Round #1125

Landlord took a £450 holding deposit from a prospective tenant on 14 April 2025 for a property at £1,500 pcm in Reading. The deadline for agreement was 28 April 2025. The tenant pulled out on 25 April 2025 after the landlord disclosed (on 24 April 2025) that the property has an outstanding HMO licence application not yet granted. Landlord is refusing to return the holding deposit citing "tenant default". Is the holding deposit retainable under schedule 2 of the Tenant Fees Act 2019?

# Holding Deposit Analysis: Schedule 2 Tenant Fees Act 2019 ## Preliminary Checks: Lawfulness of the Deposit Itself Before analysing retention, it is necessary to confirm the deposit was lawfully taken. | Check | Position | |---|---| | **Cap (s.2 & Sched.2 para.1)** | 1 week's rent = £1,500 × 12 ÷ 52 = **£346.15**. The landlord took **£450**, which **exceeds** the statutory cap by ~£103.85 | | **Consequence** | Taking a holding deposit above the cap is a **prohibited payment** under s.2 TFA 2019. The excess (arguably the entirety) is irrecoverable and the landlord commits a **civil offence** (s.12), exposing them to a fine of up to £5,000 (first offence) | > **Critical point:** The unlawful excess means the landlord is already on weak ground before the retention question is even reached. Enforcement authorities (local housing authority) can also require repayment. --- ## Schedule 2 Analysis: Grounds for Retention Schedule 2 TFA 2019 sets out the **exhaustive** list of circumstances in which a landlord *may* retain a holding deposit. The landlord must satisfy **at least one** of the following: ### Ground 1 – Tenant provides false or misleading information (Sched.2 para.4) No suggestion of this on the facts. **Not applicable.** ### Ground 2 – Tenant fails a right-to-rent check (Sched.2 para.5) No suggestion of this on the facts. **Not applicable.** ### Ground 3 – Tenant withdraws from the proposed agreement (Sched.2 para.6) This is the ground the landlord will rely on. However, **this ground is expressly disapplied** by Schedule 2 paragraph 7 where the landlord (or their agent) has behaved in a way that it would be **unreasonable to expect the tenant to enter into the tenancy agreement**. --- ## The Critical Issue: Schedule 2 Paragraph 7 Disapplication ### What paragraph 7 provides > *"Paragraph 6 does not apply if the landlord … has failed to take reasonable steps to enter into a tenancy agreement with the relevant person or … has decided not to enter into a tenancy agreement with the relevant person."* More relevantly, the **Guidance issued by MHCLG** (and the predecessor MCHLG guidance, which remains operative) makes clear that a landlord cannot rely on tenant withdrawal where **the landlord's own conduct caused or justified the withdrawal**. Withdrawal driven by a material undisclosed fact going to the habitability or legality of the property is treated as analogous to landlord-side default. ### The HMO Licence Issue #### Legal Framework - Under **s.61 Housing Act 2004**, it is a criminal offence to manage or permit occupation of an HMO that requires a licence without one being granted (not merely applied for). - An **application pending** does not confer a licence: **s.63 HA 2004** provides interim protection from prosecution while an application is pending, but **does not render the property licensed**. - Whether a full licence is required depends on whether the property meets the definition in **s.55 / s.56 HA 2004** (mandatory licensing: 5+ person HMO) or is subject to **additional or selective licensing** under ss.56–60 HA 2004 by Reading Borough Council. - Reading Borough Council **does operate additional HMO licensing schemes** covering a wider range of HMOs than the mandatory national scheme (2+ storey, 3+ persons in some designations). #### Significance to the tenant's decision | Point | Analysis | |---|---| | **Disclosed late** | The landlord disclosed the licensing position on **24 April**, after the holding deposit had been held for 10 days. This is information **material to the tenant's decision** to proceed | | **Material non-disclosure** | The existence of an unlicensed (pending) HMO status is a **material fact** affecting: (a) the legality of granting the tenancy; (b) whether the landlord can lawfully grant the tenancy before licence is granted; (c) mortgage/insurance implications | | **Landlord-induced withdrawal** | The tenant withdrew **one day after** the landlord's disclosure. The causal link is clear: the tenant withdrew because of information the landlord provided which they were arguably obliged to disclose at the outset | | **Reasonableness** | It is **entirely reasonable** for a prospective tenant to decline to enter a tenancy of an unlicensed HMO — they would be occupying premises the management of which may constitute a criminal offence, and they would have no certainty the licence would be granted | ### Additional Point: Can a Tenancy Lawfully Be Granted? - Where an HMO **requires** a licence and none has been granted, granting a tenancy may itself be problematic. - Crucially, under **s.75 HA 2004**, if a landlord grants an AST of a licensable HMO without a licence, the tenant (or local authority) may apply for a **Rent Repayment Order**. - A prospective tenant is entirely justified in refusing to proceed into a situation where they could be occupying premises carrying these legal risks. --- ## Deadline Compliance | Date | Event | |---|---| | 14 April 2025 | Holding deposit paid | | **Statutory deadline** | Under **Sched.2 para.2**, the landlord must reach agreement or notify the tenant within **15 days** (or such longer period as agreed) = **29 April 2025** | | 24 April 2025 | Landlord discloses HMO licence issue | | 25 April 2025 | Tenant withdraws — **within the deadline** | The tenant acted within the deadline. There is no procedural default on the tenant's part. --- ## Conclusion | Issue | Position | |---|---| | **Deposit lawfully taken?** | **No** — £450 exceeds the statutory cap of ~£346. The excess is a prohibited payment | | **Ground for retention (tenant withdrawal)?** | Technically triggered on face of it | | **Sched.2 para.7 disapplication?** | **Yes, strongly arguable** — landlord's late disclosure of material HMO licensing issue caused the withdrawal; it was reasonable for the tenant to withdraw | | **Is the deposit retainable?** | **No** — the landlord cannot rely on Schedule 2 to retain the deposit | | **What should happen?** | The **full £450** must be repaid within the statutory period (Sched.2 para.9: within 7 days of the deadline/decision point) | --- ## Recommended Steps for the Tenant 1. **Write formally** to the landlord citing: - TFA 2019, Schedule 2, paragraph 7 disapplication - The overcapping of the deposit (£450 v £346.15) - Demand repayment of **£450 in full** within 7 days 2. If refused, **report to Reading Borough Council** (the enforcement authority under s.16 TFA 2019) — they can require repayment and impose a civil penalty. 3. Alternatively, bring a claim in the **First-tier Tribunal (Property Chamber)** under s.14 TFA 2019 for recovery of a prohibited payment (the entire deposit or at minimum the excess). 4. **Separately consider** reporting the unlicensed HMO operation to Reading Borough Council's housing enforcement team. --- *This analysis is based on the Tenant Fees Act 2019, Housing Act 2004, and associated guidance. It constitutes general legal analysis, not formal legal advice. The tenant should consider consulting a housing solicitor or Shelter/Citizens Advice for case-specific representation.*

## Analysis: Retainability of the £450 Holding Deposit --- ### 1. Preliminary Validity Check — Was the Holding Deposit Lawfully Taken? **Cap:** Under the Tenant Fees Act 2019 s.3 and Schedule 2 para.1, a holding deposit cannot exceed one week's rent. - Weekly rent = £1,500 × 12 ÷ 52 = **£346.15** - £450 exceeds that cap by **£103.85** The excess (£103.85) is a **prohibited payment** under TFA 2019 s.3(4). Taking it is a **Category A** offence (civil penalty up to £5,000 for a first breach: s.12). The entire deposit arrangement is tainted from the outset, but the analysis of retainability proceeds on the full £450 since the landlord is claiming retention of it. --- ### 2. The Fifteen-Day Deadline Schedule 2 para.2 sets the "deadline for agreement" as the earlier of: - 15 days after the holding deposit was received, **or** - any later date agreed in writing by both parties. Deposit taken: **14 April 2025** 15-day statutory deadline: **29 April 2025** Agreed deadline: **28 April 2025** (within statutory window — valid) The deadline is **28 April 2025**. The tenant withdrew on **25 April 2025** — before the deadline. --- ### 3. Schedule 2 Retention Grounds — Exhaustive List The landlord may **only** retain a holding deposit on one of the grounds in **Schedule 2 paras.7–8**: | Ground | Condition | |---|---| | Para.7(a) | Tenant **provides false or misleading information** that reasonably affects landlord's decision | | Para.7(b) | Tenant **fails the Right to Rent** check (Immigration Act 2014) | | Para.7(c) | Tenant **withdraws** from the proposed tenancy | | Para.7(d) | Tenant **fails to take reasonable steps** to enter the tenancy before the deadline | The landlord is invoking **para.7(c)** — tenant withdrawal. --- ### 4. The Critical Complication: Landlord-Induced Withdrawal Para.7(c) permits retention where the tenant withdraws, **but this must be read alongside para.8**, which provides that the landlord **must repay** where: > the landlord or letting agent decides **not to enter** into a tenancy agreement with that person (para.8(a)), **or** > the parties fail to enter into a tenancy agreement **before the deadline** and it is **not the tenant's fault** (para.8(b)). #### Was the withdrawal genuinely the tenant's fault? The landlord disclosed on **24 April 2025** that the property is operating under an **ungranted HMO licence application**. Under the **Housing Act 2004 s.72**, operating or permitting occupation of an HMO requiring a mandatory licence **without that licence being granted** is a criminal offence. A property subject to an outstanding (ungranted) application is, at the point of disclosure, **unlicensed for HMO occupation**. This has two consequences relevant to retention: **a) Material non-disclosure at the point the deposit was taken (14 April)** If the HMO licence was already pending/outstanding on 14 April, the landlord withheld information that was **directly material** to whether a legally compliant tenancy could be granted at all. A tenant cannot be said to have withdrawn without cause when the cause is the landlord's own late disclosure of a legal impediment. **b) The tenancy the landlord was offering may not have been lawfully grantable** Under HA 2004 s.61, whilst an application is pending a property may benefit from a temporary exemption — but this is not the same as a licence being granted, and the landlord cannot guarantee possession or a lawful HMO tenancy until the licence is determined. The tenant was withdrawing from an arrangement that was **not yet legally certain to be performable**. **c) Para.8(b) analysis** The failure to reach agreement before 28 April was not caused by the tenant's caprice. It was caused by the landlord's **disclosure of a material legal fact on 24 April** that a reasonable person would regard as a legitimate reason not to proceed. In these circumstances, the withdrawal falls properly within **para.8(b)** — the parties failed to enter into a tenancy and it is **not the tenant's fault**. --- ### 5. Conclusion **No, the holding deposit is not retainable.** The landlord's reliance on "tenant default" under Schedule 2 para.7(c) fails because: 1. The withdrawal was **caused by the landlord's own late disclosure** of an unresolved HMO licensing position — a material legal impediment to granting the tenancy. 2. Para.8(b) applies: the failure to reach agreement was **not attributable to the tenant**. 3. Independently, the deposit exceeds the **one-week cap** and the excess is itself a prohibited payment, further undermining the landlord's position. **The landlord must repay the full £450** (Schedule 2 para.8 — repayment within 7 days of the decision not to proceed: s.3(3) and the Tenant Fees Act 2019 Regulations). --- ### 6. Tenant's Practical Remedies - **Complaint to Reading Borough Council / Trading Standards** — enforcement authority under TFA 2019 s.10–11; civil penalty up to £5,000 (first offence) or £30,000 (repeat). - **First-tier Tribunal (Property Chamber)** — application for recovery of prohibited payment and/or unlawfully retained holding deposit. - **Small Claims Court** — straightforward debt claim for £450. - The unlicensed HMO point should also be reported to the Council's Housing Enforcement team under HA 2004 Part 2 — potential rent repayment order for the prospective tenant is not available here (no tenancy existed), but criminal liability for the landlord under s.72 remains live.