Understanding the Tenant Fees Act and Deposit Cap

The introduction of the Tenant Fees Act 2019 has led landlords and letting agents in England to reconsider their deposit-taking practices. This article explores potential penalties for landlords who have taken more than the permissible five-week deposit and discusses the circumstances under which the excess amount should be returned.

Understanding the Tenant Fees Act and the Five-Week Deposit Cap

The Tenant Fees Act 2019 implemented a cap on the maximum deposit landlords can charge tenants. This cap is set at five weeks' rent for properties with an annual rent of less than £50k and six weeks' rent where the annual rent exceeds £50k.

To calculate the permissible deposit amount, landlords should first determine a week's worth of rent by dividing the annual rent by 52. This amount should then be multiplied by either five or six, depending on the property's annual rent.

Navigating Pre-June 2019 Deposits: Should You Return the Excess?

Landlords may feel uncertain when dealing with deposits taken before the enactment of the Tenant Fees Act on 1 June 2019. Guidance suggests that there's no obligation to return excess deposits in these circumstances:

Q. If a tenant paid a tenancy deposit which exceeds the cap before 1 June 2019, do I need to re-pay the amount of the deposit above the cap?
No. Landlords and letting agents are not obliged to immediately refund part of a tenancy deposit that is above the cap but was paid before 1 June 2019. If a tenant signed a tenancy agreement before 1 June 2019 (and that tenancy is continuing or is a statutory periodic agreement), then the tenant will be bound by the terms of that contract until it is either renewed or terminated.

While this guidance provides clarity, we advise a more cautious approach. We encourage landlords to return any excess deposit taken before 1 June 2019 due to the legal ambiguity surrounding this matter.

Deposits and Section 21 Notices

When planning to serve a Section 21 notice for possession, landlords should return any excess deposit to avoid potential complications or delays. Here are a few scenarios that landlords may encounter:

Scenario 1: Tenancy Started and Went Periodic Before 1 June 2019

This scenario poses the least risk, as the tenancy agreement and the subsequent transition to a periodic tenancy occurred before the Tenant Fees Act was enacted. Nevertheless, we still recommend returning any excess deposit.

Scenario 2: Tenancy Started Before 1 June 2019 but Went Periodic After

In this scenario, the transition to a statutory periodic tenancy post-1 June 2019 triggers the rules of the Tenant Fees Act, necessitating the return of any excess deposit. Meanwhile, if the tenancy becomes contractual periodic after 1 June 2019, it is not considered a renewal and is therefore less risky. However, we still advise returning the excess deposit.

Renewals and New Tenancies Post-1 June 2019

The Tenant Fees Act rules apply without exception for any tenancy renewals or new tenancies established from 1 June 2019. Any deposit exceeding the five or six-week cap must be returned to the tenant.

Penalties for Non-compliance

Non-compliance with the Tenant Fees Act is punishable by local weights and measures authorities, with provisions in place for cross-border offences. A first offence can result in a fine of up to £5,000. A second offence within five years can lead to a fine of up to £30,000 and is also considered a criminal offence and a banning order offence. These penalties are in addition to the requirement to repay any prohibited payments.

Any financial penalty imposed can be enforced as if it were a county court order, which may permit using bailiffs, attachment of earnings, or a charge on property.

Restrictions on Terminating Tenancies

Landlords who have required tenants to pay more than five weeks' deposit are prohibited from issuing a Section 21 notice until they have repaid the prohibited payment in full. This repayment can be achieved through a direct refund or offset against future rent due under the tenancy. Once the excess deposit is returned, landlords are free to serve a Section 21 notice.

For More Information

MHCLG has published comprehensive guidance on how the Tenant Fees Act affects tenants, landlords, letting agents, and local authority enforcement officers. For more information, visit here.