Fees on Assignment of Tenancy and the Limits of Reason

1st October 2021 Commercial Litigation

The First Tier Tribunal recently made a decision relating the Tenant Fees Act 2019 (TFA) which is potentially quite serious for agents.

As most agents will know the TFA allows for fees to be charged where a tenant wants to vary, assign or novate a tenancy. Or, in plain English, a fee can be charged where a tenant wants to leave early and replace themselves with an alternative tenant. This can either be as a change of sharers or a complete change of tenant. However, the fee chargeable is limited by paragraph 6 of Schedule 1 of the TFA to be either £50 or “the reasonable costs of the person to whom the payment is to be made in respect of the variation, assignment or novation of the tenancy”.

However, most agents are of the view that this sum is totally unrealistic and tend to charge more to reflect their actual costs. Ludlow Thompson, a well-known agent, is one of them. Ludlows charged £393.54 for a tenancy assignment after a tenant sought to leave their tenancy early and an assignment to another tenant was agreed. This was broken down as:

Referencing the new tenant: £23.94

Inspection £58.80

Creating new tenancy agreement £274.80

Re-registration of deposits £36

I make no comment as to the appropriateness of these figures but the general assumption was that provided these sums were reasonable and could be justified then the sum was permissible under the TFA. The outgoing tenant disagreed and appealed to the Tribunal.

Somewhat surprisingly the Tribunal agreed with the tenant. They took the view that the legislation should be interpreted as meaning that the default was £50 and in order to charge more the situation had to be out of the normal run of events. A distinction was drawn between the provisions on assignment and other provisions in the TFA, such as for damages, which are simply stated as having to be reasonable without any £50 qualification. The Tribunal also stated that the government guidance supported their view and also was in keeping with the purpose of the legislation which was to regulate the actual level of fees and not just to require them to be reasonable.

As a qualification the Tribunal said that there was no reason for the situation to be extraordinary to justify a fee of over £50 but it had to be something different from a normal change of tenants.

This will be a problem for many agents who charge their actual costs for these changes, which are usually over £50. The other problem will be for tenants. There is no obligation on a landlord to agree to a change of tenants and if agents are going to be limited to a fee of £50 they may look to recover the additional expense from landlords who may then simply refuse to agree to a change of tenants.

I doubt that Ludlows will appeal but I think they should. The Tribunal seems to me to be completely off base on this decision. Firstly, I do not agree with their analysis of the law. It seems to me that the basis for the clause on assignment is that a fee of up to £50 requires no justification and is assumed to be reasonable, and if it is over £50 then justification is needed. Naturally, this differs from the position on damages where there should not be a sum which is just waived through without consideration. Second, I see no basis on which the Tribunal can rely on government guidance to support its decision. The courts have been pretty clear that guidance is nothing more than the views of the relevant department on the law, not necessarily what Parliament intended and are a very weak aid to interpretation. This is even more so as the guidance on the TFA is well known to be riddled with errors anyway. Thirdly, I do not agree with the views of the Tribunal as to the purpose of the legislation. The TFA served several purposes. But it was not really there to regulate the exact cost of fees in all cases. It was intended to regulate the cost of some fees such as referencing fees which were banned and deposits which were capped. But in other cases it was intended to make fees reasonable. There is nothing in the statutory language of the TFA that justifies the conclusion the Tribunal has drawn here.

However, this case will undoubtedly cause difficulties for agents until it is appealed to the Upper Tribunal and a binding decision is obtained.

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David Smith is a Partner located in Londonin our Commercial Litigation department

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