Rabu, 28 November 2012

Break fees are broken

'Break fees' for ending your tenancy early are one of the less successful innovations of the Residential Tenancies Act 2010.

To be frank, break fees are broken, and we should go back to square one to fix them.

Under the Act, a break fee is a fee equivalent to six or four weeks' rent (six weeks' if you leave in the first half of your fixed term; four weeks' otherwise). That's the first problem with break fees: they are too high. So high, in fact, that they really act like a fine or penalty for ending your agreement, and if they weren't expressly sanctioned by the Residential Tenancies Act, they'd be unlawful.

If it were lower – say three weeks' rent – a break fee might usefully replace the conventional way of settling liabilities where a tenancy is ending early. The conventional settlement is:
  • the tenant is liable to compensate the landlord for loss of rent, potentially to the end of the fixed term – BUT;
  • the tenant is not liable for any loss that could have been avoided by the landlord taking reasonable steps (ie 'mitigation of loss') – so if the landlord could have gotten a new tenant in and paying rent after a few weeks, but has failed to do so, the tenant is not liable to pay – BUT;
  • the tenant is liable to compensate the landlord for losses incurred in taking those reasonable steps (ie advertising costs, the agent's letting fee, etc).
This means you cannot be certain how much it will cost you to move out early, and that you'll want to watch the agent like a hawk to make sure they're taking those reasonable steps. A simpler and more certain settlement of liabilities would be good, but – and this is the second problem with the current provisions on break fees – break fees don't always replace the conventional settlement. Under the Act, landlords and agents get to choose which one they'll use (that is, the Act allows for break fees as an optional additional term).

And you can expect that they'll choose the one that will cost you more: so, if the property is in an area of high demand and will be relet in a flash, expect a break fee; if it's a slower market, expect the conventional settlement.

Or maybe not... perhaps your landlord or agent will wrongly draft an agreement that provides for both, for something else. We've heard of agents demanding 'break fees' on top of compensation for loss of rent, advertising costs and letting fees – the amount of the fees ranging from one week's to six weeks' rent. Some agents have agreements that provide for one or the other, but are crossing out half of the additional term, so that it reads that the tenant is liable to pay a break fee, but not what the fee is, leaving the tenant mystified as to their liability and what the agent thinks they are doing.

This problem comes mostly from the ignorance and cupidity of some agents, but the break fee provisions should also carry some of the blame, because they have not set out a sufficiently clear and binding reform.  

The present provisions should be scrapped. The Parliament should provide for a three-week break fee for all circumstances; if it won't do that, then just stick with the conventional settlement in all circumstances.