Can You Charge a Cancellation Fee in the UK?

If you operate a business that involves a booking service, it can be very frustrating when customers cancel their bookings. This is because last-minute cancellations can cost your business time and money, especially if you invest significant resources into preparing services for your clients. When this happens, cancellation fees are a legal means for you to ensure that you do not experience losses from customers backing out of agreements early. This article will outline when and how you can charge a contract cancellation fee. 

What is a Contract Cancellation Fee? 

You can charge a cancellation fee when another person to your contract wishes to end the agreement before its scheduled end date. In business settings, many businesses that take bookings for holidays, flights or services use cancellation fees to ensure they do not lose earnings from that cancellation. Known also as termination fees, cancellation fees also encourage people to honour a contract to its full duration. They are usually issued against the party who wants to end the agreement early. Importantly, they require that person to pay a fee to ensure your business does not lose out on expected earnings. 

Can My Business Charge a Cancellation Fee? 

Businesses that engage in booking or reservation-based services will commonly use cancellation fees. For example, you may want to use a cancellation fee if your business provides:

• holiday or travel reservations;
• hotel bookings; 
• restaurant reservations;
• delivery services;
• specialised events-based services, such as a photography service; or
• ticketing services. 

You will also often see cancellation fees used in subscription-based services or general contracts for the performance of a service. Your business may want to use a cancellation fee if you provide: 

• mobile phone plans;
• an internet streaming service; 
• a gym service;
• goods via a subscription service, for example, grocery delivery services like HelloFresh; or 
• software services.  

For example, in a mobile phone contract, service providers regularly write cancellation fees into their terms and conditions, requiring customers to pay off the remaining balance of a contract if they wish to end that contract early. That ensures the provider is not left out of pocket for their expected earnings. 

How Much Can I Charge For a Cancellation Fee? 

The amount you can charge for a cancellation fee depends on the service you provide and the individual case in question. Therefore, cancellation fees must be proportionate to losses you expected to incur if the customer was to terminate their contract. Different companies calculate cancellation charges differently. However, there are several things to consider if you want to impose a termination fee. 

Lost Earnings

As stated above, you can charge for the anticipated profits you would have made if a customer had not terminated a booking or subscription.

Administrative Costs

Companies can charge administrative fees they have incurred in the process of cancelling the arrangement.

Wasted Costs 

You can also charge for any fees you have suffered to set up or facilitate the services. For example, suppose you operate a grocery delivery subscription service. In that case, the logistic costs you have incurred to package and arrange for the goods you were supposed to deliver can count in a cancellation charge. 

Flat Rate or a Percentage of the Contract Price

Sometimes businesses might want to charge a flat rate for cancellation depending on the service they operate, or they can charge a percentage of the contract’s sum. For example, a hotel may charge a set rate to cancel a room booking, but a flight company may charge a percentage of the total booking if a person cancels their flights. 

When is it Unreasonable to Charge a Cancellation Fee?

Sometimes customers may be forced to cancel a contract due to circumstances out of their control. This is known as a frustrating event and could include situations where: 

• a customer falls ill and is not able to physically use a booking they have made; or
• a customer cannot fly because of a natural disaster or a global pandemic. 

In these scenarios, it may be unreasonable to enforce a cancellation fee. If you attempt to do so, a customer can use the law of frustration to stop them from paying early termination charges. 

You must also remember that you can only charge a cancellation fee if reasonable to do so. Customers may also receive a full or partial refund of the fees they have paid. In such cases, it is best to seek legal advice when determining how much should be charged and the amount that you should refund.

Key Takeaways 

If your business operates a booking or subscription service, you may charge cancellation fees if your customers want to cancel the service before the agreement is supposed to end. As such, cancellation fees can be a useful tool to deter customers from ending a contract early and ensure you recover any losses incurred when preparing to provide them with that service. You can calculate a cancellation fee in several ways, but it is important to remember that the fee must be proportionate to the losses you incurred from that termination. Furthermore, there may be occasions where it would be unreasonable to enforce a cancellation policy because the customer experienced frustrating circumstances they could not control. As a result, you should seek legal advice when drafting and enforcing a cancellation fee policy.

If you need advice on how your business can recoup fees from cancellations, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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