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.”