Are fees for deposit replacement schemes prohibited payments? A follow up from Will Eastman

Are fees for deposit replacement schemes prohibited payments? A follow up from Will Eastman

26 February 2022

After an interesting case in county court, earlier this month Head of Legal and Claims, Will Eastman gave his thoughts on deposit replacement schemes. After the final hearing took place earlier this week, Will has provided another update on the matter.

If you haven’t read the original post on this case, please click here to read it now.

To recap, possession proceedings have been issued relying on a section 8 notice, citing grounds 8, 10 and 11, and a section 21 notice. I can now say that the property was based in Wales, the County Court at Swansea is where the case was dealt with, and the replacement deposit was provided by Flatfair.

At the first possession hearing, the Judge hearing the matter took issue with there being a deposit replacement scheme, suggesting the fee paid by the tenant was a prohibited payment. The Judge was unable to be convinced otherwise at that hearing and adjourned the matter.

It’s a bit ironic that a fee for a deposit replacement scheme, a product that was arguably launched to ease the impact of the Tenant Fees Act 2019, or in this case the Renting Homes (Fees etc.) (Wales) Act 2019, is being considered a prohibited payment under the very same acts.

My view still remains that the intention of Parliament, could not have been to catch such fees for these schemes as a prohibited payment. That said, it appears that a strict application of the relevant acts would result in the payments being prohibited (i.e. not on the list of permitted payments), despite the published guidance suggesting otherwise. I have seen a number of differing views from legal professionals who are thought of as experts in their fields, to Deposit Replacement providers themselves.

The final hearing took place earlier this week. At this hearing, the Judge remained unconvinced that the payment was permitted, and the section 21 notice could be relied upon. However, the Judge conceded that the relevant acts did not preclude our customer from relying on their section 8 notice. We were therefore given two options:

  1. Rely on the section 21 notice, the Judge give directions and the matter be set down for a trial; or
  2. Rely on the section 8 notice and obtain possession.  

Our customer was eager to get back possession and therefore, went with option 2. Regrettably but understandably, the Judge was not willing to consider also giving a judgment on the issue of the suggested prohibited payment, as to do so would be “academic” and a “waste of the Court’s time”.

Whilst our customer has achieved the outcome they hoped for in these proceedings, the decision undoubtedly allows a sense of uncertainty in the industry to linger and no opportunity to bring an appeal and therefore, an element of certainty on the issue.

Where this issue is raised and only a section 21 notice is available to be relied upon by the Landlord, a trial on whether the Tenant truly had a choice, or was “required” to make the payment will be the only way to determine the issue. This point alone has attracted varying opinions. Some say that the clear choice between a traditional deposit and a replacement scheme is enough. Others question whether giving a Tenant the ultimatum of finding 5-6 weeks cash for a deposit, or taking out a replacement scheme for the equivalent of what is usually 1 weeks rent, can be considered as a choice. Only time will tell.

I suspect, although hope I am proven wrong, that this is not going to be the last we hear of it. In fact, we have another claim, in Wales and where a replacement scheme is in place with no rent arrears at present………. We might not have to wait very long at all.

– 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.

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