Forum on Tenant Fees and Holding Deposits
Clara Zang of Arden Chambers reports on an evening spent considering the Tenant Fees Bill
On Thursday 30 August 2018, Samuel Beswick (Cravath International Fellow, Harvard Law School) convened a panel of speakers to discuss the legal and practical role of tenant fees and holding deposits in the residential tenancies market. The forum was hosted by the Centre for Access to Justice and held at Bentham House, UCL Faculty of Laws.
- Justin Bates: barrister at Arden Chambers (Panel Chair).
- Dr Aruna Nair: Property Law lecturer at King’s College.
- David Smith: Policy Director of the Residential Landlords Association and Partner at Anthony Gold Solicitors.
- Paula Hebberd: Solicitor and Director at Woodstock Property Law.
- John Gallagher: Principal Solicitor at Shelter.
- Samuel Beswick: Cravath International Fellow, Harvard Law School.
Many prospective tenants pay a sum of money to letting agents as a “holding deposit” before they enter into the main tenancy agreement on the understanding that this would reserve the property for them whilst the references and background checks are being processed. It follows that the prospective tenants will (reasonably) assume that agents will take the property off the market upon receipt of the holding deposit and will refrain from arranging further property viewings. In reality, the payment of a holding deposit will often not have this effect and the panel discussed the difficulties faced by prospective tenants in circumstances where they pay a holding deposit but fail to obtain the final tenancy agreement through no fault of their own.
The panel discussed how the holding deposit should be legally characterised and what its purpose was. The panel appreciated that the first difficulty faced by prospective tenants was how to characterise the fee paid to the letting agent. The fee paid may not in fact be a holding deposit at all, despite the label given to it by letting agents. For example, the agent may treat the payment as a fee for referencing costs or they may simply be giving the prospective tenant the first opportunity to make a claim to the property, failing which they will have their fee returned (i.e. because somebody else makes a better offer). In some circumstances, a holding deposit may be better characterised as “earnest money” to prove that the prospective tenant has a genuine interest in the property. It acts as a risk balancing strategy for agents to protect the landlord in the event that a final tenancy agreement is not entered into, rather than offering protection to prospective tenants by holding the property for them.
The panel discussed whether the prospective tenant might have a damages claim for breach of contract in circumstances where the agent fails to take the property off the market and/or chooses not to grant a final tenancy agreement to a prospective tenant. Depending on the terms of the lease, formality requirements or lack of certainty of term may prevent the finding of a binding contract. If the parties enter a written agreement which states that it is “subject to contract”, this may also prevent the finding of a binding contract.
The Tenant Fees Bill will make it legitimate for agents and landlords to take holding deposits from prospective tenants, provided that it is returned if a tenancy is not subsequently granted. The Bill does not assist with defining what constitutes a holding deposit and whether the subsequent failure to grant a tenancy can lead to any further remedies and ancillary damages for out-of-pocket losses. Therefore, the Tenant Fees Bill appears to protect the landlord by creating a scheme that legitimatises the taking of a holding deposit for the benefit of the landlord, who is at liberty to change his mind as long as the holding deposit is returned.
The panel felt that the problem was exacerbated by the common and widespread misconception that a letting agent can be a servant of two masters (both the landlord and the tenant). The panel were strongly of the view that it is legally impossible for an agent to owe a substantive duty to both the landlord and tenant, although they do have a limited duty to tenants (e.g. not to mislead). The interest of the tenant and landlord are not aligned and it seems clear that the agent’s principal is the landlord, not the tenant, despite this common misconception. The view that a letting agent can serve two masters goes against the principles of agency enshrined in both common law and statute as there is a clear conflict of interest between the landlord and the tenant or prospective tenant.
In many cases, landlords will engage multiple agents and may not know how their agents have been behaving. Landlords may not even be aware that a holding deposit had been paid and will often not benefit from the agent’s receipt of a holding deposit or other fee from prospective tenants. Although the landlord enters a contractual arrangement with their agent to manage their property and handle tenants, the landlord will nevertheless be held liable for the managing agent’s actions and will normally be the subject of court proceedings for their agent’s poor behaviour, as the agent will not have any assets for the claimant to pursue.
The panel noted that there were a number of free advice agencies, such as Shelter, who can assist tenants. Local Authorities may also assist, as well as the Property Ombudsman and Property Redress Scheme. Unfortunately, prospective tenants who wish to pursue legal action as a litigant in person will face difficulties as the legal process is challenging and the county courts will not be able to provide face-to-face help due to legal aid cuts. This will result in prospective tenants simply looking elsewhere for accommodation rather than pursuing legal action against agents and landlords. The panel felt that a more accessible court system was required, and suggested that statutory changes may be required to “sweep and replace” the current system in place.