When a tenant signs a tenancy agreement, they are bound by it and cannot unilaterally force the landlord to end the tenancy early.
However, if the landlord is minded to let the tenants leave early, what sort of compensation can they claim from tenants?
Tenancy agreements often include ‘early termination clauses’ – how enforceable are these?
There have recently been two decisions which help us with this:
- A Property Ombudsman decision , and
- A First Tier Tribunal case, Thompson & Rolph v. Greenhill Investments Ltd.
Both decisions deal with situations where tenants challenged payments under the Tenant Fees Act 2019.
What does the Tenant Fees Act 2019 say?
The relevant section is Paragraph 7 of Schedule 1
7 Payment on termination of a tenancy
(1) A payment is a permitted payment if it is a payment to a landlord in consideration of the termination of a tenancy at the tenant’s request—
in the case of a fixed term tenancy, before the end of the term, or
in the case of a periodic tenancy, without the tenant giving the period of notice required under the tenancy agreement or by virtue of any rule of law.
(2) But if the amount of the payment exceeds the loss suffered by the landlord as a result of the termination of the tenancy, the amount of the excess is a prohibited payment.
(3) A payment is a permitted payment if it is a payment to a letting agent in consideration of arranging the termination of a tenancy at the tenant’s request—
(a) in the case of a fixed term tenancy, before the end of the term, or…
(b )in the case of a periodic tenancy, without the tenant giving the period of notice required under the tenancy agreement or by virtue of any rule of law.
(4) But if the amount of the payment exceeds the reasonable costs of the letting agent in respect of the termination of the tenancy, the amount of the excess is a prohibited payment.
(5) In this paragraph “fixed term tenancy” means any tenancy other than a periodic tenancy.
The Property Ombudsman’s decision
This confirmed that, notwithstanding contract term made to the contrary,
- The fee cannot exceed the financial loss suffered by the landlord, and
- Costs must be proved by evidence
In this decision the Ombudsman found that, if a landlord, due to the tenant moving out early, has to effectively pay commission twice, this can be claimed as an early termination fee.
It is also important that the relevant clauses in the tenancy agreement are clear and not confusing (as they were in this case).
Thompson & Rolph v. Greenhill Investments Ltd
In this case, again, the tenants wanted to leave early and challenged the fees they were asked to pay under the early termination clause in their contract.
In particular, although they accepted that the agents had to do extra work due to their decision to leave early, they claimed that the payment made by them should be limited to a ‘reasonable fee’ and should not be based on the agent’s agreement with the landlord, to which they were not a party.
The tenants also challenged the claim for loss of rent due to the rent for the new tenancy being lower.
The Tribunals findings:
The two main findings for our purposes were two:
1 The landlord’s loss of letting agent fees is essentially a ‘double recovery’ as those fees could reasonably be transferred to the new letting and so did not represent a genuine loss.
2. The tenants could not be liable for the loss to the landlord due to the lower rent charged to the new tenants.
On this last, the Tribunal held that having accepted an early termination of the tenancy, the landlord is liable to mitigate his losses. But the tenants cannot be held responsible for the alleged changes in the letting market. Tellingly the Tribunal pointed out that had the property been let at a higher rent, the tenants would not have been paid the difference. Plus, this item did not fall within Paragraph 7.
The agents were, therefore, ordered to make a payment back to the tenants.
So, what do we learn from this?
Landlords and agents need to be careful about the early termination payments they charge to tenants.
- They cannot charge the difference between the existing and the new rent.
- Any fees charged (such as referencing fees) must be ‘reasonable’ and supported by evidence
- Agents fees for arranging the new tenancy can be charged but must be ‘reasonable’. They cannot be referable to the agency agreement with the landlord (as the tenant is not a party to this)
- The total sum claimed from the tenant must not be more than the landlord’s loss – which in most cases will be the rent for the remainder of the fixed term.
Always bear in mind that if tenants are asked pay more when leaving early, than they would have done if they had stayed and paid rent as anticipated under their contract – the excess will be a prohibited payment.
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