New Year brings “Interesting” problems and Misguided Guidance

by Ian Narbeth

8:21 AM, 4th January 2020
About 11 months ago

New Year brings “Interesting” problems and Misguided Guidance

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New Year brings “Interesting” problems and Misguided Guidance

2020 is upon us and the Government has announced it intends to remove so-called no-fault evictions and magically to make one tenancy deposit serve two masters (details awaited). Last year’s Tenant Fees Act 2019 (TFA) is the gift that keeps on taking (from landlords). Ostensibly a measure to prevent rip-off fees, it prohibits all payments to a landlord by the tenant unless the TFA specifically authorises them. It introduces potentially crippling penalties for breaches of its complex provisions (the guidance booklets run to 59 pages for landlords and 81 pages for tenants). 2020 brings a subtle problem that many landlords and letting agents may overlook and then find themselves in trouble.

If a tenant fails to pay rent on time the TFA provides that the landlord cannot charge interest for late payment ”before the end of the period of 14 days (which I will call the 14 day grace period) beginning with the date (“the due date”) on which the payment is required to be made in accordance with the tenancy agreement”. After that interest at no more than 3% pa over the Bank of England’s Base Rate may be charged. Currently Base Rate is ¾%.

The guidance booklet for landlords at page 51 gives this example.

Example

For this example, we are assuming that the Bank of England’s (BoE) base rate is 3%. As any interest charged must not exceed the BoE’s base rate +3%, the total interest that could be charged would be: (BoE base rate at 3%) +3% = 6%.

If a tenant owed the landlord or agent £500:

  1. the annual interest would be £30 (500 x 0.06 = 30)
  2. you’d divide £30 by 365 to get the daily interest: about 8p a day (30 / 365 = 0.0822)
  3. after 30 days this would be £2.47 (30 x 0.0822 = 2.465)

The guidance booklet for tenants at page 65 gives a similar example:

Example

For this example, we are assuming that the Bank of England’s (BoE) base rate is 3%. As any interest charged must not exceed the BoE’s base rate +3%. The total interest that could be charged would be: (BoE base rate at 3%) +3% = 6%.

If you owed the landlord or agent £500:

  1. the annual interest would be £80 (sic) (500 x 0.06 = 30)
  2. you’d divide £30 by 365 to get the daily interest: about 8p a day (30 / 365 = 0.08)
  3. after 30 days this would be £2.40 (30 x 0.08 = 2.4)

The reference to £80 instead of £30 is sloppy but does not come into the calculation. The guidance booklets are not binding but you will immediately notice that tenants are told the interest is seven pence less than landlords are told. This may be a source of argument. Which guidance booklet is right? Answer: neither.

In the Example the calculation in non-Leap Years is £30 divided by 365 multiplied by 6% which works out at 8.219178 pence per day (it may seem strange to use that level of precision but bear with me). 30 days’ interest is therefore £2.46575 which is less than £2.47. Nothing in the TFA allows rounding up. Councils are most unlikely to entertain a claim for repayment of less than a penny but the kicker is that there is an excess and the TFA says it is a prohibited payment. So long as a prohibited payment has not been repaid a s21 notice cannot be served. A judge might say this is too trivial to matter but who wants to be the first landlord to face this defence to a s21 application?

Continuing with the Example, what if in Leap Years we should divide by 366 instead of 365? The calculation then becomes £30 divided by 366 multiplied by 6% which works out at 8.196721 pence per day and 30 days’ interest is £2.4590164. Even if one allows rounding up to £2.46 the calculation is a whole penny less than for a 365 day year.

There is authority for saying that in Leap Years the interest calculation should be on the basis of a 365 day year. However there is contrary authority that one should work on the basis of a 366 day year. The problem for landlords and managing agents is that under the TFA it is all or nothing. If there is a prohibited payment, a s21 notice cannot be served. Who wants to be the first landlord to face this Leap Year defence to a s21 application? I can just see county court judges throwing a landlord’s case out because of a penny too much interest. The tenant might then report or threaten to report the landlord to the Council for further action under the TFA. Perhaps not meriting a £5000 fine (or £30,000 for a second offence within 5 years) but who knows?

The safe course for landlords is not to bother charging interest for late rent. Given the comparatively small sums most landlords can now claim the time and trouble of calculating and claiming from the tenant is not worth the candle. A trivial mistake may have dire consequences for landlords.


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Comments

Mick Roberts

7:19 AM, 6th January 2020
About 11 months ago

Ha ha

magically to make one tenancy deposit serve two masters

silversurfer2017

9:35 AM, 6th January 2020
About 11 months ago

Much easier to initially advertise the property at a slighty higher rent than you wanted and take no deposit

Graham Landlord

10:02 AM, 6th January 2020
About 11 months ago

Never forget. The introduction of Sec 21 was desperate move by the Government as an inducement to try and persuade property owners to let out their empty properties. The inducement was. "If you let your property out, we promise you can get YOUR property back without having prove the Tenant is a fault and the rent is what you have agreed" Cancelling Sec 21 is going to turn back the clock to 1977. Property Owners won’t risk letting out property, and risk having to go before a Judge to justify wanting it back. However, the promised change Sec 8, saying you will be easily to get you property back for rent arrears, gives Landlords the route to bump the rent up to create that situation. So expect rent control to be introduced as well. With the huge consequentially cut back in letting, there will be a huge cull in letting industry.

Ian Narbeth

12:47 PM, 6th January 2020
About 11 months ago

Reply to the comment left by Graham Landlord at 06/01/2020 - 10:02
I agree Graham. At the moment even before it is abolished s21 is being neutered by a host of pettifogging requirements. I have written about them here.
I have little confidence that the court process will be speeded up before s21 is abolished. (Note to Robert Jenrick: speeded up means getting it down from an average of 22 weeks to get to court to something like 6 to 8 weeks, not down to 21 weeks and also means speeding up enforcement.)
Like you I fear rent controls though the Tories have said they won't do that. Expect more attacks on "rogue" landlords when the predicted shortage of houses to rents materialises.

Dylan Morris

18:34 PM, 6th January 2020
About 11 months ago

Reply to the comment left by Ian Narbeth at 06/01/2020 - 12:47Can’t see that the Government would want the Court process speeded up, as this would be of little benefit to tenants and would increase homelessness.

Chris @ Possession Friend

20:01 PM, 10th January 2020
About 11 months ago

Reply to the comment left by Dylan Morris at 06/01/2020 - 18:34
Dylan, the Govt are only ' Saying they will speed up Sec 8 ' as an appeasement for abolishing Sec 21.
Not many Landlords actually believe that, or a lot of what government says !


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