Concerns have been raised that agents who let to tenants who can only proceed by using a deposit replacement product could be in breach of the fees ban.
Simon Roberts, head of residential lettings at Jackson-Stops in Woburn, said that if the only way a tenant can rent a property is to buy a deposit replacement product through the agent, then that tenant has been given no choice – and has effectively been forced into a contract with a third-party provider.
Deposit replacement providers have been stressing that when the fees ban comes in, it is crucial that the agents offer it as a choice and not a requirement.
However, Roberts said that if a tenant simply cannot afford a conventional deposit, then the agent may effectively insist that for the tenancy to go ahead, the tenant pays for a replacement product, generally equivalent to a week’s rent.
Roberts – who stressed that his opinions are his personal views – said: “While these schemes may work for some people, I believe that for the majority they won’t and could be in breach of the new legislation.”
He said he thinks the legislation is unclear and could be challenged in court.
He said: “As I see it, the only way around that would be if the prospective tenant went to the agent with a deposit replacement provider of their own choosing.
“This would probably be acceptable but it would need to be challenged in a court and ruled on.”
The legislation, which comes into force on June 1, states:
* A letting agent must not require a relevant person to make a prohibited payment to a third party in connection with a tenancy of housing in England.
* A letting agent must not require a relevant person to enter into a contract with the agent or a third party in connection with a tenancy of housing in England if the contract is—
(a) a contract for the provision of a service, or
(b) a contract of insurance.
Roberts said: There is nothing in law that says a tenant must have a deposit, but agents worth their salt will insist on one and that will be a condition of the tenancy.”
While some tenants may actively choose a deposit replacement product, in other cases, he said, the agents will know full well that the prospective tenants have no cash for a traditional deposit.
He said that in these cases: “By saying to the tenant ‘It’s your choice’, they are trying to circumvent the upcoming legislation.
“I am of the opinion that by offering the deposit replacement option, the choice is being taken away from the tenant and could contravene the legislation.
“I am also of the opinion that these schemes are a ticking time bomb whether or not they are FCA regulated, and these companies will be faced with paying out compensation just as the banks had to with PPI.”
A chief benefit to the tenant is that deposit replacement products cost far less up-front than a traditional deposit, although the cost of a replacement product is not refundable, whereas a traditional deposit can be fully refundable. A benefit to the agent is the referral fee paid by replacement providers.
This is the second time that the issue of agents introducing tenants to a third-party provider has been raised to EYE. Earlier this month, a referencing provider issued a warning that because prospective tenants would have to sign its terms and conditions, agents could be in breach of the ban.
However, deposit replacement providers insisted that there will be no problem – although we did hear suggestions that schemes which charge annual renewal costs could be in breach of the new law.
Jon Notley, CEO of Zero Deposit, told EYE: “In getting ready for the new legislation, our partner agents, in their discussions with tenants and in their documentation, make clear that the only requirement they have is that the tenant pays a security deposit, which under the Tenant Fees Bill is a permitted payment.
“In the event that the tenant then chooses to purchase Zero Deposit, they (and the landlord that the agents are acting for) will accept the Zero Deposit guarantee in the deposit’s place.
“The important point is that Zero Deposit is offered as a choice that the tenant may take if they want to.”
Franz Doerr, of flatfair, said: “Giving tenants a choice is at the heart of what we do at flatfair and the element of choice is explicitly set out to all new tenants who sign up to the scheme.
“We have already seen a successful fee ban in Scotland and flatfair has proven – and continues to prove – an incredibly popular choice for the tenants, landlords and agents there.”