Are fees for deposit replacement schemes prohibited payments? A legal update from Will Eastman

Are fees for deposit replacement schemes prohibited payments? A legal update from Will Eastman

2 February 2022

After an interesting County Court decision, Head of Legal and Claims Will Eastman offers his thoughts on deposit replacement schemes:

Over the past 7 years, I have had the pleasure of overseeing a Legal & Claims Department that handles claims on one of, if not the largest UK wide Rent Protection and Legal Expense insurance portfolio.

Thankfully, we are very good at working with tenants to find a solution that works for both them and the landlord. However, inevitably, there are some matters that result in possession proceedings being issued. In the overwhelming majority of those proceedings, our experienced Litigation Team is successful in obtaining possession orders at the first hearing.

Infrequently, however, we do see the odd, unexpected decision made by some Judges for one reason or another. Most of the time, the Judge has simply made an error and the very short hearing duration has meant there hasn’t been sufficient time to pursue a line of argument to persuade them otherwise. Generally, we obtain a possession order at the next hearing.

Last week, we had our first “odd” decision for quite a while, and it got us thinking. This was a possession claim, that was issued as a manually drafted application pleading both an expired section 21 notice and section 8 notice. The section 8 notice was relying on grounds 8, 10 and 11. The representative conducting the hearing for our customer (the claimant), was most of the way through the hearing and the Judge was satisfied with the evidence given. However, before granting the possession order, the Judge took issue with the fact that a deposit replacement scheme had been used on this tenancy and suggested that the fee paid by the tenant, was in fact a prohibited payment.  Unfortunately, despite the best efforts of the managing agent and the representative in Court, the Judge could not be persuaded otherwise in the short time left; the case was adjourned until the next available date for a hearing for the Court to consider skeleton arguments.

So, is the deposit replacement fee paid by a tenant, a prohibited payment under the Tenant Fees Act 2019, or, the Renting Homes (Fees etc.) (Wales) Act 2019?

I don’t think so…

Both of the acts contain generally similar provisions about what payments are permitted. They both also make it clear that unless the payment is in the list of permitted payments, it will be prohibited. Whilst both a holding deposit and a security deposit are permitted payments (within the monetary limits set), there is no mention of a deposit replacement scheme within the list and the Judge, therefore, has concluded, maybe understandably, that the payment is prohibited.

The first point to consider is, and whilst it isn’t law it is persuasive, the guidance for letting agents and landlords allows for such replacement schemes to operate, without suggesting that they will be a prohibited payment (page 10 for Wales and Page 32 for England). That said, I know that this isn’t the law, just guidance.

The law states that a Landlord or Letting Agent cannot require the tenant to make a prohibited payment, (a payment not on the list of permitted payments.) So what if the tenant chooses freely to make such a payment, rather than have to find the money for a traditional cash payment?

In this case, the tenant was given two options; find the money for a deposit equivalent to 5 weeks of rent, or, pay a fee equivalent to one week of rent through a third party replacement deposit provider. The tenant chose the latter option and signed the tenancy, which contained a clause saying they acknowledged that they chose freely to make that payment for the deposit alternative. Is it not then, that because the landlord or letting agent gave the tenant the option to choose freely, they couldn’t have ‘require[d]’ the tenant to make the payment. It therefore surely follows that they are not in breach of the relevant acts and whilst the payment isn’t explicitly on the list as a permitted payment, it surely cannot be a prohibited payment that causes the Landlord or Letting Agent to fall foul of the acts and lose their right to seek possession on an expired section 21 notice?

It doesn’t seem right to me to suggest that Parliament intended to put tenants in a position where they must find large sums of cash for tenancy deposits. Especially when the market is offering an alternative, to help tenants afford to move more freely in the private rented sector (PRS) and the current political agenda appears to be gearing towards giving tenants more rights and freedom within the PRS.

In any event, in this claim, we also have the benefit of a section 8 notice. Nowhere in the acts does it state that the taking of a “prohibited” payment prevents the Landlord from relying on a section 8 notice. As such, I am confident that we will get possession at the upcoming hearing, but it is unfortunate that our customer has to wait a little longer to get their possession order.

Whilst I am confident all will work out for our customer, this case does raise the hypothetical question of whether other landlords will have similar challenges raised by a Judge, tenant or their representatives and if they only have a section 21 notice to rely on, will they be successful solely on the government guidance? The answer is not a clear cut one, in my opinion, and whilst having a clause in the tenancy to acknowledge that the tenant was free to make the choice of a deposit replacement is helpful, it may not be enough to persuade a judge on the day.

This case also demonstrates that not all possession proceedings are straightforward, and unexpected delays or complications can arise at any time. This is why it is so important to have comprehensive protection in place and an experienced legal team behind you. As the market leaders, who provide UK wide Rent Guarantee protection, HomeLet can offer the cover required to make sure you have the level of protection you need.

For our customer, the inadvertent complication in these proceedings will not cost them a penny more in lost rent, because we are covering that under our rent protection. They also don’t have to worry about being unable to get possession of their property back, because our experienced, in-house, Litigation Team know what is needed to get possession back, even when things aren’t going to plan.

– Will Eastman, Head of Legal and Claims

This article is for general information only and is not intended to be legal advice or formal guidance.

  placeholder-form

Are you ready to maximise the value of every let?

Just provide us with a few details below and we’ll be in touch quickly to demonstrate how simple it is to increase your revenue.

Alternatively, you can call us on 0330 333 7252

Our office hours are 09:00-17:30 Mon – Thurs and 09:00-17:00 Friday.

reCAPTCHA is required.

Enjoying our content?

Get the latest news, views and tips from HomeLet. We won't spam you promise.

×