Banned 'Tenant Fees' good for tenants?

The 'Renters Rights Bill' moved forward last week with the announcement from the Chancellor Philip Hammond in the Autumn statement that Lettings Agents will no longer be allowed to charge tenants fees in England. The details of the ban have yet to be addressed, but in a bizarre strategy, the DCLG (Department for Communities and Local Government) is asking industries bodies such as ARLA (Association of Residential Letting Agents) for their views in the new year, after this decision has already been made.

While the press and some social media commentators feel this is a good attack on greedy letting agents, this article sets out to address it's implications for not just to agents like ourselves, but landlords and tenants, once this comes into force sometime in 2018-2019.

What are tenants fees in the first place?

Prospective tenants who go through an agent are charged fees by the agent in the event they wish to take a property, in addition to the first month's rent and deposit. Fees cover a range of services for tenants such as:

  • Referencing - determining whether tenants would be suitable to rent
  • Adverse Credit Check
  • Affordability Checks
  • Any References from Previous Landlords
  • Right to Rent in the UK Checks
  • Creating the tenancy documentation
  • Compiling Inventories
  • Travelling costs to the property for the Check In
  • Deposit Protection Fees
  • Credit card charges 

Fees range in prices depending on which agent you choose. ARLA, which represents over 70% of all agents in the UK ran a study and found the average fee tenants are charges is £202. However, some agents, particularly in London, charge anything between £550-£650. 

In addition, tenants paying a non-refundable fee acts as a sign of commitment to taking a property and demonstrates to the landlord they are serious about taking a tenancy - if they are willing to put down money, it's unlikely they will pull out of the deal later and in return, the property is listed as 'under offer' and no further applications from other potential tenants are taken.

What's the idea behind banning these fees?

Each year, rental prices have generally increased over time. In the October 2016 Statement Edition from Homelet, they found the average UK rent price was £902, this is 3.0% higher than last year (£875pcm). To help make these increasing costs more affordable for tenants, banning tenant fees will make it easier for tenants to rent a property by not having to fund so much upfront costs. 

What else has been done?

Last year, legislation was put in place requiring all letting agents to publish their fees avoiding the hard sell some agents are known for. The idea being that landlords and tenants can make an informed decision about which agent they would like to use before being charged for things they weren't aware of (see is your agent complying with the law). However, despite this, many agents still don't comply with the law and many councils don't have the resources to effectively police them. Landlords and tenants don't shop around for more competitively priced agents, and so the idea has largely failed.

Scotland banned the fees in 2012 so it's possible to look at them as an example of what to expect.

What do these fees pay for?

Some people think that the lettings process is simply amending a template and hitting print - this couldn't be further from the truth. Tenants fees are an income for letting agents in addition to income received from the landlord in order to keep the business running. On average these fees make up about 12-18% of a letting agent's income. 

Good business has always been about being able to serve the bottom line in order to function, but also to grow. An agent's costs could be summarised as:

  • Office space rental and rates
  • Wages for the people we employ (we employ three people)
  • Advertising costs for Property (Rightmove is currently £1,236 a month)
  • Mileage costs for visiting properties for viewings, check ins, check outs and inspections (45p a mile)
  • Computer software subscriptions for management, inventories, floor plans, file storage
  • Professional body membership (ARLA, The property Ombudsman Scheme, The Tenancy Deposit Service)
  • Fixed assists such as office equipment and computer systems
  • Mobiles and broadband costs

In addition, agents experience, expertise, availability and professionalism are all valuable asset which tenants benefit from which aren't direct costs, but still something seen as a chargeable benefit.

Is it just a case of more charges for landlords now?

MP Kevin Hollinrake said:

There is clearly not a free market for tenants, who follow property rather than choose between letting agents because of fees, so it is an issue that we need to address. However, letting agents rely on these fees for income, and so that income would have to come from somewhere else; it could be added to rent or else come from higher fees for landlords. Agents may also choose to take the most secure tenants and prefer those with good credit histories, rather than take a risk on a tenant with an inferior credit history, because of the risk of having to do the work twice, which would add to their costs. There is a potential issue there, so should we consider a cap rather than abolition?

Whether this will happen or not remains to be seen. 

If there was scope for the landlord's to be charged a higher fee, it would almost certainly result in rents being increased further and so tenants would indirectly be paying more than if they just paid an upfront fee.

In the case of Scotland, rents did increase but not dramatically. Some agents went so far as charging an extra £25 rent to every tenant but charged that as a fee to the landlord to recover the lost income. 

Is it really all doom and gloom then?!

If tenants can't be charged a fee, then there's nothing to show a commitment from them to taking a property. What's to stop a prospective tenant applying for 5 different properties at the same time before rejecting 4 of them at the last minute? Four of the agents would have carried out unnecessary work and be faced with all the lost time and costs associated with it. The landlords of those properties would be faced with an increased void period. These costs, of course, would have to be made back up from somewhere, which is almost certainly higher rents for everyone.

A possible solution would be to continue viewings until a tenancy agreement is signed, but in the cases where there are outgoing tenants, you wouldn't dream of having a new contract signed until current tenants had vacated. This would mean tenants won't know for sure if a property is theirs or not until a week or so before they are due to move in. If there are five applications on a property, all waiting for the go ahead, that's four people that could be facing homelessness or a scramble to find another vacant property at the last minute.

While a free market would be preferable, it's clear that doesn't work. If someone sees their dream property, they aren't going to decide not to go for it because the agents charge £50 more than another agent that doesn't have the property - the reality is they are going to take the £50 hit and the property of their dreams. Equally, if a market is low on properties with high demand, a prospective tenant is going to pay what they need to secure a property.

So what's the alternative? I'm not sure, but if the issue is how to kerb rising costs for tenants, the answer certainly isn't banning agents fees to tenants - it will merely drive up rent prices for tenants and be an administrative nightmare for everyone. 

I would have thought no one wants this, but we live in a post-truth society where facts don't mean anything anymore (perhaps why no one from the industry was consulted before the announcement was made?). Perhaps at the end of the day, it's all about sticking two fingers up at the greedy London letting agents, the only problem is, everyone will pay the price #slowclap.

Silver Lining?

The move could spur competition as landlords, unlike tenants can shop around for a more competitively priced agent. Most agents around Wilmslow charge a month's rent upfront as a letting fee. Martin & Co charge 90%, we charge 60%, and yet we don't have flocks of landlords coming to us from other agents because our fees are less. A study by Rightmove in 2015 showed that when landlords were asked how important fees are compared to agents location, the number of properties on the books, visibility, industry accreditation etc, fees came in at just 26%. 

What the future holds remains to be seen, it's still a long way off, but despite the applause from vocal social commentators, our view is this is not the way to fix the housing crisis.