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Purplebricks Compensation Worries Get Worse And Worse

Tim Worstall
Tim Worstall trader
Updated 15 Dec 2021
  • Purplebricks Group PLC (LON:PURP) problems could be getting even worse than the market thought.
  • The specific error is that the correct documentation was not supplied to renters – leading to compensation being due.
  • Purplebricks might now see that bill soar – evictions might not be legal as a result of the same problem.

Purplebricks stock slumped 18% earlier in the week as news leaked out that they’d been getting the paperwork wrong. As a result of that incorrect documentation, there will be compensation due. Whether that’s £30 million as some claim, or £9 million as others and the company seem to think, remains to be seen.

The actual problem, in detail, is that there’s a national scheme to hold rental deposits. The landlord needs to supply specific documents to the renter that the deposit is in this scheme. If the paperwork isn’t done then the renter can reclaim three times the value of the deposit.

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If an agency has been handling the lettings then the landlord can – and will – claim from the agent if the renter makes that claim. Purplebricks wasn’t including the deposit scheme notification in its standard documentation pack. So, claims might be that £9 million the company think it could be, the Telegraph for one thinks it might be £30 million.

The Purplebricks share price already reflects this – that 18% slump this week already.

Except getting the paperwork wrong indicates, at least possibly indicates, laxness elsewhere. Further, the interlocking nature of modern paperwork can lead to other problems from the first original mistake. Which might be what is happening to Purplebricks.

If that deposit scheme notification isn’t made then that makes Section 21 evictions (“no fault” evictions) invalid. There have been thousands of such evictions as landlords sell up or shuffle portfolios etc. Purplebricks is therefore potentially on the hook for more compensation there. There is also a claim that the 3 times the deposit compo racks up each time a tenancy is renewed. So, feasibly, renters – therefore landlords and so Purplebricks as the liability is passed through – could be owed 9 times their deposit and so on.

Whether this is all actually true for Purplebricks is an interesting question. That plus whether the initial mistake – not serving the docs on deposits – leads to further such complications.

One possible position to take is that this is all teacup storm stuff and it will pass. Purplebricks has the cash to pay the current estimates of claims and it’ll be over. Another is that the one error is going to compound and continue to cause problems. It’s even possible to go further and think that if they could get the one part of the simple enough paperwork wrong then what else lurks in the filing cabinets? 

The Purplebricks share valuation is likely to bounce around as these questions are chewed over by the market in general. Given the uncertainty of the answers – logically, any one of those surmises could be true – an assumption of price volatility would be reasonable.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.