The flawed Call for Evidence over Tenancy Deposits

by Ian Narbeth

13:46 PM, 8th July 2019
About 2 weeks ago

The flawed Call for Evidence over Tenancy Deposits

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The flawed Call for Evidence over Tenancy Deposits

The Government (or at least the Ministry for Housing Communities and Local Government (MHCLG))  has got it into its head to interfere with tenancy deposits to make it easier for tenants to move house. They have issued a Call for Evidence (CfE), click here, asking for information. Some tenants struggle to find a second deposit whilst their current deposit is held. As I shall explain the Government’s exercise is based on fallacious reasoning.

Although the Tenant Fees Act 2019, which abolished upfront and exit fees and was supposed to save tenants money, has only been in force for a few weeks and has not had time to bed in, the Government is calling for evidence about “passporting” deposits.

For those who can’t find this word in the dictionary, it apparently means transferring some or all of a deposit from the current landlord to the new landlord before the current tenancy has ended. Call me a cynic, but the fact that MHCLG are calling for evidence probably means the decision has already been taken and the consultation is just for show. Someone at MHCLG must have heard the word “passporting” in the context of Brexit and of financial institutions being able to continue to operate in the EU after the UK departs. It is misconceived to apply something vaguely similar to tenancy deposits.

I would urge landlords to complete the CfE and to contact their MPs to protest about the proposed changes. We need to explain that a tenancy deposit is security for obligations under a tenancy. That means it needs to be held until it is clear that there is no further liability under the tenancy or what the liability is. Until the tenancy ends and the tenant returns the keys the landlord cannot quantify a claim. Releasing part of a deposit early means that landlords will, and if they are prudent must, act as if they are only entitled to the part retained.

The CfE cites statistics from the Deposit Protection Service (DPS) “that, on average, tenants receive 77% of their deposit back, and 51% of tenants have their deposit returned in full.” It then commits a serious logical fallacy by arguing that, because most tenants will therefore eventually be entitled to the majority, or all of their original deposit that “some of this amount could be available for passporting to a new tenancy”. THERE IS NO “this amount”. It is an average figure across millions of tenancies. The argument is literally nonsense. Every individual landlord has to look at his own situation. It makes no difference to any particular landlord whether 77%, 51%, 29% or any other percentage of tenants get some or all of their deposits back. The correct question each landlord asks himself is: “Will this deposit be sufficient to meet a potential claim under this particular tenancy?”

Prudent landlords will not release the deposit until vacant possession is given. The discussion about percentages is irrelevant. Because 51% of tenants have their deposits returned in full in no way implies that 51%, or any percentage, of a particular deposit can or should be transferred to the new landlord before the current landlord’s claim has been satisfied.

Only a small percentage (let us say 3% for sake of argument) of borrowers default on their mortgages. Does that mean lenders only need to take 3% of the value (let’s allow 5% to give them a cushion) of the loan as security? The question only has to be posed to show the fallacy.

The CfE goes on to say: “the DPS data also tells us that 20% of tenants lose 50% or more of their deposit. In these circumstances’ landlords would need to be reassured that they will still be protected by their security deposit if their tenant causes damage to their property.” There is a second logical fallacy. Until the dispute about the deposit is resolved THERE ARE NO “these circumstances”. Nobody knows until after the event what the circumstances are. If the deposit is to have any value then, for as long as the tenancy subsists, the landlord needs to know that in all circumstances until any dispute is resolved or a maximum liability agreed, 100% of the deposit is available to protect him.

Logically it is not possible to resolve a dispute about the deposit before it is resolved and landlords should not be required to do a “final” inspection 7-14 days before the tenancy ends and be expected to trust that the tenant will not cause more damage and will actually leave when supposed to.

If you think this is bad, I am afraid it gets worse.

The Government has read the submissions from the RLA and others that the obstacles to serving a Section 21 notice operated to ensure compliance with various regulations such as providing Gas Safety Certificates, EPCs and Prescribed Information Forms. In the foreword to the CfE James Brokenshire the Minister says he is “committed to strengthening the grounds for possession under Section 8 of the Housing Act 1988 to deliver a fair and effective tenancy regime”. He says he wants to consult with landlords, tenants and others in the rental sector on the details of a better system that will work for landlords and tenants.

Sadly, the Minister’s words are belied by para 1.8 of the CfE which says “The Government also intends to carry over (emphasis mine) the existing tenant protections included in the Section 21 eviction process (for example for the requirement for landlords to provide evidence that they have protected the tenant’s deposit before an eviction can be granted by the court) into the new tenancy regime.”

In other words it will be made harder for landlords to recover possession under Section 8 than it is at present. New obstacles to s8 claims will be introduced. That is not working for landlords but against them.

So a tenant might owe four months’ rent and the landlord is using s8 to evict for non-payment of rent. Under Brokenshire’s proposed regime the landlord might be ambushed at court, because he served the Prescribed Information form two days late. The landlord might then be required to return the whole deposit to the tenant and start again with his s8 claim.  No doubt the tenant will “suggest” the landlord also pays three times the deposit as a penalty.

This exercise is destined to be yet another nail in the coffin of the PRS. If landlords are nervous about losing s21 (as the NLA survey demonstrates), think how it will appear if landlords lose the benefit of s8 as well over a technicality.



Comments

Paul Essex

20:16 PM, 8th July 2019
About 2 weeks ago

As far as I can see the only logical response to this would be to always have a guarantor to cover damage etc and to forget deposits.

Larry Sweeney

22:53 PM, 8th July 2019
About 2 weeks ago

Excellent article by Ian and spot on in every respect. We took part in the fair coalition summit. Perhaps Brokenshire (failed NI secretary) feels that having gone through the motions like councils do with their sham consultations, he can impose any crap on the PRS. Our message is simple Mr Brokenshire, we are not any landlord organisation. We fight for all property owners rights and undermining property owning rights is undermining democracy.
Our advise to landlords therefore is
1/ Do not accept benefit tenznts.
2/ issue s21 now and explain to tenants that Brokenshire wants to restrict mobility by removing s21.
Finally do not accept passporting. Unless a tenant is ready and willing to transfer a deposit to your account, do not accept this tenant. They may attempt to bully landlords by declaring this illegal. Simple unless a deposit in the form of cleared funds is available, do not part with posession. If in doubt read Ian's article and its implications again.

Dr Rosalind Beck

9:09 AM, 9th July 2019
About 2 weeks ago

Yes, Ian. Bringing over the obstacles/loopholes the Government has incrementally introduced into the way of serving Section 21 to Section 8 could mean non-paying criminal tenants gain the right to remain in your property forever without paying the rent, because you gave them the EPC a day late or even gave it to them, but didn't get them to initial that they had received it. In fact, any tenant who knew of a small administrative error in their tenancy could do this.
It makes a mockery of the justice system in the UK, which already now contains ridiculous conditions for private landlords.
Such a farcical move would have to be the subject of an urgent application for Judicial Review. This time though we would need lawyers who can win for us and the landlord organisations had better put their hands in their pockets more speedily and willingly than they did with the failed application for Judicial Review on s24. They should be getting their thinking caps on now and leading the way on this, given their resources and their ostensible aim of supporting landlords.

Luke P

12:39 PM, 9th July 2019
About 2 weeks ago

Let's say a LL inadvertently forgot to issue a H2R Guide (or worse, issued the wrong version around the time of a new release) and wanted to recover the property using a S.21...they can't because they have not complied with the service of the prescribed information. However they can fall back on a S.8 if the property recovery was for arrears, ASB, tenancy breach, the LL wants to move in etc. In a post-S.21 world, are we saying that if you inadvertently issued the incorrect version of a H2R Guide, you could *never* issue a S.8...regardless of the level of arrears/ASB/the LL's need to move in??

Luke P

13:26 PM, 9th July 2019
About 2 weeks ago

Reply to the comment left by Luke P at 09/07/2019 - 12:39
Bad example...you can re-issue the H2R Guide, but you cannot 're-issue' a Gas Safety.

Dr Rosalind Beck

13:29 PM, 9th July 2019
About 2 weeks ago

Reply to the comment left by Luke P at 09/07/2019 - 13:26
This part of the legislation is already ridiculous. Surely the most important thing is that a gas safety certificate is in place; not that a copy was given to each tenant on a particular day. Paperwork has become more important or as important as the substantive issue. That is so wrong.

Jireh Homes

15:23 PM, 9th July 2019
About 2 weeks ago

Responded to this consultation and very cleverly the questions do not probe the practicality of the "passporting" issue! So had to use one of my responses to highlight why the concept was flawed and unworkable.

Ian Narbeth

15:45 PM, 9th July 2019
About 2 weeks ago

Reply to the comment left by Jireh Homes at 09/07/2019 - 15:23Absolutely right Jired and it rather suggests that the decision has been taken but HMG wants to give the impression of consulting.
If "passporting" before the end of a tenancy comes in then either the current landlord will lose the benefit of the deposit or he will not. If he does not lose it, the new landlord will know that the whole deposit may not be available for him. If the current landlord loses the benefit, the new landlord will realise that he too will be subjected to the same heist of the deposit at the end of the tenancy to "passport" it to the next landlord.

Luke P

15:47 PM, 9th July 2019
About 2 weeks ago

Reply to the comment left by Ian Narbeth at 09/07/2019 - 15:45
It's time to do what I did back in 2007...stopped taking deposits entirely and now solely rely on a homeowner guarantor. Not only is it usually a relative that kicks the tenant's backside when things start to go wrong, but is far greater in value than five weeks rent (providing their asset doesn't have too many charges and don't die)...

AroundTheClock

22:14 PM, 9th July 2019
About 2 weeks ago

It sounds as if there would be no point in requesting a deposit in the first place. Maybe that’s what they want? I.e for the landlord to take even more risk.

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