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How do tenancy fees work?

by | Nov 30, 2022

Introduction

Tenancy fees are charged when a tenant doesn’t comply with their tenancy agreement and are amongst the many things a landlord can use in order to mitigate the risk of keeping a tenant in their property. Others include tenancy deposits and rent guarantee insurance which can also prevent a landlord from falling into debt.

However, there are still rules around how a landlord can charge a tenant for the fees they owe and under what grounds they owe them. 

What is the tenant fees act?

The Tenant Fees Act was introduced in 2019 which places a cap on tenancy deposits paid by tenants to private landlords. This prevented landlords from charging too many fees and introduced security deposits that allowed a tenant to have their money safely stored away and regulated by the Financial Conduct Authority (FCA) in a tenancy deposit scheme if it was an assured type of tenancy.

Because of these regulations, it is unclear what kind of tenant fees are now in place but this article will go over them. To read the advice given by the government in detail, click here for the legislation guidelines and the statutory guidance for the enforcement of the rules by authorities.

Legislation representing the tenant fees act of 2019

What is in the tenant fees act?

Inside the tenant fees act, you can find the guideline information which includes:

  • What fees you can ask a tenant to pay
  • When the ban on fees is likely to apply
  • Who enforces the Tenant Fees Act
  • What are the Financial penalties
  • The prohibited and permitted payments

For this full document click here to take you straight to the government website. It is important to read these regulations in detail as this guide isn’t the full legislation that is hard to comprehend and is instead a guide put together with everything you need to know moving forward after 2019

Why do tenant fees exist?

Tenant fees used to be in place for setting up renewing or ending a tenancy agreement. This meant landlords could charge additional fees on top of things like a tenancy deposit and charging rent. 

However, the government scrapped these plans as they were viewed as exploitative and meant tenants had to pay a lot just to move into a property. Getting rid of these fees in the tenant fees act made it easier for first time renters and those already renting to save and get on the housing ladder.

Nonetheless, there are still some fees that are able to be charged but they aren’t so much to do with the management of a tenancy agreement but instead for things like losing the keys of a property which are things that are preventable on the tenant’s behalf so it is fair that they are penalised as a result.

What do landlords and letting agents charge tenants?

After the Tenant Fees Act of 2019, it is only legal for tenants to be charged:

  • For rental income
  • The deposit for the tenancy, is refundable
  • A refundable holding deposit for confirming a tenant’s interest to move in as tenant referencing is completed
  • Fees to change the tenancy which is capped at £50
  • Payments that are charged to a tenant to end a tenancy (must be requested by the tenant only)
  • Bills associated with utilities such as gas and electricity, council tax, tv licences or broadband (Sometimes covered by the landlord through the rental income)
  • A fee for the replacement of keys or security devices to get into a property
  • Fees for the late payment of rent

These standards are upheld by the Tenant Fees Act of 2019 to such an extent that if a landlord is found to charge a tenant with something that falls outside of these points, they lose their rights to evict a tenant for no fault under section 21.

As well as this, if you are found to do this and incur a financial penalty twice within a twelve-month period then a housing authority from the local council may put you on a list of rogue landlords which can be found by tenants so they know not to move into your property. This is known as a banning order offence.

A landlord who has gone to jail for charging rent illegally

What other restrictions are there for charges to tenants?

Apart from the restriction to get rid of some of the fees as part of the Tenant Fees Act of 2019, there was also additional protection given to some of the other charges that tenants face.

Caps on tenancy deposits

Tenancy deposits must now be capped at five weeks’ rent if the rent paid for the year is less than £50,000. If the rent is more than £50,000 per year, then six weeks’ worth of rent can be taken.

It is useful to note that the amount that is paid for the tenancy deposit must be protected in a tenancy deposit scheme so this is different to paying rent upfront. There are currently no restrictions on how much rent upfront can be charged so landlords tend to make up for the restriction in tenant deposit for charging rent upfront.

This is especially true for tenants who do not have a secure form of income such as student or DSS tenants. In these cases, a landlord may also ask for a guarantor.

Caps on holding deposits

The caps on holding deposits are one week if rent. This means if a landlord was trying to let out a property for £1000 per month, they cannot charge a tenant more than £250 for a holding deposit.

The rules around holding deposits

It is also important to make sure a holding deposit is charged for the right reason for being charged to reserve a property. This means if a tenant is interested in a property and they want to pay the letting agent or landlord to conduct pre-tenancy checks to move them along in the process, they would have to pay a holding deposit. 

On top of this, a landlord can only hold a deposit collected from an interested tenant for 15 days before they have to make a decision about letting the tenant into the property or not. It is rare for things to take this long however unless there are delays like waiting for a landlord reference.

The deposit also works well for keeping the property exclusive to the tenant that is interested, stopping other tenants from showing interest in the property. This isn’t always the case though as some letting agents still conduct viewings and receive letting requests while tenant referencing is ongoing.

How holding deposits should be repaid

Holding deposits should be repaid as soon as a tenant signs a tenancy agreement or within 15 days if no decision has been made. However, if a landlord needs a longer time, they have to get this permission in writing from the tenant.

The court deciding if a tenancy fee has been charged lawfully

What is an early termination tenancy fee?

Early termination fees are one of the rights that landlords still have. If a tenant asks to leave a tenancy during a fixed term, first of all, a landlord must understand that a tenant doesn’t have the right to do so and you don’t have to charge them a fee. You can simply wait for the end of their term and then ask the tenant to hand in a notice to quit.

However, if you feel like the tenant will fall into rent arrears or the tenant will cause significant disruption to a property business if they do not pay to move out of their tenancy agreement early. This is where a fee makes sense.

A landlord must also be reasonable with these fees. They cannot change any more than the rent that they otherwise would have collected throughout the duration of the tenancy and they cannot charge any more than the associated costs of letting the property again through a letting agent.

In addition, if there are no missed rental payments as a result of a tenant ending their tenancy agreement early, a landlord is encouraged to not charge any fees to end the tenancy and to just let the tenant out of the property at the earliest date.

If you are found to breach any of these things by charging too much of an early termination fee, then this is classed as a prohibited payment and the landlord could have to face a fine.

What is the application fee for renting?

An application fee for renting is the same thing as a holding deposit. This should be paid as one week’s rent and be refunded to the tenant if no decision is made about their tenancy within 25 days or as the tenant signs a tenancy agreement

This is among some of the allowed fees a landlord can charge under the tenant fees act of 2019.

What is the difference between a letting agent fee and a tenant fee?

A letting agent fee is charged by a letting agent to the landlord in order to find a tenant. A tenant fee is charged by the letting agent or the landlord to the tenant in order to enforce a penalty.

Letting agent fees can be a flat fee where there is a fixed amount charged for every tenant that a letting agent finds for the property. It can also be that a commission of the tenant’s rent is taken from the landlord in order to provide the services a letting agent can give.

With tenant fees, there can be a variety of reasons that a tenant is charged that ranges from refundable holding deposits to paying rent late so the fees are charged very differently to a letting agent and are always to do with some kind of penalty rather than the providing of a service in the case of a letting agent.

How to charge a tenant a late payment fee

Whenever a late payment fee is charged, there is the need to write this in the tenancy agreement beforehand, otherwise, this can take a tenant by surprise. However, using a good tenancy template should prevent this issue from happening as it is quite common for landlords to include this.

A landlord qualifies for a late payment fee where rent is more than 14 days late or there is a lost key in the property for gaining access. Although lost keys aren’t the same as paying rent late, the fee is often charged as a late payment fee because a landlord would charge a similar amount for this type of breach in the tenancy agreement anyway.

A landlord realising their tenant has paid rent late so charges them a fee

Late payment fees are there mainly because it is the step before eviction under section 8. If a tenant continually damages a property or continually pays rent late, then this is grounds for eviction under section 8 where a landlord can give a tenant between two weeks and two months’ notice to move out.

In order to work out how much to charge for this fee and not charge too much so it becomes a prohibited payment, there are some rules a landlord has to follow. This includes making sure the interest on the fee isn’t more than 3% above the Bank of England’s percentage that is given every year for every day the rent is late or when there are reasonable costs associated with the losing of a key.

For example, if a tenant paid £1000 every month in a periodic tenancy, the bank of interest base rate was 3% and the rent was late by 10 days, then the landlord cannot charge more than £600. 

This is calculated by adding 3% to the 3% of the Bank of England base rate to get 6%, then working out 6% of £1,000 which is £60. Then, you multiply the £60 by 10 because the rent was late for 10 days. Hence a £600 fine.

What happens if a landlord charges a tenant fees unlawfully?

Most of the time, if a landlord charges too much of an allowed fee which results in a prohibited fee or they charge a fee that is disallowed under the Tenant Fee Act of 2019 which is also a prohibited fee, there is a standard fine of £5,000.

If there is an offence committed twice within five years then the landlord may face further imprisonment as this is seen as a banning order offence. However, this may be evaded by paying £30,000 as an alternative to prosecution but this strictly depends on the local authority.

When is a fee given to a landlord instead of prosecution?

Because each local authority developed its own enforcement protocol, it is hard to know whether a landlord will actually face a fine or they will face enforcement. In order to work this out, a landlord can try to find the statutory enforcement guidance from their local authority.

For a more in depth understanding of how this works, see the government guideline of the tenant fees act 2019 here.

Typically, whether you face a fine or you face conviction, you will also be added to the register of rogue landlords for the borough which isn’t a good list to be on as it will mean letting agents may not work with you as they don’t want to bring tenants into properties that will make them pay unnecessary fines.

Can landlords include fees as part of the rent lawfully?

Unless it is clearly stated in the tenancy agreement and it is made clear what a tenant is paying when they pay the rent, it is not advisable that a landlord charges any type of fee as part of the rent. All payments related to fees in particular must be paid separately, signed in writing and recorded.

This is because if a landlord doesn’t do this and a tenant says they have paid a fee when really they haven’t or it is made clear a tenant is due to pay more of a fee than they already have, a landlord can provide evidence.

If something like this were to go to court because the dispute escalated, this can be extremely useful for a landlord or tenant in court.

Rent that isn’t including tenancy fees

In summary

All in all, amongst other legislation like landlord licences, tenancy fees have changed a lot over the years so it is understandable if landlords, property managers or letting agents have difficulty wrapping their heads around them. As a result, a landlord must consider that the tenant also doesn’t know about the fees they are subject to.

As a result, outlining this in a tenancy agreement is also best practice as it is never fun having to go to court or settle disputes verbally when things could have been made clearer in the first place.

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