Reducing Rent in Compliance with the Tenant Fees Act

2nd February 2021 Commercial Litigation

The Tenant Fees Act 2019 (the “TFA”) came into full effect on 1 June 2020 and now applies to all assured shorthold tenancies and most residential licences.

We wrote about the end of the transition period here and answered some common questions here.

We have been asked a fair bit recently about the effect of the TFA on temporary rent reductions agreed as a result of the coronavirus pandemic. More specifically, how does a rent reduction interact with the cap on tenancy deposits?

The TFA introduced a 5-week cap on deposits, which would now apply to almost all assured shorthold tenancies. So, what happens when a landlord agrees a temporary rent reduction to accommodate a tenant whose financial circumstances have been adversely affected by the pandemic?

Where a landlord had been holding the maximum permitted deposit before agreeing the reduction, post-reduction they would be holding a deposit in excess of the 5-week cap. However, this does not necessarily mean that the landlord (or agent) has breached the TFA. What it comes down to is the specifics of the agreed rent reduction and the history of the tenancy.

Where the tenancy is for a fixed term, which commenced before 1 June 2019 and has not expired, there is likely to be no breach of the TFA. This will be the case if the reduction is agreed as a temporary time-limited measure which does not amount to a renewal of the tenancy. This is because the deposit was received before the TFA came into effect and so is not covered by the legislation.

In the same way, there will be no breach where a fixed-term tenancy which commenced before 1 June 2019 automatically became a statutory periodic tenancy after 1 June 2020, due to an exception provided by the TFA. However, this is only if the agreed reduction does not amount to a renewal of the tenancy.

Where a tenancy has either commenced on or after 1 June 2019 or it has been renewed since 1 June 2019, the TFA will apply in full. However, a temporary reduction should not be a problem provided the reduction does not amount to a renewal of the tenancy. This is because the part of the TFA which prohibits deposits exceeding 5 weeks rent bases its calculation on the annual rent calculated immediately after the last grant, renewal, or continuation of the tenancy. So, if the tenancy was renewed with a reduction then the deposit would have to be reduced but if the rent was simply reduced within an ongoing agreement then no deposit reduction would be required.

There is no reason for a deposit reduction to result in repayment to the tenant. The TFA allows for monies that are over the permitted sums to be returned to the tenant or allocated to some other payment that is due, such as rent. So a tenant who had some arrears could agree a renewal at a reduced rent with the deposit overpayment then being used to reduce the existing arrears rather than being returned.

As it is apparent, whether or not there is a breach could be a complex question which is heavily dependent on the circumstances of the tenancy overall and on the specifics of the agreed reduction. It is important to get this right due to the consequences which follow a breach, particularly a section 21 notice is served during the breach being rendered invalid.

Get in touch with us for advice on the Tenant Fees Act.

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

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Neli Borisova is a Solicitor located in Londonin our Commercial Litigation department

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