by Ian Narbeth
17:27 PM, 17th May 2019, About 2 years ago 28
Landlords be warned – From 1st June 2019 if you take a holding deposit (which must not exceed one week’s rent) ahead of a new letting, the Tenant Fees Act 2019 says it must be repaid if you go ahead with the tenancy agreement. Yes, if you complete the tenancy, you are supposed to repay the holding deposit. That obligation may not apply if, as it almost always the case, the holding deposit is set off against the tenancy deposit or the first instalment of rent due on completion. The problem is that the duty to repay is only removed if the holding deposit is applied towards the tenancy deposit or first instalment of rent “with the consent of the person by whom it was paid”.
Consider the following scenario. A prospective tenant pays a holding deposit of £200 in respect of a proposed rental at £1,000 per month. The tenancy is to be completed ten days later. The landlord sends the tenant a completion statement showing £1000 tenancy deposit and £1000 for the first month’s rent with £200 set off against the total. The tenant pays £1800 and moves in.
Unless the tenant consents to the £200 being applied towards the rent deposit, the legal position is that the landlord is in breach of the Act. He should have repaid the £200 and the tenant should have paid the full £2000. Most reasonable people would say that is pointless. However, if the landlord does not obtain the tenant’s consent the payment of the holding deposit has become a prohibited payment. The landlord becomes liable to a fine of up to £5,000 for a first breach and up to £30,000 for a second offence within 5 years.
Local authorities are tasked with pursuing landlords. Now, it might be that in these circumstances a local authority will not be interested. They really should have better things to do! However, on a plain reading of the Act, the words “with the consent of the person by whom it was paid” must mean that if the consent is not obtained the payment is a prohibited payment. Paragraph 6 of Schedule 2 to the Act could quite easily have omitted the words in quotation marks. The result would have been what most reasonable people would consider fair, namely that the holding deposit has been applied towards the first rent or the tenancy deposit. However, Parliament in its wisdom, has decreed that unless the tenant has consented to this the landlord is in breach. It might be argued the tenant has impliedly consented to the holding deposit being applied. However, if that is the case, the words “with the consent of the person by whom it was paid” are superfluous. If the holding deposit is applied towards the first payment of rent or towards the tenancy deposit then, by definition, accounts between the landlord and the tenant are square and the landlord has not retained the holding deposit. In what circumstances would the implied consent not apply?
In the vast majority of cases, tenants will not know there is an issue. They have suffered no injustice if they are given credit for the holding deposit. However, if the landlord and tenant later fall out, the tenant can bring up the prohibited payment to threaten with legal action a landlord who is trying to recover arrears of rent or possession for other breaches of covenant. He can ambush the landlord in any application under Section 21 (so-called no fault eviction) until the “prohibited payment” is repaid. That leads to the absurdity that as soon as the landlord repays the prohibited payment, the tenant owes the landlord precisely the same amount in rent arrears. The Tenant Fees Act 2019 piles absurdity upon absurdity.
What can landlords do? When taking a holding deposit, get the prospective tenant to sign an acknowledgement that if the tenancy goes ahead the holding deposit can be applied towards rent or the tenancy deposit. Unless landlords go through this bureaucratic nonsense they will fall into the elephant trap that has been set – wittingly or unwittingly I do not know – by this ill-thought out piece of legislation.
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