Conclusions and recommendations
Aim of the draft Bill
1.The relationship between tenants, landlords and letting agents is unusual in that letting agents see themselves as providing services to both tenants and landlords. Landlords choose letting agents and tenants choose properties. In doing so, tenants have little choice but to accept letting agents’ fees. We agree that it is right that the Government has sought to rebalance the relationship. (Paragraph 12)
2.While we acknowledge that the draft Bill would deprive letting agents of an income source, we agree that the draft Bill will increase competition in the sector by improving fee transparency, which will reduce unfair practices, and is to be welcomed given existing irregularities in the market. (Paragraph 19)
3.Given the comprehensive ban on letting fees, we conclude that the legislation will improve affordability for tenants in the private rented sector at the start of a tenancy. The draft Bill has the potential to save tenants hundreds of pounds. We acknowledge concerns that rents may increase, but believe the risk to be low as demonstrated by the recent experience in Scotland and the expected effect of improving the competitiveness of letting agents. If rents do increase to recover lost letting agent or landlord income, we believe that would be preferable for tenants as it spreads costs over a tenancy and still reduces the up-front cost of renting in the private rented sector. (Paragraph 24)
Permitted payments
4.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. (Paragraph 30)
5.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. (Paragraph 41)
6.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. (Paragraph 47)
7.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. (Paragraph 48)
8.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. (Paragraph 49)
9.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. (Paragraph 51)
10.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). (Paragraph 52)
11.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. (Paragraph 54)
12.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. (Paragraph 69)
13.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. (Paragraph 70)
14.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. (Paragraph 71)
15.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. (Paragraph 76)
16.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. (Paragraph 80)
17.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. (Paragraph 86)
18.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. (Paragraph 87)
19.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. (Paragraph 89)
Enforcement
20.We recommend that the Bill prevent landlords from recovering possession until they have repaid any prohibited fees. In doing so it would more fully mirror the approach taken in tenancy deposit legislation and would in our view be more effective. (Paragraph 98)
21.We see no reason why tenants should not be allowed to establish their entitlement in the less formal First-tier Tribunal. Enforcement against a recalcitrant landlord is likely to take time whatever the method, but we also think it likely that many landlords would pay once a tribunal had determined a tenant’s rights. We recommend the Government allows tenants to recover prohibited fees in the First-tier Tribunal, with a simple process of registration and enforcement as if payable under an order of the county court. (Paragraph 99)
22.We also recommend the Government review whether to provide the First-tier Tribunal with enforcement powers. In the longer term, it should review the routes (e.g. housing court, housing ombudsman) by which tenants can seek redress, with a view to unifying the process across the private rented sector. (Paragraph 100)
23.We do not share the Government’s confidence in its interpretation of the draft Bill, as currently drafted, that prohibited loans are repayable on demand. The Government must clarify the drafting in this respect to remove any question of doubt. (Paragraph 104)
24.We believe that funding enforcement of the Bill solely through the retention of any civil penalties is likely to be ineffective, exacerbate existing pressures and lead to further discontentment in the enforcement of legislation in the private rented sector. The funding model as it stands offers a perverse disincentive for local authorities to engage proactively and cooperatively with landlords and letting agents despite this approach being considered as more effective than a punitive system. If the funding arrangements go unchanged in the Bill, the Government will fail to achieve the aims of the legislation. (Paragraph 114)
25.We strongly urge the Government to reconsider its intention for the legislation to be solely self-funded through the retention of civil penalties. The Government must provide sufficient additional funding directly to all local authorities to enforce the legislation if it wants the Bill to achieve the Government’s aims. Failing that, the Bill should increase the maximum amount of civil penalty. (Paragraph 115)
26.The Government has told us it intends that local authorities should take into account the need to cover their costs of their enforcement functions when setting the level of a financial penalty. This is a departure from the usual principle that penalties should principally relate to the gravity of the wrongdoing. (Paragraph 121)
27.We recommend that the Bill provide that the only costs to be taken into account in fixing the level of a financial penalty are those costs directly associated with the breach for which the penalty is being imposed. Alternatively, the Government must explain in detail its reasons for departing from usual principle. (Paragraph 122)
28.There is a conflict between local authorities’ experience of recovering the costs of their investigations in the court and our interpretation of the law. We recommend that the Government review whether the law about recovery of a prosecutor’s costs of investigation is sufficiently clear, adequately understood by local authorities, and comprehensive enough to ensure that there is no disincentive to authorities pursuing wrongdoing landlords and letting agents. (Paragraph 123)
29.We would be concerned if local authorities were perceived as judge and jury, if the penalties they levy were perceived by the public as a revenue stream, or if the penalty process was inconsistent with the European Convention on Human Rights. We are pleased that the Government intends to address these concerns by providing a broader right of appeal. (Paragraph 128)
30.We recommend that the Government clearly specifies in the final Bill a broader right of appeal against financial penalties, allowing the First-tier Tribunal to decide appeals as complete re-hearings, and to take into account all matters, whether or not known to the local authority at the time of its decision. (Paragraph 129)
31.In our view, any provision which excludes the court’s usual ability to test the accuracy of what it is being told ought to be included in legislation only cautiously. We do not doubt for a moment the sincerity of local government officers, but mistakes are always possible. We recommend that the Government reconsider carefully whether the need for local authorities to be able to recover financial penalties might not adequately be met by providing in Schedule 3, paragraph 7, that a certificate of non-payment is prima facie, rather than conclusive, evidence of that fact. (Paragraph 131)
32.The success of the Lead Enforcement Authority is dependent on developing strong relationships with all local authority tiers, tenants, landlords and letting agents. Such relationships should also be cultivated at local authority level. Guidance developed by the Lead Enforcement Authority for local trading standards should strongly encourage collaborative relationships with a range of stakeholders, particularly with all local authority tiers in order to draw on local expertise. The guidance should also highlight existing powers of delegation under the Local Government Act 1972 and the Deregulation and Contracting Out Act 1994 which permit weights and measures authorities to delegate their powers under the Bill to other tiers of local government where appropriate. (Paragraph 136)
33.The Lead Enforcement Authority should be tasked, and given the funding, to launch a nationwide awareness raising campaign to promote the legislation to tenants. (Paragraph 137)
34.We note that there is crossover with the UK-wide estate agent Lead Enforcement Authority but given the territorial application of the draft Bill do not think it is appropriate to merge the two authorities. (Paragraph 138)
35.Guidance for local authorities on the exercise of their enforcement powers is key to ensuring consistent and proportionate responses to breaches of the legislation. Therefore, the production of guidance under clause 17(5) of the draft Bill should be a duty, not simply a power, on the Secretary of State or the Lead Enforcement Authority (if not the Secretary of State). We welcome the Government’s stated intention to ensure that the production of guidance, issued under clause 17(5), is a duty in the final Bill. (Paragraph 143)
36.We recommend that the lead enforcement agency be under a duty to issue the guidance referred to in clause 17(5), and that it be subject to Parliamentary scrutiny. In particular, we advocate the use of the draft negative procedure as endorsed by the House of Lords Delegated Powers and Regulatory Reform Committee. (Paragraph 146)
Impact Assessment
37.We are highly concerned that the Government did not publish an Impact Assessment when publishing the draft Bill. The Government’s insistence that there is no statutory duty to produce an Impact Assessment at this stage misses the point. The Cabinet Office guidance is clear, as is the guidance (and recently revised guidance) from the Department for Business, Energy and Industrial Strategy. The Government should publish an Impact Assessment at the same time as releasing a draft Bill. Effective Parliamentary scrutiny can benefit from scrutiny of an Impact Assessment by others. (Paragraph 153)
38.The Government should follow its existing guidance and publish an Impact Assessment at the same time as releasing a draft Bill. We expect to be provided with an Impact Assessment alongside any draft Bill which we are invited to scrutinise in future, and we ask that the Cabinet Office remind all Government Departments of the importance of issuing an Impact Assessment as part of the pre-legislative scrutiny. (Paragraph 154)
39.There are concerns, and little clear evidence, about the potential for this Bill to impact on equality of opportunity between those who do and do not share a range of characteristics protected by the Equalities Act 2010, including race, gender and age. Any impact may well be proportionate to the aim of the Bill. But we expect the Ministry to carry out and publish an assessment of this, including the evidence we received, before introducing the Bill. (Paragraph 157)
Published: 29 March 2018