Agent warns of ‘possible breach to fees ban law’ if tenants use deposit replacement scheme in order to rent

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.”

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38 Comments

  1. LordElpus56

    It will always be a choice. Technically there are options for tenants to either save up a bit longer or borrow the deposit from family – if it’s a choice between that and buying a Deposit Replacement policy then it’s still a choice.

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  2. Proptex

    Agree that yearly renwal fees (charged by Zero Deposit) will be prohibited under the upcoming fee bill.
     
    I would stick to the reputable providers in the space, where tenants are offered the choice to pay a one-off membership charge before the tenancy and no yearly renewal fees thereafter, regardless of how long they stay in the property (e.g. Flatfair, I know that they structured their product with the help of Clifford Chance and the FCAs Innovation hub)

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    1. RealAgent

      Reputable? So you’re  suggesting Zero Deposits isn’t? I would suggest you post an amendment to that comment… because if not you’re either a competitor or an idiot to put that statement out on a public forum! Just for your information we’ve been using Zero deposits and as one option to our offering and those tenants in need of it love it…. yes tenants remember them, the sector all of this misguided legislation was set to help…. I say again….THEY LOVE IT!!  

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      1. Proptex

        Looks like someone just woke up and realised they didn’t do their homework when signing up with ZDS

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        1. RealAgent

          Looks like someone else needs to actually wake up and realise how defamatory comments on a forum can land you in very hot water!

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      2. Lil Bandit

        How is FlatFair reputable? They don’t have an insurer nor are they regulated by the FCA! I would use them if I was running low on snake oil, however.

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        1. AgencyInsider

          As you keep on saying Lil Bandit. Every time flatfair gets mentioned. Do you work for Zero Deposit?

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          1. Lil Bandit

            Take off your tinfoil hat AgencyInsider and get a grip!

             

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            1. AgencyInsider

              I have a massively satisfactory grip thank you very much Lil Bandit. I will take your deflective response to my question as a Yes.

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  3. David M

    For me, the situation is very similar to having a guarantor for a tenancy., which you have alongside a deposit.  A guarantor continues to be liable after the initial term has ended (If the agent has correctly drafted the agreements *)  and does not require the guarantor to agree to any extensions.

    How can a deposit guarantee scheme say we will agree to give a deposit if required…but if the Tenant remains in place beyond the initial term we need a further payment.   The nature of the housing act is that Tenants rights are protected unless the Landlord serves onto them a prescribed notice to end the tenancy.  With this in mind, any Tenant who uses a deposit guarantee should expect a section 21 approx  2 months before the end of the tenancy as no landlord would take the risk of a tenant remaining in their property without adequate protection

    For me, the only way this can really offer the Landlord protection is if the Deposit companies actually pay over the money to the agent, and then pursue the Tenant to recover it at the end of the tenancy or when the tenant fails to pay their renewal fee…

    * one of the consequences of the fee ban will likely be the loss of highly skilled legal co-ordinators who are equipped to draft and prepare the legal documents associated with tenancies…I suspect the quality of agreements will fall and this is bad news for Agents, Landlords & Tenants.

     

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  4. J1

    Just decline the tenancy if the tenant cannot raise the deposit!

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    1. CountryLass

      That’s what I was thinking. I’m not keen on my Local Authority’s housing bond scheme, but if a Tenant checks out ok, and if they need it and the Landlord is happy then I will give it a go.

      But Councils have a bit more staying power than a company, so to me they seem safer. What happens if ZeroDeposit or whatever scheme they use goes bust?

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  5. Wanderer

    I don’t know anything about the deposit replacement schemes but if there’s an annual fee what is making the tenant pay it? What happens if they don’t pay it, does that mean there is no longer a deposit?

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    1. letstalk

      The replacement scheme, Blinc, where they are not advised that alternate means of deposit have been agreed, persue the payment and dont lapse the deposit, it’s part of their terms and conditions. Of course I shoudl imagine all DRS’s have difering terms.

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  6. natural_selection

    Nonsense, what’s the difference between a tenant taking out a loan or using credit card to pay for the deposit? They also have a charge associated. The key here is that a deposit replacement scheme should always be a ‘choice’, and the more choices to make renting easier for as many people as possible, the better.

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    1. CountryLass

      Most places don’t take credit cards, we don’t. We get charged by the bank for taking a payment, but the Government has stopped us from adding that surcharge to the bill.

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  7. Simonr6608

    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.”

    Only until someone seeks clarification via the courts and how popular will these schemes be once an agent has to declare how much commission they earn from each sign up

     

     

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    1. letstalk

      We do have to declare, already, if we receive a commission on any product offering to our clients or customers.

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  8. HIT MAN

    My understanding is that the tenant has to contact the provider and the agent will receive a commission for them doing so, surely that’s a beach of the legislation, where would the tenant get details of such schemes, from the agent I think! so where does the choice come in? I think agents will exploit this just to receive commissions.

    What if the tenant says I want to chose my own nil deposit scheme? the agent may say that they don’t use the same scheme?? Where is the choice now?? 

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    1. Simonr6608

      That was my own thinking when I spoke with Ros and sent my take on the schemes to her following the opinion piece from Jon Notley, CEO of Zero Deposits. Again they will and do have a place in the market for some but as and when the use of them and how they are administered end up in court for clarification which I’m sure will happen at some point in the future it could cost the industry with additional legislaton and red tape. Simon Roberts Jackson-Stops, Woburn

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  9. CoastLet

    I have to question whether or not any tenancy that requires a deposit scheme to proceed is the right tenancy to be putting in place? I’m not sure that advising a Landlord to proceed with a tenant/tenancy that can’t demonstrate that deposit funds can be raised prior to moving in is the right way to go!

    In particular this will be the case when the fee ban is implemented….tenants essentially will be able to proceed with almost zero financial commitment to the Landlord/his agent.

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    1. Tcos

      Also given the fee ban is there to stop tenants having a large expenditure at the start of the tenancy and the security deposit is being capped at 5 weeks I would say there is no real reason a tenant should not be able to come up with the funds. In my view no deposit schemes whiff a bit.

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  10. DarrelKwong43

    IMHO, forget about taking a deposit, whether a physical one or zero deposit insured.

    Agree, that it gives a tenant an incentive to look after the place, but that is the only positive.

    If someone is going to trash a property, or owe months in rent, then 5 weeks deposit will not make much a of a dent.

    Look at Guarantors, or building a buffer into the rent charged.

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    1. CountryLass

      The theory of building a buffer in to the rent sounds good, but it has issues. We can’t inflate the rent for a while, then decrease it, which would have been a problem for one of my OAP Tenants, when the Landlord dropped the rent when her husband passed away and he found she had had to get a job to get some extra money.
       
      So if the rent would have been £500, but we take it to £600 to get a deposit, what happens after that? We can obviously place it to one side, but after the 6 months, they are still going to be paying £600 a month, on a property with a market value of around £500. So after 12 months in the property, they will have paid over what is needed for the deposit, and will continue to do so every month til the Tenancy ends. We can’t decrease the rent, as that would breach the ban. The Landlord is happy as he has a higher rent, the Tenant is p!$$ed off as they are paying too much, so they certainly agrent going to clean the property or redecorate after they leave, but they still want their ‘deposit’ back TYVM! So then the Landlord is unhappy as he has already spent the ‘extra’ rent he got each month after the deposit was paid, and the Tenants refuse to accept any deductions, and we end up in arbitration with DPS/TDS.
       
      If the plan was properly implemented, it could work, but I don’t see how it can be done without yet more legislation!
       
      Although… could having a higher rent for the initial period with no deposit, then having a new tenancy agreement at a lower rent get round it? As long as it was documented that it was for a Deposit, and not a fee? And it was deducted from the rent before the management fee was taken, so it is clear we do not make money from it?

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      1. DarrelKwong43

        strangely the ban only talks about the first month being higher than the second.

        Trying to legislate for a tenant fee ban, trying to cover all the angles and permutations is almost impossible.

        I think my suggestion would be an increased £15 per month, not the £100 as per your example.

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        1. Eric Walker

          Actually, the ban doesn’t mention months at all. It only mentions relevant periods and specifically ‘if the amount of rent payable in respect of any relevant period (“P1”) is more than the amount of rent payable in respect of any later relevant period (“P2”), the additional amount payable in respect of P1 is a prohibited payment’

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          1. DarrelKwong43

            relevant periods in reality for a tenancy agreement will be monthly

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  11. Scottish_Mist42

    We are considering both main providers of these products however I remain to be entirely convinced.

    Neither are FCA compliant and also where there is an underwriter with commercial exposure, I’m not convinced the adjudication process is going to be entirely unbiased.

    I’m edging towards the side of caution and will wait and see how it plays out during the next 12 months.

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  12. Property Poke In The Eye

    Sorry I may of missed some update.

     

    Do agents have to provide and Zero Deposit Option?   Why can’t agents just take a a deposit like normal (4-6 weeks)?

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    1. Simonr6608

      Of course you don’t have to offer it but I am starting to see more and more agents doing so and the reason for this is probably a large referral fee which will go someway to replacing the lost tenant fee income

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    2. DarrelKwong43

      there is no legal obligation to take a deposit full stop.   If you get me a room full of landlords, I will give them my best  true deposit horror stories and I am pretty confident at least 75% will be begging you (as an agent) not to take a physical deposit. 

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      1. Peter

        Bearing in mind most tenancies do not end with horror stories, just a variety of, mostly minor, dilapidation and cleaning issues, but, nonetheless, requires a charge, I think landlords will be begging us to take a deposit. Although I will add that smaller deposits will, in the vast majority of cases, suffice.

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      2. Simonr6608

        Nobody has said that there is a legal requirement to take a dseposit but the vast majority if not all agents make the deposit a condition of the tenancy. Sorry but i have to dispute your claim regarding 75% landlord would beg not to take a deposit once theyve heard your stories.

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        1. DarrelKwong43

          TBH, Simon, I think 75% is quite low 😉 

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  13. Peter

    * 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,

     

    Have agents with arrangements with utility providers considered how the above might impact on them!

     

    I am aware some apartment blocks have one gas supplier for the whole block, so tenants have to accept this situation and the block management invoice the tenants directly or via the landlord’s service charge for the tenant to reimburse. Could this be in breach of the above?

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    1. Simonr6608

      Tenants can change utilities if they so wish and any clause in an AST saying tenant must ask permission is unenforcable with regards to communal heating the tenant isn’t entering any contract with a supplier and the management company cannot make a profit on the charges

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      1. Peter

        But could it be deemed that a tenant is entering into a contract with the block management company to pay for the provision of gas which the tenant has no choice over?

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  14. qweasdzxc

    The most relevant paragraph of the TFB does not appear to have been quoted:

    (6) For the purposes of this section, a letting agent does not require a relevant person to make a payment, enter into a contract or make a loan if the letting agent gives the person the option of doing any of those things as an alternative to complying with another requirement imposed by the letting agent or the 40landlord.

    As long as you offer the tenant the chance to pay a deposit then you can also offer the deposit replacement scheme and even make them pay annually if that is what the DRS contract requires.

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