Tenant Fees Act 2019 changes from 1 June 2020 – Holding Deposits

This is part 3 of a 3-part series exploring how the Tenant Fees Act 2019 provisions apply to tenancies from 1 June 2020. In the first two parts, Sarah Cummins examined how the conclusion of the phased introduction of the Tenant Fees Act would affect permitted fees and tenancy deposits. In this final part, I will examine the current position on holding deposits.

The transitional provisions in the Tenant Fees Act 2019 treat holding deposits differently to other permitted payments, because the Act applies in England to any holding deposit taken from 1 June 2019 onwards. Where a holding deposit was taken before 1 June 2019 and not returned to the tenant, the Act does not give that tenant any right to recover it now.

While this means that the end of the transitional period on 1 June 2020 has not had any effect on holding deposits, it is still a convenient time to look at how the holding deposit rules at Schedule 2 of the Tenant Fees Act 2019 have fared in their first year of operation.

What even is a holding deposit?

The Act never defines holding deposits. It caps them at one week’s rent and specifies the circumstances in which a prospective tenant is or is not entitled to receive the whole deposit back, without specifying what a holding deposit actually is.

While the Act is silent, the Government’s guidance for landlords and agents defines a holding deposit in this way:

“A holding deposit creates a binding conditional contract between tenant and landlord. Under this contract, the tenant agrees to provide honest representations as to their income, tenancy history and references, and to enter into the tenancy under the terms agreed with the landlord. The landlord agrees to enter into the tenancy as per the agreed terms subject to satisfactory fulfillment of all pre-tenancy checks.”

This definition does not accord with standard industry practice, which is for tenancies to remain ‘subject to contract’ until the tenancy agreement has been finalised. Nothing in the Tenant Fees Act supports the suggestion that a landlord is legally committed to offering a tenancy if references and pre-tenancy checks are satisfactory. That position can be traced back to comments made in Parliament during the passage of the Tenant Fees Bill, but it is difficult to find any legal foundation for this idea.

A holding deposit is better characterised, I would suggest, as a payment to demonstrate that the tenant is serious about entering into the tenancy (or “earnest money”) rather than a payment which commits either landlord or tenant to enter a binding tenancy. The authors of Shelter’s website appear not to be fully convinced by the Government’s position either, noting that “Payment and acceptance of a holding deposit may create a conditional binding contract between tenant and landlord/agent”. It would be better if the Government’s guidance at least acknowledged the uncertainty over the real nature of a holding deposit, as the current wording might mislead tenants.

How are the courts interpreting the rules?

Litigation over the Tenant Fees Act 2019 has already begun in the First-tier Tribunal, where tenants can apply for an order requiring landlords or agents to repay any prohibited fees.

Most of the decisions published so far are concerned with holding deposits. In several cases landlords and agents simply fail to respond to the Tribunal and are debarred from taking further part in proceedings; this sanction was applied to Purple Bricks in a claim for the return of a £156.92 holding deposit.

Decisions relating to holding deposits can address whether landlords have behaved reasonably during pre-tenancy negotiations and whether any clauses in the proposed tenancy agreements breach the Act. If landlords seek to include a banned fee this gives tenants a legitimate reason to refuse to go ahead with the tenancy.

In one decision [LON/00AW/HTC/2020/0005] the Tribunal considered a clause in a tenancy agreement that required the tenant to wash the floors two to four times a month, based on use and wear. The clause went on to say:

“If the floors are not treated with the white soap at least twice a month, they will be damaged and will have to be professionally sanded and washed after the completion of the tenancy – at the expense of the tenant.”

That on the face of it, might be an unreasonable demand and a prohibited cleaning fee, but the Tribunal found otherwise. The clause was reasonable, according to the Tribunal, because the tenant had already agreed to clean the floors 2-4 times a month, and the rest of the clause “gave the tenant additional direction and assistance to understand what fair wear and tear will be in the context of the floors”.

This example is particularly interesting as the Tribunal’s decision appears to contradict a part of the Government’s guidance which suggests that tenancy agreements should not specify the consequences of breaches by the tenant: “Landlords and agents cannot write terms into the tenancy agreement that require a payment as a penalty should a tenant fail to perform an obligation. For example, any clause that says ‘if you fail to do x then you must pay y’ even if the amount is not specified is likely to be prohibited.”

I have never found this part of the guidance particularly convincing, as ‘damages’ are a permitted payment, and nothing in the Act itself expressly rules out clauses in tenancy agreements which state that tenants must pay damages – as long as it really is damages rather than a disguised fee. In the example above, the Tribunal drew a distinction between the primary obligation on the tenant (to wash the floors) and further explanation about what that duty involved and what the consequences of breaching it would be (having to pay to fix the damage which not washing the floor would cause).

How much of a holding deposit can be retained?

Another point of potential conflict between the Government’s guidance and the decisions made by the Tribunal is the amount of a holding deposit which a landlord may retain. In LON/00AW/HTC/2020/0005 the Tribunal found that the ‘strong encouragement’ in the Government’s guidance not to retain the whole of a holding deposit had no statutory force. This was realistically the only possible conclusion – that part of the guidance is just guidance – but a holding deposit agreement will usually be a consumer contract and the terms of that contract must be ‘fair’. Tenants might argue that keeping the whole holding deposit is unfair if the landlord or agent has suffered no financial loss.

Can the Tribunal limit the amount of a holding deposit a landlord can keep to only a reasonable amount on that basis? This remains to be seen, but the answer may well be no, because the Tribunal’s jurisdiction under the Tenant Fees Act appears to be limited to remedying breaches of that Act – it is not at all clear that the First-tier Tribunal will be able to do anything more for prospective tenants than enforce the rules in Schedule 2, which do not involve considering unfair contract terms.

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*