Guarantor Alternative Products - are they Tenant Fees Act compliant?

Are Guarantor Alternative Products (“GAPs”) permitted by the Tenant Fees Act (“TFA”), and does the Renters’ Rights Bill (“RRB”) change anything in this regard?

This question is prompted by a post by David Smith (link: The Challenge of Rent in Advance ) in which he suggests that GAPs may come under scrutiny when RRB bans rent in advance. David is the gospel on lettings law and so this caused quite a stir in the industry.

That said, I disagree with what he has written and I will set out to explain why I believe GAPs are TFA compliant. The main reason for this view is that GAPs are an alternative to guarantor agreements which are not themselves prohibited by the TFA. The change to rent in advance is irrelevant because it was not rent in advance that permitted GAPs in the first place.

Terminology

The TFA works by banning any ‘prohibited’ ‘requirement’. A ‘prohibited’ requirement is one that is not ‘permitted’.

Usually in the context of the TFA we are talking about a prohibited payment, but here the issue is around a prohibited requirement (that the tenant must enter into a contract with a third party). To be clear, GAPs are both a prohibited payment and a prohibited requirement under the TFA, but for the purposes of this I do not believe that it also being prohibited payment matters, so I will use prohibited/permitted requirement going forwards.

The TFA talks about a ‘relevant person’, but for simplicity I will just use the word tenant since the alternative does not meaningfully apply here.

The TFA does not meaningfully talk about guarantor agreements, but when I say it I am talking about an agreement with a person/organisation based in the UK that the landlord will look to enforce against in the event of default by the tenant. This is distinct from an overseas guarantor where the mechanisms of enforcement are far harder which makes them inherently less desirable to a landlord.

The Law

I have copied the key parts below, and I will focus on Section 1 of the TFA because Section 2 (which affects agents) is essentially the same as Section 1 so there is no need to split hairs. A link to Section 1 is here: Tenant Fees Act 2019

Section 1(3) reads:

A landlord must not require a relevant person to enter into a contract with a third party in connection with a tenancy of housing in England if that contract is—

(a)a contract for the provision of a service, or

(b)a contract of insurance.

This is the section that makes GAPs into a prohibited requirement because it is a contract with a third party and it is a contract of insurance.

I think it is also worth stating at this point that traditional guarantor agreements are not prohibited or expressly permitted under the TFA. They are not prohibited because S1(3) does not apply to a guarantor agreement because, whilst it is a contract with a third party, the contract is not ‘for the provision of a service’, nor is it ‘a contract of insurance’.

They are not permitted because there is no ‘permitted requirement’ schedule in the same way that Schedule 1 of the TFA sets out ‘permitted payments’. I make this point to distinguish between ‘permitted’ in the sense of the TFA, and permitted in the usual English use of the word. Guarantor agreements are not prohibited and that means they are permitted, even if there is no express section to confirm that in the TFA.

Section 1(7) reads:

For the purposes of this section, a landlord does not require a relevant person to make a payment, enter into a contract or make a loan if the landlord gives the person the option of doing any of those things as an alternative to complying with another requirement imposed by the landlord or a letting agent.

Which leads into Section 1(8) which reads:

Subsection (7) does not apply if—

(a)the other requirement is prohibited by this section or section 2

The combination of Section 1(7) and 1(8) explore what ‘requirement’ means. 1(7) states that there is no requirement if the prohibited requirement is an alternative to ‘something else’, and 1(8) states that the ‘something else’ must itself not be prohibited.

It is also this section that means a GAP being both a prohibited payment and prohibited requirement does not matter because they are both resolved by being an alternative to something else.

The Guidance

I have included a link to the guidance at the end of this post, but we are concerned with Page 32 which discusses Deposit alternatives, which reads:

[a tenant may agree to a deposit alternative if] the tenant has been given [an] alternative option which is explicitly permitted under the ban

I believe this guidance is semantically different from what the law says. The guidance suggests that a prohibited requirement can only be an alternative to an explicitly permitted requirement, but S1 of the TFA says that the prohibited requirement cannot be an alternative to another prohibited requirement. I have highlighted the word ‘explicitly’ because, as mentioned above, guarantor agreements do not feature in TFA at all. Therefore unlike, say, cash deposits, guarantor agreements are not explicitly permitted.

Whilst this is guidance is given the context of Deposit alternatives and so may not directly translate to GAPs, it is still guidance on interpretation of what might need to be offered be so that the landlord can avoid making a prohibited requirement.

Interpretation

There is clearly then a clash between the law and the guidance; GAPs can only be offered as an alternative to ‘something else’ otherwise it is a ‘requirement’ and a breach of the TFA. The status of that ‘something else’ is what decides whether the alternative is a ‘requirement’. Let us play out the two scenarios:

1)      The law would suggest that the ‘something else’ must not be prohibited. Since guarantor agreements are not prohibited, GAPs are an acceptable alternative and so permitted.

2)      The guidance would suggest that the ‘something else’ must be explicitly permitted. Since guarantor agreements are not permitted, GAPs are not an acceptable alternative and so banned unless they are also an alternative to a permitted payment.

This is where rent in advance comes in. Presently, rent in advance is a permitted payment and so it also permits GAPs in scenario 2, but when rent in advance ceases to be permitted under RRB it means the scenario 2 goes back to banning GAPs.

This sounds bad, but I think it is a false dichotomy; the law and the guidance are not equal. The law trumps the guidance and so it is irrelevant what the status of scenario 2 is when it is never the permitted payment (rent in advance) that allowed GAPs, it was the offer of a guarantor agreement. So long as the tenant is given the option of providing a UK guarantor then a GAP can be offered as an alternative, and rent in advance is irrelevant.

I believe that GAPs can continue to be offered for the foreseeable future.

Tenant_Fees_Act_2019_-_Guidance_for_landlords_and_agents.pdf