Purplebricks has detailed the price it is paying for a lettings compliance blunder first spotted last year.
It predicts that, at worst, claims against the agency by tenants could reach in excess of £5m.
In a trading statement for six months to the end of October this year, it says the problem - when the agency failed to properly serve legally-required documents to tenants explaining their deposits had been put into a recognised protection scheme - led to “forensic analysis” of lettings processes within the company.
The statement says: “The Board then agreed and implemented a number of process and control enhancements, including in the processes around timely registration of deposits, and provision of prescribed information and other information to tenants appropriately in light of their individual circumstances. The Company has also now concluded the process of ensuring that customers have been contacted with appropriate information.
“A provision of £2.8m for potential future claims which could arise under the Housing Act 2004, and for associated professional fees remained at 30 April 2022 after utilisation against professional fees in respect of third party advice and assurance and claims settled in FY22. This amount reflected estimates in respect of the rate at which current and former tenants will make claims, and the average level of payment made in respect of successful claims, including legal support costs.
“The ultimate level of financial exposure is dependent on the claim rate, the level of penalty applied in respect of successful claims and the future legal fees incurred to support claims management. To date, a low volume of claims has been experienced. However, we would note the significant period in which those affected are able to bring a claim.
“The provision is especially sensitive to the claim rates, which were assessed at 30 April 2022 at 9.9% for current tenants and 2.0% for former tenants. The board assesses that, absent any significant change in claim rates, or in other relevant circumstances, maintaining the provision at 31 October 2022 in line with the 30 April 2022 level balances the low level of claims incurred to date with the remaining risk in the current and former tenant populations, and reflects the best estimate of total potential future claims rate expected from the remaining population as at 31 October 2022.
“The Board has challenged and debated the process, key judgements and assumptions associated with the provision and is satisfied that it is appropriate, recognising the significant uncertainty and degree of estimation involved in calculating this provision.
“A 10% change in the claim rates, to 10.9% or to 8.9%, would increase or decrease the provision by £0.3m. The Directors assess that a reasonably possible range around claim rate and level of financial penalty applied in respect of successful claimants could result in the financial liability being in the range of £0.2m to £5.1m. Claims experience to date would indicate an outcome towards the lower end of the range. While the Board feel it is highly unlikely, a very high claim rate causing an outcome higher than £5.1m remains possible.”
Aside from this admission, the agency’s trading statement is coy about the size and potential of its lettings service, which some analysts believed may be closed following the multi-million pound costs of recovering from a compliance issue first identified about a year ago.
Instead, Purplebricks says: “Our number one priority in lettings is to improve the customer experience and ensure we retain the landlords we have, as well as looking at how we scale this part of our business. We remain excited about the significant opportunity there is for Purplebricks in the lettings market and look forward to setting out the growth plans for lettings at full year results.”
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I suspect Purplebricks are not the only agency or landlord who has failed to comply with the deposit legislation, they are probably only the tip of an iceberg. I kept well clear off the deposit legislation when it was introduced predicting this is what would happen. The reason it is not happening to any great extent is tenants are unaware of their rights or if they are, do not enforce them. Why do the tenants who know about their right to compensation and are not claiming against their landlords? Because I believe they like their landlord and people do not sue those they like.
Purplebricks experience is repeated then they were probably better off not bothering to comply with the tenancy deposit scheme as the cost of compliance I suspect would have cost more than they have had to pay in claims. 98% of the previous tenants have not claimed and only 9.9% of the current tenants have claimed.
Jim Haliburton
The HMODaddy
Not into all this virtual agency stuff , so easy to shut a website down and then kaput !
I don’t take deposits, don’t rate them and there are too many hurdles, my tenant selection is so brutal that only Gold A rated + people get through, never had any issues… ever.
Interesting comments, I can understand your sentiments and I bet that purple bricks wished they had never taken them.
I used not to take deposits but do now. I have had bad experiences where I have paid agencies to find tenants for me, I no longer do this and meet all prospective tenants and so far have had no problems. Lesson learnt. Nobody is more invested in your property than you.
If the total potential claim from tenants was originally £30m, if they all knew their deposit had been registered late and decided to go after PB for 3 x the deposit, why would you only make an initial provision of £2.8m? Thats less than 10% of the potential problem? How did they arrive at that figure, did they ring them all and ask their intentions? Assuming they didnt, albeit they did foolishly inform tenants of the error in the first place, it was clear they were kicking the bad news down the road with that provision last year and are doing so again now increasing it to £5.1m, albeit its sounds like they dont have a clue what it's likely to be. If I was a PB tenant though I would be making my claim for some free cash. Watch this provision slowly creep up as more claims are made.
What's the betting PB will go bust in the new year together with a few more estate agents, all those leased BMWs being reprocessed !
We have been quite successful in defending Landlords against Deposit claims by solicitors. Either totally negating the claim, or negotiating it down to realistic levels and thereby limiting legal costs.
The Deposit Scheme is a scam brought in on a pack of lies by Shelter in 2007 when they alleged up to 45% of Deposits where withheld by landlords, it later transpired at that time less than 2% went to Deposit Resolution. This is unsafe legislation and should be scrapped.
It’s a farce not a law why should any LL be required to give them back the Deposit plus another 3 Deposits that he never got its disgraceful behaviour by Authorities. This is not justice but making a mockery of the law.
Well said Michael!
I have only 5% of Deposits that I used to have before this corrupt scheme and the only reason I have any is because the Tenants wanted me to have it, they were scared I wanted to get rid of them knowing my rents are 30% below Market value and wouldn’t be able to find alternative accommodation for my reasonable rents.
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