing rogue landlords from charging £150 to clean and replace a light bulb for instance.

There are some landlords circumventing the security deposit scheme altogether. Using innovative things like great landlord tenant relationships and insurance schemes. These mean the tenant doesn’t start the tenancy on a financial back foot. But good tenants are the key to this kind of approach.

Rent Increases

The Bill bans raising the rent during the first part of the tenancy and dropping it down after. This is to prevent landlords offsetting any increase in agent fees via the rent.

You can increase the rent after a tenancy has begun, but only if you’ve included a rent review clause in the tenancy agreement provided the rent review clause permits both a reduction or an increase dependent on circumstances.

You can also increase the rent annually by way of a Section 13 notice, if the tenant deems the increase excessive they can apply to the First-tier Tribunal to determine whether the increase is reasonable.

What can Landlords Charge fees for Now the Bill has Passed?

You are still entitled to charge for reasonable fees, though a lot of the acceptable fees now come with additional guidelines, many of which have already been covered in this article. 

According to the new legislation, the fees listed below are the only ones considered legitimate. Any fees charged outside of these are considered prohibited payments.

  • Refundable holding deposits (capped at 1 week’s rent)
  • Rent
  • Security deposits
  • charges for changing the tenancy including the tenant wanting to terminate the agreement early – capped at £50
  • Charges for late rent payments or charges for replacing a lost key or security device
  • Utilities where applicable

Remember, some of these fees have additional restrictions under the new legislation.

You can still charge a tenant for not paying rent provided that a clause covering this has been written into the tenancy agreement and the rent is more than 14 days overdue.

You should not charge the tenant more than 3% of the Bank of England’s annual percentage rate for each day their rent payment is overdue. If you do it’s considered a prohibited payment.

Charges for missing keys and security devices should not exceed the reasonable costs incurred to replace them.

The act does not prevent you from recovering damages arising from a breach of contract via the normal channels of deposit deduction or court action.

What happens if I charge an illegal fee?

Well for a start your tenants will be able to claim from you any money they shouldn’t have paid via the First-tier tribunal. If you charge illegal fees you won’t be allowed to serve a Section 21 notice until they’ve been paid. 

Trading Standards will be enforcing the legislation, if you’ve breached the legislation it is considered a civil offence that comes with a fine of up to up to £5,000 for a first offence. If you charge another illegal fee within 5 years of the initial fine it’s considered a criminal offence and comes with fines of up to £30,000. You may also be subject to a banning order under section 14 of the Housing Act 2016.

Each time you request a prohibited payment it is considered a breach of the legislation, so you could face multiple offences for multiple prohibited payments.

While Trading Standards will be enforcing the Bill, letting agents will also face tighter regulations. Letting agents used to be able to operate without any qualifications or professional oversight. The Bill doesn’t introduce these tighter rules for letting agents. It’s something the government claims will come shortly after the Bill.

The new rules for letting agents mean that they’ll now have to meet minimum training requirements. They may also have to abide by an industry code of conduct and show they are compliant with the new rules.

This is good news for landlords who use letting agents to manage their properties. It affords some level of confidence that the letting agent is acting within the law.

How to Minimise the Risk of Taking a Prohibited Payment

The new legislation is quite in depth, with so many new rules around each type of payment it’s natural to be worried about making a mistake. To ensure you are always protected, you should consider building an audit trail of  all communications with your tenants. You should keep evidence of any payments you’ve asked a tenant to make including:

  • Tenancy or any other signed agreements
  • All relevant paperwork pertaining to the tenancy 
  • Receipts and invoices
  • Bank Statements
  • All correspondence from the tenant
  • Any notes you made during a meeting with the tenant

If you’re using a property management software like Landlord Vision all these details can be saved and retained in the software, making a secure and trustworthy audit trail.

You can rest assured that there is a margin of error. If you ask for or take a prohibited payment you should rescind the ask or return the payment as soon as possible. If you don’t return the payment within 28 days, regardless of your intention to return it, you’ll be deemed to have requested or taken a prohibited payment.

Does the Tenant Ban Act apply to all types of tenancies?

The Ban applies to all assured shorthold tenancies, student tenancies and holders of licences to occupy. 

If you’ve charged fees on previous tenancies that were formed before 1st July 2019 you are not expected to pay these back.

This legislation applies to all new AST’s and Licences formed once the law is in effect, and any AST’s or Licences that renew after that date.

 

You can find the full government guidelines for landlords here.

 

(Article last updated 28/06/19)

What do you think of the Tenant Fees Bill? Good, bad or ugly? Have your say in the comments.

 

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