Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
About 4 weeks ago 36
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.
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:
The guidance booklet for tenants at page 65 gives a similar 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:
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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