Letting Fees:

The announcement by the Chancellor during the Autumn Statement that he would move to ban letting agent fees caused consternation in the private rented sector (PRS), especially as it follows many other seemingly negative changes for landlords and letting agents over the last year.

This is as yet another proposed change on which Government will need to consult, assess its impact, think through all its implications and find time to implement.

In the meantime there is no change. Rics says: “There are so far two routes to government’s implementation: full consultation and primary legislation (which is unlikely to see change during 2017) and curtailed consultation and secondary legislation under existing statute, such as Competition & Consumer Regulations (this would make change more rapid and within 2017)”

The Department of Communities and Local Government (DCLG) whose jurisdiction this issue comes under has confirmed that they are looking at consulting early this year and are in favour of taking the primary legislative route. This gives the sector much more time to influence and to then adapt to what is decided. For tenants struggling with their budgets and the competitive letting market that exists in places like London, this will seem like a long desired relief.

For the letting industry, it comes as another administrative hurdle and one which upsets the established balance of fees, but some agents have abused this, and it could be argued, they have brought it on themselves. But the direction of travel is in-line with recent changes in Scotland, and the focus on the relief of those ‘just about managing’ in society, identified in recent speeches by the Prime Minister since the result of the EU Referendum.

However, as with other recent changes in the private rented sector (PRS), the unintended consequences may see rents actually rise if these costs are passed on, or if not, many smaller landlords exiting the market and reducing the overall stock available for rent. This applies further pressure, alongside stamp duty and mortgage interest rate relief changes, in a market with a shortage of rentals in many areas.

It is unlikely the government’s initiatives on more housing provision, Build to Rent for example, will be sufficient to “pick up the slack”, but a Housing White Paper due out soon should give more detail on the government’s long-term thinking on housing and renting regulations. Although the tenant fees issue yes or no debate appears to have been concluded, given the Chancellor’s remarks in the Autumn Statement, industry experts are looking for rules that strike the right balance between allowing letting agents to recover their reasonable costs in determining a tenant’s suitability to rent a property, and protecting tenants from suffering excessive charges by less scrupulous agents.

David Cox, managing director of the Association of Residential Letting Agents (ARLA), said: “A ban on letting agent fees is a draconian measure, and will have a profoundly negative impact on the rental market. It will be the fourth assault on the sector in just over a year, and do little to help cash-poor renters save enough to get on the housing ladder.”

For landlords and tenants, the Chancellor’s move won’t help those who are ‘just about managing’ as any rises in letting agents’ fees will hit both. Millennials in particular, critics say, since they were increasingly likely to rent.

Some 24 per cent of those aged 25 to 34 rented privately in 2004-05, according to the official English Housing Survey; 10 years on, this has risen to 46 per cent. The proportion of the same age group buying with a mortgage fell from 54 per cent to 34 per cent over the period.

The Fair Fees Forum

A recent communique from the National Approve Letting Scheme (NALS) attended by leading industry players gives a flavour of the consultation process and the issues involved.

1. The Fair Fees Forum met on Friday 13 January

2. Attendees at the Forum included; Belvoir, Chestertons, the Connells Group, Countrywide, Hamptons, Hunters, LSL Property Services, Northwood, Savills, Spicerhaart, Touchstone, Winkworth, Shelter, Association of Residential Letting Agents, National Approved Letting Scheme, Royal Institution of Chartered Surveyors, National Landlords Association, Residential Landlords Association, Greater London Authority (in listening mode), The Property Ombudsman, Ombudsman Services: Property, Property Redress Scheme and Department for Communities and Local Government (in listening mode).

3. The group reviewed and discussed information collated and supplied since the last meeting which included: • A comprehensive overview of the work of an agent before and during all stages of a tenancy; • Available evidence on the fee ban in Scotland and how it had been implemented; • The impact and implications of a ban on all parties in the rental process: tenants, landlords and agents; • The impact of the ban on the work of redress schemes and the need for clarity for consumers as well as robust enforcement

4. DCLG reminded the group that it was the political will of Government to ban fees. Therefore, the excellent work of the group should be focussed on continuing to provide evidence and data to help inform Government on the fee ban and how best to make it work.

5. The Group discussed the implications of the fee ban in terms of loss of service to tenants, increased cost for tenants in accessing a tenancy, potential decrease in choice of agent for consumers, and, an increase… in self-management by landlords all of which were set against a backdrop of a lack of regulation in the sector.

6. An overarching message that came from all members was the upmost need for clarity, transparency and effective enforcement of the ban.

7. The Group considered the proposal from NALS for a Competition and Markets Authority CMA) review into fees and charges in the lettings market and how best it should operate. The Group agreed to the proposal and to contacting the CMA as soon as possible with their request ahead of the Government consultation being launched.

8. The Group agreed to meet again when the consultation has been issued, in order to examine the detail and to consider areas where a joint response from the Group could be made. Members of the Group will also provide individual responses to the consultation and share them, if they choose. About the Fair Fees Forum NALS originally created the Fair Fees Forum to bring industry, trading standards and consumer groups together to discuss the creation of a fair fees charter for the private rented sector, and look at alternatives to an outright ban.

In light of the announcement of a ban on fees, the Forum’s Working Group is working together to inform the scope of the Government’s consultation. Comment from Tessa Shepperson, solicitor: Expressing surprise at the move when the Chancellors in his Autumn Statement announced that he was going to bring in legislation to ban letting agent fees to tenants, particularly, she says, as the Housing Minister had been rather dismissive of suggestions of this very thing a while ago. “Still it looks as if this is going to happen and we can expect a consultation shortly.”

My personal view, says Tessa, who operates the website LandlordLaw.co.uk, is that many fees that letting agents charge tenants are wrong and should not be allowed. For example administration fees and fees for drawing up a tenancy agreement. The reason why she considers these to be inappropriate is that “the agents’ client is the landlord. NOT the tenant. So it is the landlord who should pay the fees. In fact it is arguable that these things should already be covered by the agents’ commission. Otherwise what is it for?”

In fact agents could be breaching agency law by charging fees to tenants if they are not disclosed to their landlords, as they could be considered to be a ‘secret profit’. In this case the landlords are perfectly entitled to claim that the money be paid over to them.

This is in fact the basis of a claim being brought against Foxtons by Leigh Day. It is pretty clear that these fees will be covered by the proposed ban, says Tessa, so agents might want to start re-structuring their fees now to minimise their problems later. Fees which Tessa Shepperson thinks should be allowed

1. Reference charges.

If these are limited to the actual cost of getting a reference done I think it is fair. As many have pointed out, otherwise tenants can go around making unrealistic applications causing huge expense to agents.

2. One half of the inventory fee.

A clause like this is considered ‘fair’ under the Unfair Terms regulations and it is for the tenants benefit as much as the landlord to have an independent inventory done. Assuming it is independent of course.

3. Costs incurred if one or more of the tenants want to leave early.

Tenants wanting to leave is not uncommon, but as they have signed a legally binding tenancy agreement committing them to a fixed term, it is quite in order for the landlord to say ‘no’. I therefore think that if the landlord is willing to co-operate and say ‘yes’ he should be entitled to be re-imbursed his agent’s reasonable costs incurred by this. After all, they are not going to do the work for free.

Where we go from here?

At some stage soon a consultation paper will be issued, and if it is, agents and landlords should do a response, making it clear that you think which three charges should be omitted from the ban, and saying why. Many other anomalies will have to be taken into account, for example what about fees for reminder letters, interest charged on debts, court fees for evictions etc? There is a good chance that many of these will be exceptions under the new legislation, but the point needs to be made when the time for the consultation comes.