Fool’s Gold

Having been impressed by seeing Gillian Tett on Bremner Bird and Fortune a while back, and being curious as to the cause of the recent global financial crisis, I recently bought her book, Fool's Gold.

Despite the book being mainly about the financial markets, a subject which would normally have my eyes glazing over within a couple of minutes, I have read it with enjoyment (well sort of) and in the space of 24 hours (albeit having skimmed most of the more technical sections). Ms Tett is to be congratulated on writing such a readable book.

So what have I learned from it? Very basically, and adopting a Pooh Bear of little brain approach, it seems that what happened was as follows:

For a long, long time, millennia even (according to some clay tablets from Mesopotamia), people have been buying financial contracts based on the future value of something. This is known as a derivative. Its a way of avoiding risk. Party A pays over the odds so he can be sure of buying something at a particular price in the future. Party B (who takes the risk) gains or loses depending on what that future price actually is.

In her book Gillian Tett follows the fortunes of a group of bankers from the American Bank J P Morgan from about 1994, who developed innovate new ways of doing this sort of thing. What in in the real world we would probably look upon as gambling.

The main innovation the J P Morgan team developed was a way of splitting the risk involved in lending money, so it became separated from the loan itself. One reason for this was that banks are required to retain capital to cover the risks on their books. If the risk had been sold on however, then they would not have to retain so much capital and could use that for other money making schemes. And make more profit.

The risk for the loan (or actually bundles of risks for loans which were sold on together) were divided into different types. There was the ‘junior’ risk, which was very risky but which carried high rewards, ‘mezzanine risk, (sort of middle risk)’ and then ‘senior’ risk which was considered to be pretty safe. There was also a residual risk, known as ‘super senior’ which was at least risk of default and which was considered very safe indeed.

The original team which developed this idea, understood and, it seems, on the whole dealt with it fairly responsibly (which is partly why J P Morgan is still in business (and doing well) today). The problem was that this type of deal became very popular, and was undertaken by people who did not understand it. It also became enormously complicated with deals so complex that no-one could really work out what was actually happening or where the loan originated. The whole topic was also shrouded in jargon and acronyms which made it almost impenetrable for people unfamiliar with it (i.e. everyone other than the few bankers specialising in this type of work.)

Another problem was that the risk was assessed on formulas which everyone considered to be valid but which were in fact based on very little underlying data. The reason for this was that although there was a fair amount of data available for when things were going well, there was little if no data for times when thing were going badly and property prices falling.

As time went by these deals became more and more popular. Most people wanted to buy the ‘junior’ or more risky products because that was where the greatest profit lay. No-one really considered that there could be a problem, as property prices had always gone up. So popular were these products (because of the massive profits which were being made) that there was a huge demand for more loans and mortgages to service the risk products. No-one was really at risk anyway (so the theory went) because the risk was so sliced and diced and was spread out so thin that it became negligible.

Presumably therefore (although I don’t think the book actually says this) loans were being made recklessly to people who could never afford to pay them long term, so that the risks could be sold on to people anxious to buy them so they could earn these huge profits. Unbelievable but presumably true.

Another problem was the ‘super senior’ risk. The very safe and boring risk, which was so safe it was not really considered a risk at all. No-one wanted to buy this as it did not carry the lucrative profits. These just tended to stay with the financial organisation making the loans. The people at J P Morgan got uneasy at this huge stockpiling (billions of pounds worth) of super senior risk, and managed to get rid of a lot of it, but other banks didn’t. They were super safe anyway so were no real risk.

Then things started to go wrong. The people who had been given loans that they could never pay, stopped paying them. Not only this, but in many cases the property when repossessed, was in such bad condition that it failed to raise much money when sold.

The risk investments therefore stopped paying. Not only that, they stopped paying in much greater volume than had ever been predicted by the predication models. Not only was there no money available to pay the junior through to senior risks which had been sold off. There was not enough to pay the super senior risks. The ones which had been largely retained by the banks. But as they were not considered to be a risk (because they were super safe) the banks had not retained sufficient reserves to cover them. Sometimes they did not even realise (because different departments did not talk to each other) that they were there, until they became a problem.

Hence the smash.

Its not really as simple as that of course. And the book talks at some length about ‘shadow banks’, which so far as I can make out are organisations created so that these risky products could be dealt with outside the regulatory system which regulates the banks.

But, ladies and gentlemen, this it seems, is largely why huge sums of taxpayers money, which should have been used for health, schools, the justice system, and defence, were used instead to stop the banks going bust. Any also why a lot of innocent people have lost their jobs. Fools gold indeed.

The OFT v. Foxton case - commission on renewals

There is still quite a bit of confusion regarding the recent decision in the case of the Office of Fair Trading (OFT) v. Foxtons (which I reported on here). One of the questions being asked is what exactly is the status now of clauses providing for commission on renewals?

I should make it clear here that we are talking about non management contracts, where the agent just finds the tenant, and the landlord then takes over the management of the property, but where the agent's agency agreement with the landlord provides for him to continue to receive commission whenever the tenancy is renewed. Also the regulations under which the case is brought, The Unfair Terms in Consumer Contracts Regulations 1999, are only enforceable in the context of an contract between a business and a consumer, made under the business's standard contract terms.

In his decision (which you can read in full here) the Judge, Mr Justice Mann, made it clear that he was not saying that clauses providing for commission on renewals were necessarily unfair in themselves. His ruling was just in respect of the specific clauses in the Foxtons agreements, before the court.

Or to use the Judge’s own words “I am not asked to decide, and do not decide, that renewal commissions (in the sense used in these proceedings) are always unfair.”

So can such clauses ever be fair, and if so what do agents need to do to make them fair? Well in my view, at the very least the renewal commission clauses must be given equal prominence with clauses setting out the initial commission charged, and the agents marketing literature must also make it clear that this type of commission will be charged and say how much. In other words, total transparency, so the landlord is fully aware of and understands the nature of the contract he is entering into.

It is also important that the way in which the average landlord/consumer is likely to view the contract is taken into account. To quote the Judge (para 84):

“the argument of Foxtons [is] that the renewal commission is justified because it is part of the payment for an income stream that has been introduced to the landlord .. There is no evidence that landlords generally (let alone consumer landlords) would view the commission in that way, and nothing in the way in which the matter is presented to them in publicity or otherwise which would bring the point home to the landlord. The landlords in question are not sophisticated economists, or even sophisticated businessmen, and would be unlikely independently to think in those sort of terms. They are likely to see themselves as paying 11% for getting a tenant into the property for the agreed first term. I doubt if many of them will think beyond that ...”

And again (para 91)

“I think it unlikely that the typical consumer who has got a tenant for (say) a year's tenancy, and paid 11% of the rent up-front, would expect a repeat bill in year 2 (and all years thereafter) unless that point is spelled out to him in some way. In the absence of that it becomes a trap, or a time bomb.”

The Judge then referred to Foxton’s glossy publicity and the first pages of the agency agreement as being suitable places for these points to have been made.

One of the main criticisms of the Foxtons clauses were that they were buried in the small print of the agreement. To quote the Judge again (para 92):

“I think that such a consumer will expect a lot of detail be dealt with in what is frequently labelled the "small print", but the whole point of that expression ... is that it contains things which are not of everyday concern to the consumer – it contains various clauses which are thought by the supplier to be necessary but which are not usually relied on ... The consumer would not expect important obligations of this nature with likely and significant impact to be tucked away in the "small print" only, with no prior flagging, notice or discussion. ... that is not a fair way to bring the point to the attention of the consumer, and is not adequate.”

However, is there any ground for saying that renewal commission is unfair per se? The Judge commented that Foxtons did very little work for their renewal commission (para 91):

“No particularly burdensome services are part of the package for years 2 and onwards (or at least nothing like the services involved in advertising the property and getting the tenant in in first place) and it would not readily occur to the landlord that the same sum would be payable in the future for years where that distinction remains true.”

If renewal commission is capable of being fair, could it then be argued that charging the same rate of commission for very much less work is unfair in itself? Although the Judge in this decision does not specifically address this point, this does not mean that it will not be considered at a later date, either in this case or another. From a common sense point of view, renewal commission for what appears to be hardly any work does seem to be unfair, although agents will no doubt continue to argue that it is only right that their firm should share in the good fortune of the landlord in having a long term paying tenant with no voids.

However at the moment we have a decision which avoids this point and seems to imply that such clauses will be fair if the are adequately flagged up in advance so the landlord is aware of them. Agents should be wary about relying on this unduly however. My advice would be that if such clauses are used they must be seen to be fair in an obvious way, i.e. to the ordinary person. If you want to charge renewal commission I would suggest charging a commission which is considerably less than the initial commission, to reflect the reduction in the work done by the agent at this stage. This would be less likley to be considered unfair.

I also think that agents should content themselves with looking to receive renewal commission (if it is claimed) only while the property is in the ownership of the landlord. This was not specifically discussed in the decision (as the renewal clause itself was found unfair). However it seems to me to be wholly unfair that a landlord should be expected to pay commission when the property has been sold on to a third party and is no longer under his control (and when he is no longer receiving any rent out of which to pay the commission), and I suspect that a court would also come to this view.

However this not the end of the Foxtons case. If the OFT and Foxtons are unable to agree on how the decision made is to be worked out in practice, the case may come before the court again. And although their initial comments seem to imply that they will not be appealing this decision to the Court of Appeal, this does not mean that Foxtons will not do so. An appeal court could come to a different view from Mr Justice Mann. The safest thing to do is to wait and see.

So my advice overall to agents is to try to make the clauses in their agency agreements as fair and transparent as possible, and not to put in too big an order for printed copies at their stationers. The fat lady has not yet sung!

NLA Property Women Awards

Further to my post yesterday, I have been reminded by the National Landlords Association that they also have awards, and have recently announced the finalists in their Property Women Awards 2009.

I am happy to support the sisterhood and publish their names here:

•East of England: Karen Murray, Irene Turner and Christeen Wilson
•East Midlands: Tracey Abbiss, Rachel Hutchinson and Sarah Stanier
•London: Barbara Gwyer, Kate Partridge and Valerie Pierres
•North East: Anne Jackson, Karen Rutter and Julie Willis
•North West: Pauline Ginty, Malika Jennings and Sylvia Marrs
•Scotland: Elaine Stenson, Pauline To and Gerry Whelan
•South East: Susan Hainsby, Kathy Nevell and Rosemary Robertson
•South West: Anne Jarrett, Caroline Lindegaard and Fiona Macaskill
•Wales: Sandra Cook, Jane James and Elizabeth Paterson
•West Midlands: Gillian Coleman, Glenda Houston and Joanna Phillips
•Yorkshire & The Humber: Samantha Allen, Shona Davison and Sandra Widdrington

There is also a green property women awards, whose finalists are

•Green: Fiona Macaskill, Kathryn Nevell and Elaine Stenson
•Young: Amy Dixon, Elaine Duthie and Sophie Macaskill

Good luck to you all! I trust that there will also be many women entrants to the Landlord and Buy to Let awards.

Tessa is a Judge!!

Just to let you know that Accession Exhibitions & Publishing Ltd (who run the Landlord & Buy to Let Show) have now launched the Landlord & Buy to Let Awards which look to be very exciting. There are a number of award categories (for example landlord of the year, insurance services, customer service, letting agent etc) and entries can be submitted up to Friday 21st August. The event is sponsored by Residential Investments.

Judges are myself, Oliver Romain, Editor, Landlord & Buy-to-Let Magazine, Ian Potter, Operations Director, Association of Residential Letting Agents (ARLA),Tom Entwistle, Proprietor, LandlordZONE, Simon Gordon, Communications Director, National Landlords Association (NLA) and Alan Ward, Chairman, Residential Landlords Association (RLA).

The awards will be announced at a posh dinner at Birmingham NEC on the evening of Friday 16th October 2009, to be hosted by TV presenter and Landlord campainer Konnie Huq.

McMillan Cancer Support - Charity of the month (July 2009)

McMillan Cancer Support exists to support and improve the lives of people affected by cancer. As one in three people get cancer this will affect us all in one way or another. The support given is not just medical but also practical, helping people cope with it all.

If you or someone in your family is affected by cancer, visit the web-site as it has a lot of online help and information plus a discussion forum where you can talk to people.

Almost all of their work is funded by voluntary donations. To donate click here.

Suggested by Landlord-Law web designer Gill Bishop, in memory of her mother.

OFT victory in Foxtons unfair contract terms case

Landlords up and down the land will be jumping with glee at the Office of Fair Trading (OFT)’s victory over Foxtons regarding their unfair contract terms. To read the background to this, see my previous posts here and here. The OFT was challenging the clauses under the Unfair Terms in Consumer Contracts Regulations 1999 (The Regulations).

The court hearing took place over three days at the end of April/early May 2009 and the judgement was published today. It has already at the time of writing been reported fairly widely, including of course the OFT press release. These are my comments after reading the report (which you can see online here).

There are basically three types of clause which were looked at:

1. A clause providing for Foxtons to receive commission if the tenancy is renewed or extended
2. A clause providing for Foxtons to continue to receive this commission from the landlord even if he has sold the property, and
3. A clause providing for Foxtons to receive commission if the property is sold to the tenant

Foxtons claimed, in essence, that these clauses were fair as they were their just reward for finding a long term tenant, which provided the landlord with an income stream and no voids.

The first thing which struck me on reading the report was the eye poppingly high price charged by Foxtons for providing a tenancy agreement, of £320. Bearing in mind that you can get a perfectly good agreement in the High Street for under a fiver, and that unlimited access to my agreements are available online for £80 pa (together with all my other annual member benefits), this strikes me as exorbitant!

Returning to the case, the Judge confirmed that although the Regulations only apply to consumers (i.e. not to professional landlords whose main income is from landlording), as this agency agreement is used for both business and consumer landlords, it is subject to them. Examples of consumer landlords are those who are letting their home where they are posted abroad for their job, or who have invested in a couple of properties in lieu of a pension. A substantial proportion of landlords only have one or two properties and therefore will normally come within the ‘consumer’ category.

1. Commission on renewal.
The Judge spent most of his time looking at this point.. He found that Foxton’s clauses were unfair, and made the following comments:

• He made it clear that he was not saying that renewal commission would always be unfair. It would depend on the circumstances of the case and how clearly the renewal commission clause was presented to the consumer.

• The Regulations specify that they do not apply to clauses which are part of the ‘core bargain’ of the parties. However the Judge held that this is not the case here, as the average consumer would not consider the renewal clauses to be part of their core agreement with Foxtons (which was primarily for getting a tenant for a specified fixed term)

• Even if the clauses were ‘core terms’ they would still need to be plain and intelligible and be subject to the fairness test.

• The clauses concerned are not plain and intelligible as the language used would not be clear to the average consumer (even though businessmen and lawyers reading the contract closely would pick up on the points)

• 11% of the rent over an extended period of time is a significant sum and a very significant part of the rent, and the typical consumer would not realise that this was part of the agreement, particularly as it is nowhere mentioned in the sales literature provided by Foxtons about their service

• Compared to the initial work finding the tenant, where quite a lot is done by the agents, very little work is done by them for renewals, other than the provision of a tenancy agreement, which is charged for separately anyway

• Unless it is clearly spelled out at the time the agreement is made so the landlord is fully aware that it will be charged, a renewals clause becomes a trap, or a time bomb (these are the words used by the Judge)

• Although a typical consumer is familiar with the concept of commission, normal commission arrangements (such as with an Estate Agent) do not include commission extending long term into the future, as here

• A consumer would not expect important obligations of this nature with ‘likely and significant impact’ to be tucked away in the "small print" only, with no prior flagging, notice or discussion

• Most normal consumers would be surprised at such a clause, and if they were represented by lawyers, it is something that their lawyer would very likely request be removed (a further indication of unfairness)

• Although the Judge accepted that the lack of a void is good for landlords, he held that the important thing is that the landlord would not, (in this case), normally be aware, from this agreement and the pre contract information provided by Foxtons, that he would be paying ongoing commission on renewals in this way

I think that these are the main points made by the Judge, although anyone particularly interested should go and read the decision for him or herself.

2. Commission when the property is sold.
The Judge merely said here that having found that the renewals commission clause in itself was unfair, it would be even more unfair if the landlord was having to pay it after the property was sold on.

3. Commission on sale to the tenant.
The Judge also found that this would be unfair and therefore in breach of the regulations. The main reason for this was the such a situation was not being considered or contemplated by the consumer landlord at the time he entered the contract, and in most cases he would be astonished by its inclusion. He was instructing Foxtons to find a tenant, not to sell the property.

The Judge also made the point that the clause would impose a potentially large financial liability on the landlord in circumstances where Foxtons had not actually done anything. If such a clause were to be imposed on him, a normal landlord would consider that he had been ambushed. It was clearly unfair.

Although it is arguable that this type of clause would also be allowable if it was properly explained to the landlord, and he understood and accepted it, before signing the agency agreement.

Conclusion
The case report ends by saying that there will be a further hearing to consider how this decision will be implemented in practice, unless the parties (i.e. Foxtons and the OFT) are able to reach an agreement first. Of course there is also the possibility that the case will be referred to the Court of Appeal so this is not necessarily the end of the story. However to summarise

• Unless they are very clearly flagged up to the landlord at the time he signs the agency agreement, and given equal prominence to the fees for the initial letting, clauses providing for commission on renewals will normally be unfair and therefore void under the regulations.
  
• Clauses relating to commission for sales in a contract for agency services for lettings are likewise almost invariably going to be void, unless they are made very clear indeed to landlords at the time they sign the agreement and given prominence in the agreement

This decision is very good news for landlords, although it could be catastrophic for Foxtons and any letting agents who have used similar clauses in their agency agreements in the past. They will now be faced with claims by landlords for recovery of charges paid, and it is going to be difficult to see how they can successfully defend these (assuming the decision is not appealed and overturned).

The OFT also say in their press release "The OFT expects the letting industry to comply with this ruling, and will take the necessary steps to ensure this where appropriate.". You are warned!

Worrying Court underfunding report

I have just read a report in the Times which makes it clear that the current problems in the courts due to underfunding are only going to get worse.

The report states that Judges are having to sit longer hours and for more days, and that a recruitment ban on all but the most exceptional posts is being imposed. This at a time when claims to the courts are only going to go up.

We lawyers have repeatedly said that there is not much point in having legal rights if it is impossible to enforce them. The Times reports states

Sir Mark Potter, Britain’s most senior family judge, called for urgent action to tackle growing delays in child abuse cases, exacerbated by a surge in work after the Baby Peter case. He warned that judges and court officials face the “formidable problem” of accommodating the extra work in an “already strained system”.

The report also points out that criminals are opting to plead not guilty as they know that by the time the case comes to trial the event will be such a long time ago that witnesses will have forgotten all about it, and they are more likley to get off.

This is all very, very worrying.

Although I did suggest a couple of years ago various ways the courts could try to raise a bit more cash. This might be the time to consider this sort of thing.

Shelter victory in sale and rent back case

Housing charity Shelter are jubilant after succeeding in saving the home of Paul Amanda Jackson of Shrewsbury, where they had lived for over 20 years.

According to the BBC report, Mr and Mrs Jackson entered a sale and rent back deal with a company, Repossessions Stopped, in 2005 after getting into mortgage arrears. However two years later they faced repossession from Repossessions Stopped's mortgage company after they fell into arrears with their mortgage payments. Apparently Repossessions Stopped (described by the Judge in this case as 'dishonest'), had paid only £63,000 for the property, despite it having a market value of £100,000, and had assured Mr and Mrs Jackson that they could live in it for the rest of their lives.

Thankfully for them, Shelter stepped in to assist and a judge at Birmingham County Court has ruled they can stay there and pay rent. The Shelter report states that His Honour Judge Worster has ruled that the family can either revert to being owner-occupiers, or rent the property for the rest of their lives, with their daughter inheriting the tenancy.

The news reports I have seen just state the order made and not the legal reasons for them, so it will be interesting to read the report of the Judgement when it comes out.

PS There is now an excellent analysis of the legal points on the Nearly Legal web-site here.

The corporate way of dealing with complaints

A couple of weeks ago I was concerned as my online bank statement seemed to be showing me as not having any available cash when I knew for a fact that I did. The lady at the bank told me to speak to their online banking customer services department. I duly did this and they said they would get back to me.

A lady has just rung me about it. As the complaint was made two weeks ago I had forgotten all about it. Also she rang me just when I was in the middle of writing something complex, and I did not particularly want to discuss it, neither did I really want her ringing me back about it.

No doubt she will now tick her boxes to show that she has satisfactorily dealt with another customer complaint, thus improving the banks customer service statistics. It’s a great way of dealing with customer complaints, apart from the fact that the customer (i.e. me) does not feel particularly happy about it.

The Courts have an even better way. It is now almost impossible to get through to the courts to speak to a real person (certainly this is the case in the busier London courts) unless you are prepared to hang on for hours. Although I rang a Court recently which did not even give me that option, but only the option of leaving a message.

So the only thing to do is to write. This leads to the following ridiculous scenario:

1. A client contacts me, unhappy about the court failing to do something
2. I try to ring the court, can’t get through. Not having all day to hang on the phone (I do have other clients) I send a fax, asking what is happening
3. Several weeks later the court write about the thing the client contacted me about.
4. Several weeks after that, I get a letter in reply to my fax, saying that the thing I was asking about was dealt with a couple of weeks ago
5. No doubt the clerk then ticks a box to say that the complaint has been satisfactorily dealt with

This has happened to me several times.

I also know of a case where a solicitor wrote to a court asking them not to list a hearing on a particular day for a particuarly important reason. However the court lost the letter and listed it on that day. When the solicitor rang to complain, he was told that he would have to write in about it!

Its madness!

Canadian landlords trample on tenants human rights, says survey

A newspaper report here, describes a survey in Toronto in Canada which shows that vulnerable people are regularly being discriminated against by landlords. To quote the article:

To test landlord compliance, the centre created five "renter profiles" – a single mother with one child; a black single mother with one child; a single South Asian man, a single man with a mental illness and a married woman on provincial disability benefits.

Volunteers posing as these vulnerable renters made telephone inquires about 982 apartments listed for rent across Toronto last summer. Each call was followed up within 1 1/2 hours by another volunteer with no discernable grounds for discrimination.

Each pair asked the same 12 questions and the landlords' responses were recorded and analyzed for mild, moderate or severe differential treatment.

For example, to gauge discrimination against the South Asian man, one caller used a distinct South Asian accent and name, while the second caller had no accent and used a Western European name.

Discrimination against the South Asian man ranged from not having his call returned to being told the unit was already rented when it was still available.

The South Asian man also faced extra application requirements such as being asked for postdated cheques. And 31 per cent of the time, he was offered fewer move-in incentives such as free cable TV, the study found.

"In some cases, the landlord makes the unit so unappealing that he doesn't have to turn the person down," said John Fraser, the centre's program director.

The centre's results are similar to those from studies in the United States, where community-based organizations regularly monitor discrimination in rental housing, Fraser said.

It would be interesting to see a similar study here in the United Kingdom.

Tenant Txt

I have recently been told about Tenant Txt, a web-site which landlords (particularly those with a large number of properties, and social landlords) can use to contact their tenants.

The landlord signs up to the web-site, and also signs up his tenants. They say whether they want to be notified via text, email or twitter. Then every time the landlord wants to notify them about something he can do this via the tenant txt website.

The site suggests that it can be used to remind tenants of important maintenance repairs, alert people if there is crime in the area, and inform tenants of community events.

If as a landlord you send out a lot of paper notifications to your tenants, this will certainly save you money on paper and postage, and therefore could be worth trying. With the higher subscription prices you can also use it to alert your office and maintenance staff.

There is an initial free trial period, and after that you have to pay. The prices are in American dollars as this is an American site, but that does not mean it cannot be used for British properties. If you try it, post a comment here and let us know how you get on.

65% of ARLA landlords report tenants in arrears of rent

A new report from ARLA gives the unsurprising result that many more tenants are finding it difficult to pay their rent. With the massive number of people being made redundant and the general downturn in the economy this is hardly surprising The question is, what do you to about it? Here are my top tips

If you are a tenant:

• Apply for housing benefit if you think you are eligible. It takes time for the application to go through and rent is paid in arrears so you need to get on with this
  
• Keep your landlord informed. If you cannot afford to pay all your rent, pay as much as you can so your landlord can see that you are trying.
  
• If you are in a muddle, seek advice. You will find a list of debt advisors here.

If you are a landlord:

• Monitor carefully rent payments due to you, and contact tenants promptly if they fail to pay
  
• Attempt to reach agreement with tenants, it may even be worth reducing the rent (better a reduced rent with a known good tenant than a void)
  
• However make sure that letters requesting payment and possession notices are sent out in good time, as sometimes eviction is the only answer, particularly if the tenant is looking to be re-housed by the local authority.

Landlords may be interested in my article on different approaches to dealing with rent arrears, and my Rent Arrears Action Plan.

Possible scam with tenants' deposit money

There has been quite a bit of publicity over the last few months about agents and the unjust charges they impose on both tenants and also the landlords they represent. The CAB did a report on this which I wrote about here. I have now been contacted by a tenant telling me about what he suspects may be another scam by agents (and potentially also landlords), although it is not something he can prove. I copy his email below:

I recently quit a tenancy in Bath and moved to London. The deposit on the Bath flat was held by the DPS [Deposit Protection Service]. I couldn't remember how much the deposit was, but I had the DPS letter saying it was £1050.

While clearing out some boxes, I found some more paperwork: the receipt from the letting agent that showed I'd paid £1575 deposit. I keep my bank statements, and these confirmed the deposit was £1575. The letting agent had placed £1050 with the DPS and kept £525.

A percentage of tenants - especially after a long tenancy - are going to forget the amount of the deposit and / or lose their original paperwork. At the end of their tenancy, they ring the DPS, establish themselves as entitled to the deposit and are told how much was lodged with the DPS. If the letting agent or landlord only lodged part of the deposit with the DPS, the letting agent / landlord get to keep the rest. If the tenant knows how much the deposit was and can prove it, they just apologise and agree to return it.

In my case, the letting agent accepted immediately what had happened, said they'd made a mistake and apologised.

I think it would be hard to detect this happening. I can't prove it wasn't a mistake. I should have checked the DPS letter when it arrived but even if I had, the letting agent would have apologised and placed the correct amount with the DPS.

The scam only works when the tenant forgets the amount and in that situation, they don't even know they've been robbed. The landlord / letting agent get to keep a percentage of deposits they handle. This can be a lot of money if only a small proportion of tenants "forget".

If nothing else this story emphasises the point that tenants must check everything so as to protect their position (and I would add that the correct amount of the deposit should be set out in the tenancy agreement). The agent in this case could have made a genuine mistake of course, but did they? Have any other tenants experienced this?

How to choose the right tenancy agreement- some guidance for landlords

Many landlords don’t bother too much about their tenancy agreement. They consider it to be a disagreeable necessity, something filled with legal ‘mumbo jumbo’, and just try to get the shortest and/or cheapest one they can find.

This is a mistake. A tenancy agreement sets out the rights and obligations between you and your tenant/s, and needs to be clear and unequivocal. You also need to use the correct agreement for the type of tenancy concerned.

Most tenancies nowadays will be an assured shorthold tenancy (AST). However if:

• the rent is over £25K
  
• the tenant is living in self contained premises in the same building as the landlord, or
  
• the tenant is a limited company

the tenancy cannot be an AST (which are regulated by the Housing Act 1988), and will governed by the underlying ‘common law’. You need to use a slightly different form of tenancy agreement which makes this clear. Otherwise mistakes could be made in error, for example by your legal advisor, if he is not made aware of the type of tenancy concerned. This could result in a claim for possession (for example) being thrown out by the court.

Assuming the tenancy is an AST, slightly different forms of agreement need to be used depending on whether:

• there is one or more tenants occupying the whole flat or house, or
  
• there are a number of tenants who all have a separate tenancy agreement for their own room, with shared use of the rest of the property

Other things you need to take into account are:

- Whether, if the term is over six months, you will want allow either party to end the agreement early. This is done by including a break clause

- Whether you will want the rent to be a weekly or monthly rent (most rent is paid monthly).

- Whether you will allow the tenant to have pets (in which case it may be advisable to use a tenancy agreement specially designed for this)

- Whether you will pay the utility bills or whether you will want the tenants to be responsible for this (for example landlords often pay the bills in shared houses).

Finally, when choosing a tenancy agreement it is a good idea to look for one which is written in a plain English style. These are much easier for both you and the tenant to understand, and tenants are more likely to read and comply with something they can read easily.

Landlords will find more information in the Landlord-Law Which Tenancy Agreement guide.