Understanding about penalty clauses in the tenancy agreement

When you want to earn money by renting your property to a tenant, it is equally important to know about the penalty clause while drafting the tenancy agreement.

A penalty clause is applicable for tenants if they breach the terms and conditions of the agreement in some way or other.

While drafting the agreement, you should ensure that the penalty clauses comply with the UTR (Unfair Terms Rules). Make sure you have a fair idea of it.

Interest paid on unpaid rent

It is a clause that is found in the majority of tenancy agreements. The clause defines the interest that the tenant should pay when he or she misses rent.


Penalty clause for breaching contract

If the tenant breaches the contractual agreement, then the owner is entitled to claim compensation for it. Typically the compensation can be claimed up to the extent the position that the owner would have been in, had the contract been carried out as per predefined terms.

Therefore, an appropriate penalty clause has to be defined to cover a situation when a tenant fails to comply with the terms and conditions of the tenancy agreement.

In any case, the clause should not be formulated in such a manner that it brings profits to the owner.

Always define modest and proportionate admin charges

In the penalty clause, landlords should define administration charges that are modest. If the charges are more than the actual cost, then it would be unfair to mention it under the regulation.

There should be no multiple charging

At times, tenancy agreements have provisions for interest on unpaid rent. At the same time, there is a clause for fixed amount payment every month for unpaid rent. It is called multiple charging which is not allowed.

If it is mentioned in the agreement, then the first occurrence should be applicable. Talk to the legal expert if you have some confusion. Explain the situation and get their approval.

Tenancy agreements should be evenly handed

Agreements have penalty clauses that are partial and one-sided. For example, there are clauses that impose a penalty on tenants if they fail to make an appointment. However, experts say that the similar penalty clause has to be there if the owner or the agent is unable to make the appointment.

Clause about the financial costs incurred by owners

If the agreement contains a clause about recovering the additional bank charges or overdraft charges levied by their bank from the tenants because they were charged because tenants did not pay rent in time.

It is not a valid clause. According to the contract guidelines, a party can’t claim for a loss that was incurred because of impecuniosities of self.

Drafting a tenancy agreement is a specialized act which requires expertise and profound knowledge of the law. If it is done without proper guidance, then there are several loopholes and shortcomings.

One should make it perfect by consulting a legal adviser who knows the ins and outs of it. Appropriate care should be taken to avoid problems later.