Don’t Panic ARLA

by Ian Narbeth

16:16 PM, 26th June 2019
About 5 months ago

Don’t Panic ARLA

Make Text Bigger
Don’t Panic ARLA

The Tenant Fees Act 2019, which came into force on June 1st, is causing concern amongst landlords and agents. ARLA Propertymark, which represents residential letting agents and has over 9,000 members, appears to be panicking and giving out wrong advice. ARLA has advised its members that they may be in breach of the Act if they take any payment other than the holding deposit before the grant of a tenancy. This would include the first payment of rent and the tenancy deposit (now limited to five weeks’ rent or six weeks’ rent for annual rents exceeding £50,000).

The Act is not well drafted, but ARLA are misinterpreting paragraph 3(2) of Schedule 1 which defines a holding deposit as money “paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2” (treatment of holding deposit).

Admittedly, that wording is imprecise because the person paying the holding deposit may not have any intention that it should be dealt with in accordance with Schedule 2. However, it can readily be inferred that the payer intended the money be dealt with as a holding deposit. That being the case, the initial payment (now limited to one week’s rent) will be the “holding deposit” for the purposes of the Tenant Fees Act. The payment of rent and of the tenancy deposit will not be intended to be or be a holding deposit. It is inconceivable that a court would hold that money described as a tenancy deposit or as rent would be construed, for the purposes of the Act, as being a holding deposit, thereby breaching the one week limit.

Unfortunately ARLA have now opened a can of worms. If agents follow their advice and only take rent and the balance of the tenancy deposit after the tenancy agreement has been signed, what happens if a tenant signs the tenancy, takes the keys and then fails to pay anything?

Landlords will rightly be upset that the agent has severely prejudiced them by letting the tenant into occupation without receiving the rent and the tenancy deposit. The agent is likely to be sued.

ARLA’s advice has been picked up by other landlord websites. Landlord Law Services say “the safest course of action is to follow the ARLA advice and take no payments other than the holding deposit.” The Negotiator repeats ARLA’s advice.

In my opinion, ARLA are completely wrong and should withdraw their misguided advice.



Comments

reader

9:29 AM, 27th June 2019
About 5 months ago

These are interesting thoughts.

So could there be a suggestion that the applicant buys an option for a lease that becomes payable on exercising that option?

Ian Narbeth

10:22 AM, 28th June 2019
About 5 months ago

Reply to the comment left by at 27/06/2019 - 09:29
Dear reader
I don't follow what your comment has to do with my post. In short term resi leases, options for a lease are not used.

Chris Daniel

17:55 PM, 28th June 2019
About 5 months ago

It doesn't seem complicated to me.
Landlord takes Holding fee ( One weeks worth of rent for up to 15 days, extendable by mutual agreement )
Reference checks done, landlord happy to grant tenancy and therefore, asks prospective Tenant to pay the remainder of a months rent to add to the Holding fee with tenants agreement , that it should constitute one months rent in advance.
Prospective Tenant also pays the Deposit and all cleared funds before Tenancy agreement is signed.
Everything apart from the Holding fee, is what we currently practice.

reader

19:28 PM, 28th June 2019
About 5 months ago

I have never taken holding fees because my agents do not. However if I had control of such matters I would be keen to ensure the rental loss due the vacancy is reduced. Where it is increased due to problem with the perspective tenant why should they not pay. It is just a case of finding a method that is legal.

May be introducing an options contact you is a way forward?

Kate Mellor

18:57 PM, 30th June 2019
About 5 months ago

I think Tessa in her Landlord Law Blog has mistaken the emphasis on whose "intention" is relevant. When I read Tessa's article I followed her reasoning that the legislation referred to the LL/A's intention, but on reading your post it's clear that it is the intention the tenant (or prospective tenant) had when making the payment which is relevant.

Surely a judge would use the "reasonable person" argument to decide whether given the circumstances of the case a reasonable person would have believed the payment they were making was to be treated as a holding deposit or not? So all that is required is to be clear when asking a tenant for the funds what it is the amounts are for (and what they are NOT for).

I've never taken a holding deposit in the past, (although that may change in the very near future). Having read this information about ARLA's latest warning, I simply added an extra paragraph to the email I sent to my latest applicant as follows: "Any money paid to us in advance does not constitute a holding deposit, unless specifically agreed in writing. It is only for the purposes described and all deposit and rent money will be fully refundable should the tenancy not go ahead."

Obviously this wording may not suit everybody as you may wish to retain money in certain circumstances. I don't ever do that and I've yet to have a tenant back out at a late stage (touch wood), or I may feel differently. Basically though I didn't want to have to overthink the wording, I just wanted to protect myself from ANY possibility that a tenant could argue they reasonably believed that the money would be treated as a holding deposit of any kind. I will probably develop my processes much further in the coming months to incorporate the necessity of protecting oneself from the fallout of these new measures.

As many have said regarding the tenant fees bill the applicant has no skin in the game. They could potentially be putting in multiple applications for properties in order to ensure they have the choice should something better not come up during their house hunt. In fact an agent told me just this past week that they had a prospective tenant who wanted to call in and apply for a property. When the agent said she would need some time to prepare the paperwork, could they perhaps come in at X o'clock? The answer was, "Oh yes. That'll be fine. We're viewing another property right before that, so we can come to you after the viewing." (!)

So, as a landlord, if I'm paying for the referencing process and there's every chance the tenant isn't even serious, then it follows that I am going to have to familiarise myself fully with the intricacies of the holding deposit legislation...

Ian Narbeth

10:31 AM, 1st July 2019
About 5 months ago

Reply to the comment left by Kate Mellor at 30/06/2019 - 18:57Kate, you write:
"I simply added an extra paragraph to the email I sent to my latest applicant as follows: "Any money paid to us in advance does not constitute a holding deposit, unless specifically agreed in writing. It is only for the purposes described and all deposit and rent money will be fully refundable should the tenancy not go ahead.""
I don't understand how you are not getting into holding deposit territory. If the tenancy has completed, then the money is rent/tenancy deposit and will be retained. If, however, the tenancy does not go ahead then you are returning money paid in anticipation of the tenancy occurring. That looks very much like a holding deposit. The courts look at the substance and not the form. Simply stating it "does not constitute a holding deposit" is not decisive of the point. You should be very careful.
Furthermore, there seems little point in taking money in advance if it "will be fully refundable should the tenancy not go ahead". What if the tenant backs out at the last moment? In practice if you refund every penny it is unlikely a tenant will complain to the Council.
It's a sore point for me at the moment as a prospective tenant of mine who was due to move in today has done just that and decided to move up North. He has texted that he knows he will lose his holding deposit. Very true, but I now have to give formal notice in writing to him explaining why the deposit is being forfeited.

reader

11:09 AM, 1st July 2019
About 5 months ago

Ian does my earlier suggestion of purchasing an option for a lease, albeit under two years duration, help at all?

Ian Narbeth

11:17 AM, 1st July 2019
About 5 months ago

Reply to the comment left by at 01/07/2019 - 11:09
Please explain what you mean. Are you suggesting the tenant pays a premium to acquire an option allowing the tenant to take a lease?

reader

11:26 AM, 1st July 2019
About 5 months ago

Would the premium issues apply? Assignment etc...

Yes I am suggesting that an exclusive option to take a lease under two years might be useful. It is I suggest the sale of an exclusive right to obtain a lease subject of course to the usual background checks. It prevents outside competition for the tenant while the necessary checks are executed.

Ian Narbeth

11:37 AM, 1st July 2019
About 5 months ago

Reply to the comment left by at 01/07/2019 - 11:26
I don't think that works. It is not an option for the tenant if you can pull out. If all you are offering is to take the property off the market whilst referencing is carried out, that is precisely what happens with a holding deposit. You are not "selling" anything by granting this "option". You are simply taking a holding deposit. Or are you doing something different?

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Shelter blame B&Bs on private landlords!

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More