Comment: When it comes to banning tenants fees the devil will be in the detail
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Estate agent Simon Gerrard is concerned that a ban on letting agent’s fees will have a negative impact on landlords and tenants.
When Philip Hammond stood up to give the Autumn Statement many thought he would be making a series of announcements addressing housebuilding and property. Whilst he did announce a white paper on housing and support for infrastructure, social housing and first time buyers, these will be seen as sticking plasters rather than solutions.
He did, however, make one short sweeping statement that has thrown much of the letting world into turmoil: “Letting agent’s fees to tenants will be banned”.
You may be surprised to learn that I have long advocated that letting agents’ administration and contract fees to tenants are indefensible and morally reprehensible which is why at Martyn Gerrard we don’t charge them.
There are only two reasons why agents charge the fees. Some agents cut their fees to landlords to attract stock and then simply charge hazily explained admin fees to the tenants to make up the shortfall.
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Alternatively, and even worse, some agents still charge the landlord the full fee and then also charge the tenants.
Either way it is estimated that a ban of these tenant fees will wipe 10-20 per cent off the turnover of agents who have been charging these spurious fees to tenants. Although this may result in fewer cut price unregulated agents, which is no bad thing, the unintended consequence is that tenants will ultimately be worse off.
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The consensus is that a total ban means letting agents will shift the lost income generated from tenants to the landlord in higher fees. This, coupled with a shortage of stock (as investors are further deterred from entering the buy-to-let market) will lead to an increase in rents. In Scotland where all but rent and refundable deposits were banned in 2012 there is evidence that rents have risen as a direct consequence of the ban.
As it currently stands, the average fee paid by tenants quoted by the Government is £233, while Shelter quotes an average of £350. The reality for many tenants, especially in London, is a much higher figure. But what is a fee and what is a reasonable cost?
I would hope a holding deposit will be seen for what it is, rather than a fee that is banned. It is not unreasonable for a prospective tenant to put down a deposit – which goes towards the dilapidation deposit when the tenancy begins – to show commitment and to assure the landlord they are serious about taking the property. A ban on non-refundable holding deposits will mean tenants could express an interest in multiple properties giving rise to costs to the landlord and agent, and then simply walk away without any consequence. Surely not the Government’s intention.
Similarly, is it unreasonable to ask a prospective tenant to provide evidence of their suitability as a tenant? This usually involves an independent company providing a report having carried out credit, employment, previous landlord, immigration and right to rent checks. Again, if the tenant does not have to pay for this what is stopping them showing interest in multiple properties with each of these landlords paying for separate referencing only to be disappointed? Will a landlord be prepared to carry out these checks without any assurance the tenant is serious and what will happen if the tenant fails the checks? If the tenant is paying then the onus is on them to be certain they will pass the reference check.
My concern is that if all the costs are to be borne by the landlord, there will be letting agents who will try to compete for business by cutting their fees. This will inevitably mean a lower quality service, fewer tenant checks and landlords left dangerously exposed.
In a speech that lasted 51 minutes, the Chancellor’s announcement to ban fees to tenants took just 26 seconds. Details of what is intended are sketchy to say the least.
We predict much confusion for tenants as any ban is unlikely to come into force until 2018. The Department for Communities and Local Government has not given any more information other than “Government will begin consultations in due course and primary legislation will follow to bring the ban into effect.”
To us it looks like another piece of Government policy that is well intentioned but badly thought through. The consultation due to begin in the New Year will hopefully allow all sides to give a fair account of the problems that a total ban will bring and common sense will prevail when the legislation is finally brought before Parliament.