The issue of reservation fees, or holding deposits, raised interest on this site last week.
Landlord and buy-to-let author David Lawrenson said that some agents were reluctant to take them, possibly out of concern that such fees could be seen as deposits requiring protection.
We asked Ben Beadle, head of member relations at the Tenancy Deposit Scheme, for the view of the TDS.
He said: “Reservation fees or holding deposits are not considered to be deposits under the Housing Act 2004 (as amended). The money that is being taken is not being taken as security for an obligation arising under a tenancy.
“Instead, the money is being taken to show the tenant’s real interest in the property and as a compensation for the landlord if a tenancy is not, in fact, entered into.
“The reservation fee will become a deposit once a binding tenancy agreement has been entered into, and the reservation fee is ‘converted’ into the tenancy deposit itself. This will often arise where the tenant has entered into a tenancy and paid their deposit but is not yet able to move into the property.
“The best example of this is with students who ‘top up’ their reservation fee, roll it over into the tenancy deposit, and sign a tenancy agreement several months before actually moving in.
“Deposit holders should ensure that they register the tenancy deposit and serve Prescribed Information within 30 days of receiving the [balance of] the deposit.
“The key point is that the ‘clock’ for doing this starts ticking once the deposit has been taken as a part of a tenancy which has been entered into even though occupation has yet to begin.”
Comments
Noted, even if you conveniently ignore the fact that your theory and that of your expert make no sense when applied in the real world...
@IBE
Actually emotion doesn't come into it for me. The actual position when eventually decided in a Court of Record - as it will be - will make no difference to me personally or business-wise at all.
For agents and Landlords it will, and I assume it will to you as you so badly want me to be wrong so the status quo can continue.
It wasn't my opinion I posted 12.30 yesterday, it was a legal one. I suggest you read that post again and as you recommend, study closely. Things are as they are and not as you would wish them to be.
End of posts, agree to differ as I say I don't actually care either way.
Ok so lets re-cap, you believe that holding deposit/reservation fees are not deposits when treated ‘under’ a tenancy since that tenancy does not exist but that it can be treated as such ‘in connection’ with a tenancy because a tenancy does exist. You rely on s45 by interpreting ‘agreement’ as intent in the sense of an agreement to take up a tenancy.
So lets follow your train of thought that a verbal agreement (intent) to take up a tenancy is the same as an actual written tenancy. That would mean the moment a holding deposit/reservation fee is accepted a verbal agreement has been created and so has a tenancy. But that would also create the tenants rights, namely that the tenant has an immediate right to possess the property, sec (2) of your beloved s45. This in effect would defeat the requirement for references and we would therefore have to have hand over the keys there and then. To deny the tenant possession of the property and therefore occupation of the property would mean that no tenancy has been created because as you kindly pointed out in an earlier post, a tenancy cannot exist before possession is granted LOPA 1925 sec 54, and so we’re back to where we started. Please tell me you see the flaw here.
Rather than relying on ‘experts’ if you read s45 a little further yourself then you will see the context that it mentions in the very first sentence is explained in sec (2),
‘ under the terms of any lease, agreement or other DOCUMENT’
You can see these are a collection of adjectives that refer to physical paperwork and I don’t understand how you fail to embrace this?
Your crusade to prove ‘intent’ has had you back and forth, first it’s a deposit then its not. Quoting s45 then conceding it’s irrelevant. Ignore s45 and forget you ever mentioned it then here we are again. One ‘expert’ misquotes and the other just analyses syntax.
Take a step back and look at it with fresh eyes IO. Follow the natural progression of all the laws of housing and they will lead you to a logical destination. It’s a common sense conclusion that your theory lacks, remember No tenancy – No deposit.
@ No tenancy - no deposit
Here is my final word on the matter, or more correctly words from someone far more knowledgeable and authoritative than me. Like me he has no axe to grind, the evental position as hopefully clarified when Johnson v old goes to the Appeal Court on 6/7 March makes no difference to us personally at all.
Unfortunately most people who hold the counter view to what is below and on issues like student lets and taking money 10 months in advance and saying it is not a sepodit do so because the position does affect them. That is understandable but wishing it is so doesn't change the LAW
You have asked me to comment on the interpretation and application of s45 The Housing Act 1988 in relation to tenancy deposit protection generally and reservation fees and whether they may be deemed a deposit particularly.
Still, not convinced about sec 45 only relating to existing tenancies as if it was for existing tenancies only why would it say”... and agreement for a tenancy”?
The “and” word is very important here and as with all matters legal it is minute examination of the Statute text that is critical. It matters not what the drafter may have intended or meant, or what we practitioners think they should have said which would have been clearer or better, what matters is what the actual text says. Only a Court can of course decide in the case of dispute, and ideally a Court of Record.
S45 The Housing Act 1988 in defining a tenancy says a tenant includes a tenancy “AND” and agreement for a tenancy, i.e. something different from a tenancy.
Note the definition in the Statute wording is brief but critically is not “exclusive”. That means when it says “includes a sub tenancy…..” it is not saying that only the things in the following list are covered, it is rather saying that where it uses the word tenancy “it means the obvious tenancy” and includes a sub tenancy. This has to be so because if you take the view it is “limiting” what falls into the definition the link word AND in the middle, and which is critical to the interpretation, seems a bit troublesome.
After the word AND it links “..... agreement for a tenancy or sub tenancy” in a single statement. Therefore it surely must be reasonable to argue that the “agreement for a sub tenancy” has to be different from the “Sub tenancy” mentioned before the AND word. It is possible to read the “.....agreement for a tenancy” to mean a tenancy, but this would not be consistent with the two references to the sub tenancy either side of the AND.
Whenever you read the word INCLUDING it means this is not the full list but the list includes these things. Therefore there is no reason not to read the statement to mean that the definition of tenancy includes an agreement to set up a tenancy. If there are cases or factors not considered in this interpretation that have not thought about, I am very happy to be educated.
Secondly I am far from convinced you need sec 45 anyway as if you read the HA04 it defines a deposit as any money held to ensure the tenant fulfils and obligation in or “in connection with” an ast. As they mention the tenancy obligations, the words “in connection with” must refer to something other than the tenancy obligations and I don’t see it that farfetched that if argued to a judge that they would say a holding deposit or reservation fee is held “in connection with” (i.e. to make sure you start it) an AST. In a simple logical thought, if you talk about an agreement for a tenancy, is it not true to say that this is always an action in anticipation of a future tenancy?
Finally in terms of holding fees I don’t see the need to refund the money before taking the real deposit as in a renewal of a tenancy you don’t physically give it back to the tenant, the renewal simply changes the purpose the money is held for and this triggers the need to protect. In effect this is the nano second moment when the deposit is no longer held for the original tenancy and becomes held for the new tenancy – again hence the need to protect including in a periodic situation the need to re-serve PI which of course in a renewal you would do anyway.
(1) - ‘So a ‘holding deposit/fee’ in itself is indeed not a deposit for an obligation arising under a tenancy since that tenancy does not exist’
(2) - ‘However, it is much harder to argue that it is not money held to fulfil an obligation “in connection with” an AST if you are holding it to focus their mind on making sure they do start the tenancy’
Part (1) correctly establishes the holding deposit/fee is not a deposit because there is no tenancy so why would that not apply to part (2) - there’s still no tenancy!
You can’t attribute ‘in connection with’ to a tenancy that has not yet been taken up, that would be self-fulfilling. It cannot yet be classed a ‘tenancy’ as legally defined or otherwise until it’s actually taken up and therefore it can only apply to an active tenancy. Likewise it’s both impossible and unreasonable to place an obligation on someone to ‘take up a tenancy’ when so many factors can influence whether that is indeed possible. The obligations referred to are the written terms of the tenancy and not agent referencing conditions. The law does not cover our referencing conditions and tenancy obligations are only relevant once the tenancy is activated. The unwavering constant is that whilst there is no active tenancy these payments can never be considered a deposit, no tenancy – no deposit.
Look at it again,
‘If you are holding it to focus their mind on MAKING SURE THEY DO START THE TENANCY’
This clearly establishes there is no tenancy yet, it contradicts the whole paragraph it was contained it and once again the constant remains true, no tenancy – no deposit. David Lawrence agrees, so does TDS and above all so does the government.
(3) - ‘The law simply defines the point at which the protection is needed as being on receipt and does not mention whether tenancies have been entered into or commenced’
A limited observation that does not address and encompass the entirety of the law. Namely, in order for PROTECTION to be APPLICABLE there would have to be a deposit and in order for a deposit to be applicable there would have to be an active tenancy in force. This logical and natural progression of the law absolutely does refer to ‘whether tenancies have been entered into or commenced’, remember no tenancy – no deposit.
(4) - ‘Unfortunately TDS has missed out some rather important words in the deposit definition in the HA 2004’
Unfortunately so has the ‘Industry expert’ who states ‘money held to fulfil an obligation “in connection with” an AST’. The Housing Act 2004 para 213 (8) actually states,
“deposit” means a transfer of property INTENDED to be held (by the landlord or otherwise) as SECURITY for—
(a) the PERFORMANCE of any obligations of the TENANT, or
(b) the discharge of any liability of his,
arising under or in connection with the TENANCY.
To misquote is to misrepresent but as you can now read it for yourself you can see a deposit is defined by a tenancy. Only once an agreement has indeed been signed can there be a tenant, a tenancy and therefore a deposit. This is never the case with a holding deposit/fee as it’s always received before any tenancy agreement is signed so no tenancy – no deposit.
Now onto Students and rent in advance….
@ David Lawrenson
Have referred this to an industry expert on matters legal and this is the answer in terms of the TDS advice.
Unfortunately TDS has missed out some rather important words in the deposit definition in the HA 2004 as the Statute says “...arising under OR IN CONNECTION WITH an AST.”
So a ‘holding deposit/fee’ in itself is indeed not a deposit for an obligation arising under a tenancy (since that tenancy does not exist {but this would argue that it never needed protection until the tenancy existed!}).
However, it is much harder to argue that it is not money held to fulfil an obligation “in connection with” an AST if you are holding it to focus their mind on making sure they do start the tenancy!!
In terms of the “clock ticking” final comment there is clearly here a total misunderstanding of LOPA 1925 sec 54 which specifically states a tenancy cannot exist before possession is granted unless it has been created as a DEED. In effect you cannot enter into a tenancy without entering into possession, which means having the keys and control of the property.
The law simply defines the point at which the protection is needed as being on receipt and does not mention whether tenancies have been entered into or commenced. This is just an interpretation of TDS, what matters is what the Law says.
I don't know whether this more precise interpretation of the Statute makes you want to revise your view at all David but it certainly needs to make all those agents who think taking a reservation fee won't complicate matters if it is later defined as a deposit think twice.
Since as can now be seen it quite easily can be so defined.
TDS opinion is doubtless well intentioned and meant to help, but on this more detailed analysis unfortunately doesn't.
In terms of Landlord attitude and voting with feet, best to let the problem walk off to someone else's door in my view. Good agents should be educationg Landlords to what is or is not the Law including in Consumer Protection areas which is where deposits and fees fall and particularly their non return when they were arguably paid as part performance of a contract.
If we can convince an agitated Landlord not to get drunk and go round to the property with a few mates and armed with a baseball bat and when it is raining, and when the tenant is an expecting lady (these are always the facts in an unlaeful eviction case!!) to throw out her and her belongings, surely we can advise them that taking say £500 and having to pay back £2000 isn't such a good idea?
Despite the TDS reassurance here, there may still remain risks to the agent. We are well aware that the law and the interpretation of it can change at any time!
But if an agent (for whatever reason) is reluctant to get a financial commitment from a prospective tenant to reduce the chance that they will change their mind and leave the landlord with a void, some landlords, (if they think the risk is high enough) may vote with their feet.
They may be more likely to 1) do the work themselves or 2) find an agent who IS prepared to take a reservation fee for them.
Final comment: A steer on this issue from letting agents' trade bodies might be of use at this point.
@Stonehenge
I agree with you but you can define a camel as a horse defined by a committee if you like but it is not what the industry calls such fees or defines their purpose that matters, but what the LAW says.
If the LAW says they are not deposits which if evetually the same money is used for the deposit is at least a possibility, that is fine and the problem as I see it doesn't exist.
But remember this.
If it is eventually decided to be a deposit, there will be an awful lot of claims for failure to protect and which can go back 6 years.
As ever is it worth the risk if there is any element of doubt given the decisions Judges sometime reach?
Pedant's corner.
A fee is paid by someone with whom you have a contractual relationship for providing a service.
Applicants and agents have no contractual connection other than to process an application for a tenancy.
They are therefore "charges" and not "fees". The agent has not provided any service to the applicant, who again is not even a client.
As if any more evidence were needed that running a letting agency is far more complex than selling property. We sell & let and selling is a breeze compared to letting & managing.
Very very dubious. This is only TDS' opinion however well informed that (or that of CLG) may, or may not be.
Of course if TDS can point to something specific in the 2004 Act or LA2011 which clearly states that reservation or holding fees as a group are not deposits of any description when first handled, that is perfect.
The intention of the deposit definition in the 2004 Act (as amended?) or not may well not haver originally intended to include such fees as a deposit, but the definition is very widely drawn and deliberately so.
In fact can TDS please point out the specific wording that amends the 2004 deposit definition, and where to find it, so holding fees are not deemed in any way to be a deposit?
For example isn't paying a deposit at some stage some obligation on the part of the tenant? If so then the fact the agent was holding the money for that purpose all along but then simply renames it at some later point in time is, I would suggest, dodgy.
As indeed is the notion of retaining the fee as some sort of compensation for the Landlord. To do so the fee would have to be clearly flagged up as non refundable in any circumstances and the tenant sign to that effect. Are they likely to do that?
Proceed with caution - an easy soft option target for a genuine prospective tenant forced by personal circumstances to drop out of a tenancy they fully intended to enter into. If the fee is anything more than a token gesture, no matter what they have signed, I'd suggest such a disgruntled failed applicant could easily mount a claim against the agent for the return of the money no matter what they have signed.
Is any agent in their right mind going to risk defending when they at least possibly have to pay anyway, plus potentially x3 if it is found, BY A JUDGE, to be a deposit?