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(I read the disclaimer in the sidebar: I'm not looking for legal advice: I'm just curious as to the implications to both parties).

Pre-amble and context: So I'm trying to rent a property in the UK. The agent we're going through wanted a holding deposit when we agreed to start the process (fine), which came with an agreement that the deposit is returned if we sign the tenancy agreement (reasonable), but not returned if we don't (ok, so they're protecting themselves against some loon block-reserving their entire property listing. Fine). I agreed because the justification sounded reasonable (with hindsight: I am not a smart man).

The fees had to be paid before seeing the tenancy agreement. The agency has thus far refused to negotiate terms on any bit of paper it's got me to sign (so we're clear: not asking about that. I ultimately agreed to the conditions, I understood the implications).

The question: Is it legal to have a deposit that is non-returnable on the basis of not signing a contract that the consumer hasn't had a chance to read before agreeing to the deposit terms?

I understand that a contract, in principal, needs to be fair (http://www.legislation.gov.uk/uksi/1999/2083/introduction/made), but what if it wasn't fair? Could they have claimed it was fair, and refuse to amend any terms (at which point, I'd have had a "take it or leave it" contract that if I don't sign, I'm out of pocket)?

I'm aware the situation described is at least ethically dubious, but it seems to me that if they refused to negotiate, if I do sign it would be under some sort of duress (?) for the sum of money I'd be out-of-pocket by?

Likewise, this looks similar to the EULA sort of question that arises (pay money for a product behind terms that you can't read until you pay money).

(again, so we're clear: it's a situation that happened to me, but if I want actual legal advice I'll call a solicitor. The question is more that I don't understand enough about contract law to work out whether or not this was legally questionable rather than just the agency screwing me).

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  • "The fees had to be paid before seeing the tenancy agreement." This strikes me as very odd. Letting agents typically have a standard template agreement that they use, which should be viewable on demand. What reason did they give for refusing to let you see it? Feb 12 '16 at 21:23
  • @SteveMelnikoff "They need time to prepare the agreement", although it does look like a boilerplate agreement they use with everyone. I imagine I could have tried to press the issue. Again, a bit of naivety on my part; it was the end of a long property search and I was a bit over-eager. Feb 15 '16 at 10:18
  • Fair enough. Sounds like they were trying to put you under pressure to sign ASAP. I agree that this is ethically dubious, and their excuse is feeble, as they could have sent you the template. I'd keep a close eye on these guys... Feb 15 '16 at 17:45
  • It is fairly normal for letting agents in London.. and you are right about asking for the draft contract, but they have so many tenants to choose from that they feel they might as well save the paper and effort. Some will even try to include a condition that they won't return the holding deposit if you don't pass their referencing checks, but it is sometimes possible to negotiate that one away, so that if they reject you for whatever reason, you get the holding deposit back.
    – nsandersen
    May 11 '16 at 11:54
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Competent parties can contract for any terms that are not forbidden by law, and a contract is valid if each party provides consideration (i.e., something of value). It sounds like the contract you're questioning is essentially, "I will give you money in exchange for you showing me an agreement and giving me the option to sign it." The act of "showing an agreement" evidently has some value, as does the "option to sign," so your counterparty has provided consideration. Therefore, the high-level answer is that the only way this contract would be inherently flawed would be if a law explicitly forbids it.

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  • "I will give you money in exchange for you showing me an agreement and giving me the option to sign it." is a succinct way of describing the question - when put like that, it does seem fairly clear cut. Feb 15 '16 at 10:24
  • The law on holding deposits has now changed. See my answer.
    – JBentley
    Jul 23 at 11:39
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The law has changed in England and Wales since this answer was posted due to coming into force of the Tenant Fees Act 2019 on 1 June 2019.

Section 1(1) provides a general prohibition on requiring a tenant to make a payment to a landlord.

Section 2(1) extends the prohibition to letting agents.

Section 3(1) provides that "for the purposes of this Act a payment is a prohibited payment unless it is a permitted payment by virtue of Schedule 1."

The effect of these three provisions is that there is a blanket ban on all forms of payment made from a tenant to a landlord or letting agent unless that payment is on the list of exceptions in Schedule 1. Schedule 1 includes the obvious exceptions such as rent, tenancy deposit, utilities, and a handful of others. One of those is holding deposits pursuant to paragraph 3 of Schedule 1. The holding deposit must not exceed 1 week's rent (paragraph 3(3)) and pursuant to paragraph 3(2) and section 5 must be dealt with in accordance with Schedule 2.

Schedule 2 contains various steps and restrictions which must be adhered to for a holding deposit to be a permitted payment. Paragraph 3(c) provides that a holding deposit must be returned if "the landlord and the tenant fail to enter into a tenancy agreement relating to the housing before the deadline for agreement."

That is subject to the exceptions set out in paragraphs 6 to 12. Paragraph 10 provides an exception to paragraph 3(c) above if "the tenant notifies the landlord or letting agent before the deadline for agreement that the tenant has decided not to enter into a tenancy agreement." and parargaph 11 provdies a similar exception if the landlord or letting agent have taken all reasonable steps to enter into a tenancy agreement but the tenant has failed to take all reasonable steps to do so. In other words, the landlord may keep the holding deposit if no tenancy agreement is entered into either through the tenant's deliberate choice or through the tenant's negligence. The "deadline for agreement" is 15 days from when the landlord/agent received the holding deposit (unless otherwise agreed) pursuant to paragraph 2.

However, these exceptions are subject to paragraph 13(b) which provides that the landlord/agent cannot rely on the exception if "the landlord or a letting agent instructed by the landlord in relation to the proposed tenancy behaves towards the tenant, or a person who is a relevant person in relation to the tenant, in such a way that it would be unreasonable to expect the tenant to enter into a tenancy agreement with the landlord."

Additionally, if a landlord relies on one of the exceptions then, pursuant to paragraph 5, they must give a notice in writing explaining why the holding deposit is not being repaid. If they fail to do so within the deadline then they must repay the holding deposit.

Under what circumstances it would be "unreasonable to expect the tenant to enter into a tenancy agreement" would be up to the courts to decide. You could try to argue that it is unreasonable to be expected to enter into a tenancy agreement the terms of which you have not seen. The landlord might argue that it is only unreasonable if those terms themselves are unreasonable.

I have checked Westlaw and to date there are no reported cases which have considered paragraph 13 of Schedule 2.

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