How Much Reservation Fee Should A Landlord Charge

How Much Should A Landlord Charge for a Reservation Fee?

So you have found a good tenant.

You have done all the checks you normally do on them. You have established from looking at their bank statements and from the credit check that they can afford the rent comfortably and they are not indebted already. You have obtained and followed up references from past letting agents / landlords and from employers. So you know they have treated their previous place(s) well and that they are not under threat of redundancy or, if self-employed of losing their business. You have checked their ID, and if necessary, (for non EEA nationals) that they have a right to be in the UK (“Right to Rent”).

All looks good to go.

However, the tenancy will not start for a few weeks, perhaps because the previous tenants have yet to move out and / or serve out their notice. And you don’t want to enter into signing a tenancy now, until the current tenants move out, just in case they don’t. (Last minute problems can always arise).

What you don’t want is for the new tenants to change their mind a day before the tenancy agreement signing / move in date and suddenly decide they are not taking the property after all. That will create an empty property, (a “void period” in landlords jargon), and lead to costs to re-market the property.

So to get round this possibility and to protect yourself from losses, you could request a reservation fee. But how much should you ask for and how do you tell them what it is for?

Well here is how we work. (I’d be interested to hear how you do it, please feel free to comment).

Reservation Fees

Once all references and other checks are done, we ask for the equivalent of 3 weeks’ rent as a Reservation Fee, in case they fail to turn up and / or pay the first month / rent and deposit on the tenancy agreement signing date (which, for us, is same day as the move in date). I am always careful to call it a “Reservation Fee” not a “Deposit” or a Holding Deposit”, so it does not get confused in any way with a tenancy deposit, which is a different thing and for a different purpose.

Ideally, I’d like to charge more because if an applicant changed their mind on move in date, we would be looking at least a month void  – this is because any new prospective tenant would probably need to give at least a months’ notice on the place they are living in. The void period could be even longer than that if we were not around to immediately re-market it. But, we understand the tenant will not at this time have received their deposit back on their current place, so we cannot charge too much, plus one is limited by what other agents and landlords charge. So, for that reason we charge three weeks – this amount affords us some protection if they change their mind. Three weeks as a Reservation Fee seems fair.

Now, some years ago, I wrote a piece in Letting Agent Today which led to a big response and set of comments / debate, in which one supposed expert kept arguing that such fees were not legally valid.

https://www.lettingagenttoday.co.uk/news_features/Letting-agents-fight-shy-of-taking-reservation-fees-says-Lawrenson

But I think the supposed expert’s position is crazy, as surely such fees are fair. The key thing is the Reservation Fee is to protect one party from costs imposed on the first party by the second party failing to do something – in this case, to show up, sign an agreement and move in.

One must be very careful about how you word things – and how you explain the circumstances in which the tenant loses their Reservation Fee. So in our communications with prospective tenants, we say this:

“Providing all the references have been obtained and financial checks have been completed and come back as OK, we will make you an offer of a tenancy to start from a defined date. Once we have made this offer, for you to accept it, we require you to reply by email confirming that you will take up the offer. We also require from you, within 24 hours of our offer, an amount of £XX (this is the equivalent of three weeks rent, as a Reservation Fee). Please note that this fee is not refundable if you change your mind for any reason before the tenancy start date and / or fail to pay the tenancy deposit and first months’ rent on or before the tenancy start date.

 

When you have paid the tenancy deposit and first months’ rent, the Reservation Fee will be refunded to you. The Reservation Fee would also be refunded to you in the very unlikely event that we are unable to secure vacant possession of the property on tenancy start date”.

It will be interesting to see whether such Reservation Fees will be allowed once the government has passed legislation in England and Wales to ban agents (and / or landlords, discuss) from charging fees to tenants*. As this is a Reservation Fee, we think it should not be affected. In Scotland, where all fees charged to tenants “in connection with setting up a lease” are banned, many landlords are thought to still charge Reservation Fees, and the validity of doing so has yet to be tested in court.

* Footnote. Though the government keeps saying they are “consulting” on banning fees charged to tenants, the Housing Paper yesterday said it will happen anyway. So it sounds like the consultation is a pretty pointless exercise given the government has clearly already made up its mind already that it is going to happen.

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