3Permitted payments
Introduction
25.Clauses 1 and 2 of the draft Bill prohibit all payments to a landlord or a letting agent which are “a condition of the grant, renewal or continuance” of a residential tenancy.49 But clause 3 and Schedule 1 allow certain “permitted payments”,50 namely:
- rent,
- tenancy (security) deposit,
- holding deposit, and
- “default” payments.
26.In this chapter, we consider:
- the four categories of permitted payment in turn,
- whether any others should be permitted, and the Government’s power to amend the categories, and
- whether the general prohibition is wide enough to encompass fees charged at the end of a tenancy.
Rent
27.Paragraph 1 of Schedule 1 permits rent payments, but the prohibition on fees would be ineffective if landlords could disguise them in this permitted rent. We heard that a slight increase in rent, spread over time, would be preferable to up-front fees.51 But if landlords could simply add the fees to the first month’s rent, the prohibition would be worthless. To prevent this “front-loading”, paragraph 1 provides that there is a prohibited payment if a landlord charges, for one period of the tenancy, a higher rent than is charged for a later period in the first year of the tenancy.52
28.However, there is an exception. The Government told us that it wants to allow “the landlord and tenant to agree a rent decrease later in the tenancy”,53 or under a review clause in the tenancy.54 Accordingly, paragraph 1(6) provides that downward variations in rent do not create a prohibited payment where the variation of rent is “by agreement between the landlord and the tenant”, or “pursuant to a term in the tenancy which provides for variation of the rent … “. Several witnesses thought this would allow the front-loading the Government is at pains to avoid.55 Dr David Smith, Policy Director at the RLA described it as:
Clearly a mistake—where it says that you cannot charge a higher rental in the first month, and then it goes on to say that you can if it is in the tenancy agreement. Obviously, if I am going to charge a higher rental in the first month, it is going to be in my tenancy agreement. Why would it not be?56
29.The Government recognised that the provision “could, in theory, enable a landlord to set an initially high-rent … and then reduce the rent in order to disguise a fee as higher rent in the first month”, but said it didn’t want the provision “obstructing rent decreases for other reasons” and believed “most tenants [would] object to inflated up-front rent”.57
30.As Schedule 1 is currently drafted there is little to prevent a tenancy agreement providing that the rent is very high initially, with a downward variation to take effect from, for example, a month later. We therefore believe that the Government should amend Schedule 1, paragraph 1(6), to make it clear it applies only to variations in the rent which are agreed after the tenancy agreement has been entered into, or take effect under a review clause which permits upward as well as downward review. Alternatively, the Government could simply remove subparagraph (6) altogether given downward rent variations would still be permissible after 12 months.
Security deposit
31.Schedule 1, paragraph 2 provides that tenants can be required to pay up to six weeks’ worth of rent as a security deposit. The money is intended to be held as security for (a) the performance of any obligations of a tenant, or (b) the discharge of any liability of a tenant, arising under or in connection with a tenancy.58 The Government stated that capping security deposits would “ease the financial burden that tenants can face at the start of a tenancy” and may lead to reduced instances of financial difficulty.59 68% of respondents to the Government’s public consultation supported the introduction of such a cap.60
32.The level of the cap has, however, proved more contentious. The Government’s public consultation broadly found that landlords supported a cap of two months’ rent, while letting agents preferred six weeks and two thirds of tenants called for a cap of one month’s rent or less.61 Our inquiry has received a similarly mixed response to this matter.
33.Landlords and letting agents have generally welcomed the six-week cap though some industry bodies wished to see the cap raised to eight weeks. The RLA stated that while it welcomed the proposals in the draft Bill to cap the security deposit at more than four weeks, it “feel[s] that two months would be a better limit”.62 This opinion was shared by LSL Property Services plc (LSL) who argued that a security deposit capped at eight weeks’ rent “would provide flexibility to accommodate tenants that request extra services, tenants with pets or those considered to be a credit risk”.63
34.The belief that some tenants warrant the charging of a higher security deposit is widespread among landlords and letting agents, and was often used by witnesses to justify the importance of capping security deposits at no lower than six weeks’ worth of rent. David Smith-Milne, Managing Director of PlaceFirst, told us:
We, as a landlord, have a wide variety of tenants. You might think that this is a small thing, but it is actually quite an important point: tenants who tend to have pets often struggle to get properties in the private rented sector, because their landlords have a zero pet policy. We as a landlord are happy to take tenants with pets, but often pets cause quite a lot of damage in a property, and capping a deposit at six weeks’ rent in an area where the rent is not particularly high—say, £400 to £500 a month—may not necessarily cover the cost of, say, re-carpeting a house after a tenant has moved out.64
Some industry submissions suggested that reducing the cap may result in some tenants finding the private rented sector less accessible as landlords seek to minimise their risk.65
35.However, both Shelter and Citizens Advice disputed the importance of a six-week cap and called for the cap to be reduced to four weeks. They contended that decreasing security deposits to four weeks’ rent would not negatively affect landlords. Shelter found that 55% of landlords already ask for a deposit equivalent to one month’s rent, with only 6% asking for more than six weeks.66 Similarly, research by Citizens Advice found that only 8% of renters had paid a deposit of more than six weeks’ rent.67 This—the only empirical evidence we received—suggests that the need for a deposit of more than six week’s rent is not prevalent. The research conducted by Citizens Advice also found that the average deposit returned to tenants at the end of the tenancy was over 75% of the deposit amount, thereby suggesting that security deposits are unnecessarily high and “disproportionate to the risk they insure against”.68
36.Shelter also countered claims made by Dr Smith from the RLA that a cap of at least six weeks’ rent was necessitated because “if you make it a month, if the tenant does not pay the last month’s rent—which does happen too often—then there is no money available to fix any damage to the property”.69 Shelter said that in practice this does not often occur. Their research found that “only 18% of landlords had experienced this in the last five years and less than half of them had experienced a tenant doing this without asking”.70
37.From tenants’ perspective, we heard considerable evidence that capping the security deposit at six weeks’ rent does little to improve affordability in the sector. Kate Webb from Shelter told us that “the Minister has missed an opportunity to maximise affordability by allowing the deposit to be six weeks rather than four”.71 This view was shared by other tenant groups. Mette Isaken from Citizens Advice told us:
Our findings are that two out of three renters faced financial problems as a result of the upfront costs of renting: things like having to take out a loan, borrowing money from your family and friends, or cutting back on food or heating, and so on. This is a really big opportunity for the Government to reduce that significant upfront cost of a deposit, but at the moment they are really missing that opportunity.72
38.Mette Isaken suggested few renters would benefit from a cap of six weeks as polling commissioned by Citizens Advice found that only 8% of renters had paid a deposit of more than six weeks’ rent.73 The evidence of Adrian Jeakings, Chairman at the NLA, was consistent stating: “deposit figures, as far as we can see, have barely changed since 2011; they are 4.9 weeks, so capping the deposit may be solving a problem that does not exist”.74
39.It was also noted that the affordability of the six-week cap was a particular concern in high-cost rental areas such as London. The Chartered Trading Standards Institute (CTSI) stated that “in some high rental areas, such as London … a total of seven weeks’ rent for a deposit [six weeks’ rent for the security deposit plus one week’s rent for the holding deposit] will remain a prohibitive amount”.75 The London Borough of Hackney explained further:
Hackney’s 34,000 private renters will rightly question whether capping deposits at six weeks’ rent will really create a housing market that works for everyone …
Rising rent levels in Hackney have meant the average two-bedroom property now costs around £1,820 a month on the private market–over £300 a month more than it did in 2011. A tenancy deposit equivalent to six weeks’ rent would therefore be £2,500—a significant barrier to many Hackney residents on low incomes, and a sum that does not reflect the potential risks to landlords.76
40.We also heard concerns that, by setting a ceiling for security deposits, there was a risk that landlords and letting agents, who currently set their security deposit at less than six weeks’ rent, would see the provision as an invitation to increase tenancy deposits.77 Mette Isaken told us that “there is a risk that when you cap something, you will see a clustering of costs around the upper end of that cap, so you could even be increasing the average deposit as a result of capping it”.78
41.We acknowledge that setting a cap on security deposits equivalent to six weeks’ rent can pose a significant financial challenge to tenants, particularly in high-rent areas such as London. However, we recognise that there are instances when a security deposit equivalent to more than four weeks’ rent may be warranted in order to protect landlords and encourage flexibility in the market. Given that the National Landlords Association told us that the average deposit is equivalent to 4.9 weeks’ rent, the Government should reduce the cap on security deposits to the equivalent of five weeks’ rent. Capping the security deposit at five weeks’ rent will reflect landlords’ existing risk in the market, while also reducing the financial burden on tenants at the start of a tenancy and the risk of a race to the top.
Holding deposit
Retention after provision of false or misleading information
42.Paragraph 3 of Schedule 1 permits the payment of a holding deposit. It was not suggested to us that holding deposits should be prohibited, but there was considerable unease about the clarity of the circumstances in which a holding deposit must be returned. In particular, there were concerns about what would happen if a prospective tenant supplied accurate information but failed a reference check or unknowingly supplied misleading information.
43.The draft Bill would allow a landlord to keep the holding deposit if (among other things) the tenant provided “false or misleading information to the landlord” and, when deciding whether to grant the tenancy, the landlord was reasonably entitled to take into account:
a)the difference between the information provided by the tenant and the correct information, or
b)the tenant’s action in providing incorrect or misleading information.79
44.Witnesses had concerns about the vagueness of “reasonably entitled” and whether provision of false or misleading information equated to failing a reference check.
45.Shelter were concerned at suggestions80 that the provision of false or misleading information was equivalent to failing a reference check, but thought it was clearly not the meaning of the draft Bill, and that agents might, following reference checks, regard information provided in good faith as being misleading information.81 ARLA did appear to equate the provision of false or misleading information with a failed reference check, refusing to accept that their description of failed reference checks as grounds for not returning deposits was inaccurate.82 The Property Ombudsman queried whether a tenant could lose their deposit because they failed a reference check despite providing accurate information.83 Citizens Advice told us they believed the draft Bill “should not enable landlords or letting agents to retain holding deposits following a failed credit check or reference check” as it could cause severe financial hardship for tenants, and recommended “that the government clarify that failed tenant checks will not enable letting agents or landlords to retain holding deposits”.84
46.The scope for confusion was apparent when the Minister for Housing and Homelessness, Mrs Heather Wheeler MP, referred to the test as being whether the tenant had “lied” (which suggested to us some degree of intent) and told us that the only fee the landlord would be able to retain was the cost of the reference check.85 The Ministry told us they had considered a test of “knowingly” but felt it “difficult to implement in practice as the landlord is unlikely to have sufficient evidence to confidently conclude that the tenant knowingly provided the false or misleading information”.86 The Ministry said it would provide guidance about when a deposit might be retained and would “seek to encourage landlords to be flexible where a tenant fails a reference check in good faith and to only retain the costs of a reference check rather than the full amount”.87
47.We are not satisfied it is enough for the Government to “encourage” landlords to retain only the cost of a reference check. We believe allowing landlords to retain a prescribed amount in respect of reference checks where a tenant has provided false or misleading information would be clearer and enforceable.
48.A test of what is “reasonable” is hard to apply in practice, and is not a satisfactory basis for a possible criminal offence, if it can be avoided. Landlords are sometimes justified in retaining a holding deposit. As the draft Bill stands, well-advised landlords would likely be told to return the deposit in case of doubt, not least given the sums involved (from a landlord’s perspective). Although it will be rare for a landlord to have evidence that a tenant has knowingly lied, we think “knowingly provides false or misleading information” would be an easier test to understand. If there is evidence for this we see no reason why a tenant should not lose their entire holding deposit.
49.The Bill should provide that a landlord may retain the holding deposit if a tenant provides false or misleading information (without the need to show this is reasonable). However, unless the tenant did so knowingly, the landlord should only be able to retain the cost of any reference check, limited to an amount to be prescribed by the Secretary of State.
Landlord who complies with Immigration Act 2014 requirements
50.Schedule 2 of the draft Bill permits a landlord to retain a holding deposit if the landlord is prohibited from renting to that tenant by the Immigration Act 2014 (and the landlord did not know it when taking the deposit).88 In this case a landlord would be liable to a penalty of up to £3,000 for breach.89 But the landlord is excused under that Act if they followed prescribed requirements,90 which currently include obtaining from the tenant certain documents or (in some cases) obtaining a “Positive Right to Rent Notice” from the Government’s “Landlord Checking Service”.91
51.We are concerned about the lack of any defence in the draft Bill for a landlord who retains a holding deposit as a result of the Home Office wrongly notifying that a tenant had no “right to rent”. There is no reason to expose a landlord to criminal penalty for retaining a holding deposit in reliance of an erroneously negative response from the Home Office. Equally, we see no reason why a landlord should return a holding deposit if the prospective tenant fails to supply the prescribed documents.
52.We recommend that the Bill—
a)allow a landlord to retain the holding deposit where they have attempted to follow the prescribed requirements for checking whether a person has the right to rent, as under section 24(2)(a) of the Immigration Act, and not been provided by the tenant with the necessary information or documents to allow them to comply with the prescribed requirements before the deadline for agreement, and
b)provide a landlord with a defence to any financial penalty or offence (but ensure the deposit remains repayable) where they have complied with the prescribed requirements but erroneously been told by the Home Office that the tenant does not have the right to rent,
provided the landlord did not know the tenant had no right to rent when taking the deposit (as currently provided in paragraph 7(b) of Schedule 2).
Payment of holding deposit to letting agent
53.The draft Bill’s definition, in Schedule 1, paragraph 3, of a holding deposit is money paid “by or on behalf of a tenant to a landlord … with the intention that it should be dealt with by the landlord in accordance with Schedule 2”.92 This contrasts with the definition of a tenancy deposit which is “money intended to be held (by a landlord or otherwise) as security …”.93
54.The Government should amend Schedule 1, paragraph 3, and Schedule 2, to clarify that holding deposits can be paid to letting agents as well as landlords.
Default fees
55.The draft Bill does not provide a comprehensive definition of “default fee”. Schedule 1, paragraph 4(1) provides that a payment that a tenant is required to make in the event of a default by them is a permitted payment if the tenant is required by the tenancy agreement to make it in the event of such a default. Sub-paragraph (2) defines default as (a) a failure by a tenant to make a payment by the due date or (b) a breach by the tenant of a covenant or condition of the tenancy.
Abuse
56.Many witnesses predicted the exception for default fees might be used by letting agents and/or landlords to recoup costs which might otherwise amount to prohibited payments. The breadth of the definition, and range of covenants or conditions, usual or contrived, in respect of which a landlord might insert a pre-determined penalty for breach, gives rise to concerns that default fees would be open to abuse. For example, Citizens Advice stated that these provisions:
Leave the legislation open to exploitation … unfair or disproportionate fees could easily and legitimately be written into contracts … a wide-range of tenancy terms could be reworded or added to satisfy the definition of “default” fees… this would not only affect fees for replacement keys or late rent payments, but could open the door for what are effectively renewal fees, inventory charges and exit fees.94
Melanie Rees, Head of Policy at the Chartered Institute of Housing, and Councillor Robert Lawton, Portfolio Holder for Housing at Bournemouth Borough Council, raised similar concerns.95 NALS, an industry licensing scheme, acknowledged that the provisions seem “to open up the scope for charging for a wide range of services provided in the event of a ‘default’”.96
57.Mette Isaksen from Citizens Advice told us that she “would strongly suggest scrapping [default fees] altogether … there is no positive benefit from having the clause in there”.97 Kate Webb from Shelter agreed and argued that, as the draft Bill allows landlords to ask for a security deposit, equivalent to up to six weeks’ rent, landlords had a “substantial sum of money” which could “cover some of the costs that it seems default fees are proposed to address”.98
58.Nevertheless, we heard that default fees can represent a legitimate cost to landlords and letting agents. David Cox, Chief Executive of ARLA told us:
If you lock yourself out at two o’clock in the morning we will charge you a fee to come and let you in. That is a reasonable charge if somebody has to get out of bed at two o’clock in the morning, drive to the office, pick up the keys, drive to the property, let the tenant in, drive back to the office, drop the keys off, drive back home and go to bed. I would suggest that that is a reasonable fee that should be allowed. Think about the tenant; if those sorts of fees do get banned, will the agent do all of that or will they just say, “My office hours are 9.00 to 5.00; please come in during office hours”? Where does the person sleep overnight if they are locked out of their property?99
Definition
59.Some witnesses called for the Bill to provide an exhaustive list of permitted default fees. According to LSL, “without a definitive list, there is a risk of opacity and misunderstanding. This may also become an area of speculative litigation”.100
60.The Minister told us that a “comprehensive list of the different types of permitted default fees is very problematic and may lead to difficulties in the future, owing to the list being incomplete or insufficient”.101 She went on to say that the Government intends to issue non-statutory guidance detailing what would qualify as a default fee and what level would be appropriate for that type of fee.102 Becky Perks, Ministry of Housing, Communities and Local Government (MHCLG) official, added that “the agent or landlord would need to be clear with the tenant at the time the tenancy agreement is agreed as to whether or not the tenant would be liable for paying that fee and what the amount is that would be charged”.103
Reasonableness of amount
61.Witnesses questioned whether the draft Bill protected tenants from unreasonably high default fees.104 The Government’s assumption that tenants will be able to challenge the type and level of default fees at the time of signing the tenancy agreement was disputed by Citizens Advice who contended that “tenants often have weak bargaining power … this makes it difficult to challenge or refuse unreasonable conditions and fees within tenancy contracts”.105
62.This is of particular concern given some evidence we received from the lettings industry suggesting that letting agents may seek to charge disproportionate default fees in order to recoup revenue lost as a result of the legislation. Northwood considered that “fees for any breach of the tenancy agreement, such as late payment, will increase and be applied more rigorously”.106 Regal Lettings supported this view by stating that “the fees that agencies would be allowed to charge tenants, i.e. default fees, would be increased severely as the loss is attempted to be made up elsewhere”.107
63.The Government stated that the approach in the draft Bill “achieves the best balance between protecting the tenant from unfair charges whilst enabling the landlords to recover their costs from tenants when the tenant is at fault”.
Existing law on reasonableness
64.Witnesses told us how the existing law might be relevant to the reasonableness of default fees. For example, Shelter considered default fees to be penalty clauses, unenforceable as a matter of common law if they “exceed a party’s actual loss or reasonable administrative expenses and there is no equality of bargaining power between the parties”.108
65.David Cox of ARLA told us that clauses in tenancy agreements “are already covered by not one but five different sets of law”.109 The Consumer Rights Act 2015 has reduced the volume of legislation, and the guidance produced by the Competition and Markets Authority in 2014 is not a source of “law”,110 but Mr Cox’s evidence does illustrate the wealth of relevant legislation there has been.111 He concluded, “there is not a lack of law in this area. Do we really need to create a sixth piece of legislation governing the same issue?”.
66.The Consumer Rights Act 2015 is particularly significant, providing that an unfair term of a consumer contact is not binding on the consumer.112 A term is unfair if, “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer”.113 The court takes into account the nature of the contract’s subject matter and the circumstances existing when the term was agreed and all other terms of the contract on which it depends. Consumers can complain to (among others) trading standards114 or the Consumers’ Association, who may then apply to court for an injunction in relation to the term.115 But Citizens Advice cautioned that:
It is untested whether amateur landlords fall within the definition of a ‘trader’, meaning tenants not renting from institutional landlords cannot rely on these protections … Once in a contract, tenants may avoid challenging fees if they think it will result in a retaliatory eviction. Tenants have no defence against a Section 21 ‘no fault’ eviction notice if the landlord follows the correct procedure.116
67.On the latter point, the Deregulation Act 2015 provides tenants with some protection from retaliatory eviction after they complain about the condition of housing.117
68.What is clear is that resolving whether a term is fair and reasonable may be a complicated task, even for lawyers. Expecting tenants to take court proceedings may be unrealistic.118 Help is available from, for example, trading standards departments or the Consumer Association,119 but it is not obvious that this is well-known to tenants, and we have heard that trading standards departments are financially stretched.120
69.Default fees can constitute a legitimate cost to businesses and should remain a permitted payment. However, we acknowledge concerns that the provisions as drafted are open to abuse. Existing legislation should guard against unfair fees. But we believe it might not be sufficiently publicised to protect tenants against the likely increase in prevalence and level of default fees when other fees are prohibited.
70.We recommend that the Government issue clear guidance to tenants, landlords and letting agents on what constitutes a reasonable default fee and, guidance to tenants about how to challenge the inclusion of such fees in tenancy contracts. The reasonableness of both the type and the amount of fee should be considered. The Government’s intention to issue such guidance should be communicated during the Second Reading debate.
71.Furthermore, the Government should consider:
a)giving trading standards the express power, and resources, to enforce the reasonableness of default fees, without reliance on the Consumer Rights Act 2015, and
b)establishing an anti-retaliation provision similar to that relating to complaints about the condition of housing.
Whether other fees should be permitted
Change of “sharer”
72.A lack of clarity regarding whether landlords and letting agents would be able to charge a fee for a change of “sharer” in a joint tenancy emerged in the evidence. While some letting agents were sure that the draft Bill would prohibit such charges,121 ARLA suggested that the industry was at risk of a “PPI moment”, presumably meaning there was a risk agents would believe the Bill did not prohibit such charges, and could face large-scale claims in the future.122
73.We heard from the industry that a fee should be permitted for a change of sharer. ARLA expressed concern that if a fee was not permitted, this “service” may not be provided, thereby restricting the ability of tenants to move and reducing choice.123 NALS added that:
It should be borne in mind that changes of sharers are a tenant instigated change to the existing tenancy agreement … The bill should allow for a payment to be made to the agent by the tenant in respect of the costs associated with this change. If the landlord has to bear the full costs, they may be much less likely to agree to a tenant instigated change in the tenancy agreement.124
74.The Minister told us that the Government acknowledge that “this is an area where further clarity is needed”.125 She continued that the Government “intend to permit a charge for a variance on the tenancy and charges related to a change of sharer, where these are requested by the tenant”.126
75.Permitting a change of sharer could (provided that the provision in the Bill is clearly drafted) avoid the need for landlords to rely on other legal rights. Sharers in a property will often be joint tenants, therefore jointly responsible127 for the obligations in the tenancy, including paying the rent. If the landlord refuses permission for a change of sharer, the remaining sharers will remain liable for the whole of the rent (it is not apportioned). If they do not meet that payment the landlord could take action against them, or indeed the departed sharer who also remains liable for the whole rent, to recover the payment. On the other hand, the remaining tenants might decide to give notice themselves (if they can), leaving the landlord with an empty property. Permitting a change of sharer avoids these issues arising. A change of sharer will involve the landlord in carrying out fresh reference and immigration checks for which a landlord may wish to charge.
76.We welcome the Government’s intention to clarify the legislation and to permit charges related to a change of sharer where these are requested by the tenant.
“Green deal” loans
77.Although the Government stopped funding the Green Deal128 in 2015, loans secured before it was closed are still being repaid as per the original agreements. Some letting agents raised concerns that the draft Bill may not permit the repayment of Green Deal loans as tenants must contractually agree to repay such loans to an approved Green Deal provider if they are the bill payer. David Cox from ARLA told us that an exemption for Green Deal charges “is particularly important when we factor in that the energy efficiency minimum standards come into force in April this year and landlords will have taken Green Deal finance out on properties”.
78.The draft Bill makes no reference to Green Deal plans as “permitted payments”, so might be thought to prohibit them. Under the Green Deal legislation, landlords must ensure that a tenancy129 agreement includes an acknowledgement by the tenant130 that the bill payer at the property is liable to make payments under the Green Deal plan.131 It might be argued that this acknowledgment in the agreement is a requirement that a tenant pay, which would breach the Bill as drafted. However, it is the Green Deal legislation, not the acknowledgment, that imposes liability on the current bill payer at the property.132 We therefore do not believe the draft Bill would be inconsistent with the Green Deal legislation or its requirement that the incoming tenant acknowledge liability.
79.Nevertheless, during the course of our inquiry, the Government stated its intentions to permit the repayment of Green Deal loans:
We now propose to exempt Green Deal payments from the ban. This mirrors the approach that Scotland has taken. This would permit the requirement on tenants to pay back Green Deal loans. Landlords must make prospective new tenants aware of any obligation to pay back a Green Deal loan. Thus, new tenants would be able to make an informed decision before entering into the tenancy. We believe that this is the fairest and most pragmatic option for both landlords and tenants.
80.While we conclude that the draft Bill does not disrupt existing Green Deal loan repayments, we support the Government’s intentions to clarify that such loans—contractually agreed as part of the former Government-sponsored Green Deal—are exempt, given concerns raised by the industry.
Alternatives to security deposits
81.Shelter hoped the introduction of a cap on security deposits would “lead to a wider conversation on deposit reform”.133 While our inquiry has not considered security deposit reform in detail, we heard about innovation in the private rented sector throughout our inquiry and from a range of stakeholders.134 Alternatives to traditional security deposits were mooted, from paying deposits in instalments and deposit passporting to investing deposits in Help to Buy ISAs and insurance-style products.135
82.It was often suggested that it would be a missed opportunity if the legislation proved unable to accommodate such developments. Dlighted, a deposit replacement insurance scheme, said that “the most obvious and powerful reform the Government could make … is to facilitate and encourage the industry to move towards deposit free renting”.136 LSL stated that such schemes “increase consumer choice and assist those who might otherwise struggle to finance a security deposit … the schemes remove the largest financial barrier left to renting a property”.137
83.Nonetheless, the affordability of some of the schemes has been questioned. Northwood stated that some letting agents are planning to charge a monthly fee as an optional alternative to a security deposit but as the fee is charged for the duration of a tenancy, this may result in the tenant paying more than a security deposit over a tenancy, and unlike a traditional deposit, the money will not be refunded at the end of a tenancy.138
84.Notwithstanding the potential risks and benefits of alternatives to traditional security deposits, the RLA raised concerns that such innovation may not be permitted as such products might contravene the legislation.139 Their concern may be justified. Payments and loans for such deposit replacement schemes, if a condition of the grant, renewal or continuance of a tenancy, are prohibited in the draft Bill. But they would probably not be prohibited were a landlord to offer to accept (at the tenant’s option) a deposit replacement in lieu of a (permitted) deposit.
85.In any event, the draft Bill provides the Secretary of State with a “Henry VIII” power to amend, by regulations subject to the affirmative resolution procedure, the list of permitted payments in Schedule 1. As noted by the House of Lords Delegated Powers and Regulatory Reform Committee, “this is a significant power because the list of permitted payments in Schedule 1 is central to the Bill’s purpose”.140 Additionally, we note that there are no limits on the type of payment which may be added to or removed from the list or the nature of modifications which may be made. Whilst the Government said that it did not intend, at the moment, to make any changes to permitted payments, it justified the power partly on the basis that it would enable the Secretary of State to respond to “technological innovation”.141
86.We welcome innovation in the private rented sector. However, we note that there are opportunities and risks to alternatives to a traditional security deposit which have been insufficiently subject to independent review. The draft Bill provides that the Secretary of State has a wide power to amend the list of permitted payments in Schedule 1, using regulations subject to the affirmative procedure. We believe that this power will enable the Government to respond appropriately to innovation in the private rented sector, when it has been shown to be beneficial to tenants.
87.The Government should encourage innovation in the deposit free renting sector by assessing the merits of alternatives to traditional security deposits and reporting their findings to the Committee. If alternative solutions are found to be affordable for all tenants, the Secretary of State should use the power provided for in the proposed legislation to amend the permitted payment list accordingly.
Fees at the end of the tenancy (“exit fees”)
88.Citizens Advice thought it unclear whether exit fees would be prohibited by clauses 1 and 2 as payments required as a condition of the grant, renewal or continuance of a tenancy.142 Shelter raised concerns that this could permit a charge for a “wide range of services from cleaning to check-out to a generic exit fee”.143 The Government’s view is that the ban covers all non-exempted payments required in a tenancy agreement, and this would include any exit fees, but is considering other drafting approaches to clarify this.144
89.There is a lack of clarity in the draft Bill about whether fees can be charged at the end of a tenancy agreement. If the Bill did permit exit fees, it would undermine the Government’s policy objectives. We therefore welcome the Government’s stated intention to clarify that fees on exiting a contract are prohibited under the Bill as they are a condition of granting or renewing a tenancy.
49 Cll 1(1) and 2(1)
50 Defined in Schedule 1
52 Schedule 1, para 1, subparas (2) to (8)
56 Q137 [Dr Smith]. See also Private Rented Sector Professionals Ltd, DTF0009; Generation Rent, DTF0055 and Q108
58 Schedule 1, Paragraph 2
65 National Landlords Association, DTF0030; Jeremy Clarke, DTF0005; Residential Landlords Association, DTF0023
79 Schedule 2, para 8.
80 By ARLA: we presume Shelter were referring to “Tenant Fees Bill at a glance” (accessed 8 March 2018)
84 Citizens Advice, DTF0042. See also National Approved Letting Scheme, DTF0 050; Q198; Q199; OpenRent, DTF0 057.
88 Schedule 2, para 7
89 Immigration Act 2014, ss 22–23
90 Immigration Act 2014, s 24(2)(a)
91 Immigration (Residential Accommodation) (Prescribed Requirements and Codes of Practice) Order (SI 2014 No 2874), article 4(b)
92 Schedule 1, para 3(2); emphasis added.
93 Schedule 1, para 2(2); emphasis added.
104 Q111; Q262. See also: Citizens Advice, DTF0058; Shelter, DTF0047; Citizens Advice, DTF0042; and joint letter from Citizens Advice, Shelter and Generation Rent.
108 Shelter, DTF0047. Applying the Supreme Court’s decision of Cavendish Square Holding BV v Makdessi ([2015] UKSC 67) we understand the questions would be whether the landlord has a legitimate interest in enforcing the charge, and whether the fee was proportionate to that legitimate interest.
110 Competition and Markets Authority, Guidance for letting professionals on consumer protection law (June 2014); see especially paragraph 2.7
111 A few limited provisions of the Unfair Contract Terms Act 1977 remain (section 3, for example). The Consumer Protection from Unfair Trading Regulations 2008, which remain substantially in force, prohibit certain unfair commercial practices, where they contravene requirements of professional diligence and materially distort or are likely to materially distort the economic behaviour of the average consumer with regard to the product. Breach is a criminal offence and may lead to a fine or imprisonment. Further protections were then added under the Consumer Rights Act 2015.
112 Section 62 of the 2015 Act
113 Section 62(4)
114 I.e., the local weights and measures authority
115 Section 70 and Schedule 3 of the 2015 Act
117 Deregulation Act 2015, s 33
118 See para 91, below.
119 See para 66
120 See paras 106ff, below.
127 In legal terms, “jointly and severally”.
128 The Green Deal was an energy saving scheme launched by the coalition Government to incentivise and help fund energy efficiency and renewable energy technologies for homes. Loans were offered for home efficiency improvements that were paid back over time. The Government stopped funding the Green Deal in 2015 citing low uptake.
129 Or licence
130 Or licensee
131 Energy Act 2011, s 14(2). The required form is currently set out in the Green Deal (Acknowledgment) Regulations 2012 (SI 2012 No 1661).
132 Energy Act 2011, s 1(6)
134 We note that Generation Rent published a report, Rethinking tenancy deposits, on this topic on 26 March 2018.
135 London Borough of Hackney, DTF0031; Shelter, DTF0047; Dlighted, DTF0053; Residential Landlords Association, DTF0023
140 Correspondence, Delegated Powers and Regulatory Reform Committee, House of Lords
Published: 29 March 2018