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What the tenant needs to know about Penalty Clauses in tenancy agreements

Penalty clauses are terms in the tenancy agreement which may mean that the tenant has to make a payment if they breach the terms of the tenancy they are entering into.

If any such clauses are to be included in a tenancy agreement then you need to ensure that they comply with the Unfair Terms in Consumer Contracts Regulations and other local statutory laws

If the tenancy agreement tries to impose any charge or penalty, the agreement should make it clear that all charges must be reasonably incurred and be for a reasonable amount.

Many tenancy agreements have clauses saying the tenant should pay the landlord`s legal or other costs or interest on unpaid rent. If the interest rate is reasonable, this is a perfectly valid clause. However, under Contract law, if someone is in breach of contract, the other party is entitled to claim compensation to put him in the position he would have been in, had the contract been carried out as intended. Therefore the main thing to consider with penalty clauses, is that they are only fair if they aim to reimburse the landlord for genuine expenses that he has been put to because of the tenants default under the agreement.

The landlord or his agents are not allowed to make a profit out of these charges.

For example, if the tenancy agreement allows the landlord to make a modest administration charge £15 for covering his costs of writing to the tenant about his rent arrears, then this may be found to be fair. In cases where agents are instructed they will often charge for this work and if the charge will be much more than the actual cost of the work, for example £400, this will be clearly unfair under the Unfair Terms in Consumer Contracts Regulations.

Sometimes landlords also want to claim additional bank charges that they may incur on their own bank overdrafts if they are unable to meet payments because the tenant has not paid his rent. These will not be valid. There is a general rule that a party of a contract cannot claim for losses incurred by reason of his own hardship or misfortune.


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