The idea of charging tenants, as well as landlords, administration fees for their tenancies is not new. While it’s illegal to charge applicants simply for being registered, there are numerous other ways that lettings agents and landlords charge tenants fees up front – quite separately from rent.
While most professional letting agents are innocent of the crimes slung at them by ‘tenant champions’ some agents haven’t helped their case by charging excessive fees for referencing, renewals, check-ins and outs and anything else they can think of. Such charges are now being put in the spotlight by campaigning groups, such as Shelter, and by agents such as Upad and Rentify which don’t charge tenant administration fees.
As Mike Brown, Director of lettings agent Brentwood Investments, says, “The lettings industry is under the cosh.” But now, he points out, there is another element in the battle. While it is lettings
agents who are getting beaten up, social landlords are now charging increasingly high reference fees.
Mike recently sought a reference from Rochdale Boroughwide Housing for an applicant who wanted to move near to the rest of her family. He was told there would be a charge of £75. He points out that such charges prevent social tenants from moving if there’s no appropriate social housing available where they want to live. “I don’t think their tenants are aware of these charges,” he says. “We have to advertise our charges – why doesn’t the public sector?”
A glance at landlord forums shows that his experience is by no means unique. Many social landlords are now making such charges – and they can; unlike lettings agencies, they’re not obliged to flag all charges upfront, and strictly speaking, this is a charge to a private sector landlord or agent, not to the tenant (though, of course, it will end up getting passed on).
As housing associations and other social landlords are forced by government policy to become more profit focused (according to the Guardian, social housing surpluses rose from £203m in 2009 to over £2bn in 2013) such charges are likely to increase.
There’s also an increasing trend for councils to sponsor the setting up of social lettings agencies accessing private rented sector properties for those on low incomes or in housing need. Social agencies represent a source of competition for the lettings agency sector, and despite their alleged social status, some appear to be competing pretty directly for business.
A 2013 report by the Welsh Local Government Association found that, “Many created significant barriers on affordability grounds by charging administration fees, and at others the protection of the landlord often appeared to take priority over the needs of the tenant.” It seems unfair that such agencies can compete for private landlords charging much lower fees than estate agents, while in some cases also making charges to tenants – and yet no one’s complaining about them.
(To be fair, a quick survey of social lettings agencies in London showed none making charges directly to tenants, though their policy on references couldn’t be ascertained.)
Mike adds that Rochdale Boroughwide’s reference charge seems high considering the work involved. “We have a questionnaire for references,” he says. “It takes someone ten minutes to fill it in. £75 is a lot for ten minutes’ work.”
Fortunately the story had a happy ending for his tenant, who found a guarantor.
By contrast, it’s open season on lettings agents and has been for a while, and not just from the tenant’s side as OFT v Foxtons (the decision on unfair renewals fees) showed. With an increase in rental levels and shortage of accommodation, some agents have ratcheted up the administration fees they charge to tenants, to levels that make £75 for a reference look positively restrained.
Lettings agencies are employed by the landlord and largely paid by commission out of the rent due to the landlord. That has exposed them to accusations of double charging, not just from tenants but also from within the industry. For instance Patricia Barber, Chair of the Association of Independent Inventory Clerks, says that while a check out can be paid for by either landlord or tenant, “I am aware of agents who double their profit by charging both landlord and tenant for one or more parts of the inventory process.”
Referencing is a service for the landlord, not the tenant so we charge the landlord £50-75 for this crucial information.”
George Spencer, CEO of Rentify, points out that in some ways this is similar to the financial services industry; brokers and fund supermarkets used to take a commission from fund managers to promote their funds, and then also take a commission from the clients who bought those funds. That’s now been stopped by legislation. The lettings market, on the other hand, has not been regulated, and it’s far more fragmented.
Who should pay?
He says Rentify strongly believes that referencing is a service for the landlord, not the tenant. “Referencing takes time, it’s a bit of a pain, and it’s the bit that’s not automatic. But it’s also the part of the process that is most indicative of problem tenants,” he explains. “We charge £50-75 to the landlord, because this is crucial information for them.”
If the agency is working for the landlord, should the tenant be paying anything? George points out that some agents, like Purplebricks, subsidise lower fees to landlords by charging tenants more (a
£200 reference fee and £75 inventory fee). He says this reflects the dynamics of the market. “Agents are competing to win acquisition is about £400. So the agents have to make money out of that any way they can. It’s the high acquisition costs that force agents to burn the candle at both ends.”
Taking referencing fees away (in Scotland) was a mistake. Tenants can run with 3 or 4 properties at once – they should pay.”
That’s something Neil Woodhead, director of Castle Estates, believes happened in Scotland before the ban on fees to tenants arrived in 2012; new entrants over the preceding few years were trying to grow their market share quickly by offering landlords cut rates but charging tenants more. “I charge 12 per cent. The man down the road wants the landlord, so he only charges 10 per cent, but makes it up out of the tenants’ pockets,” he says. He suspects some firms made more money out of their tenants than they did out of the landlords who are supposed to be their clients.
As far as he is concerned agents don’t need to charge tenants to make money. “Yes, we’ve lost referencing fees,” he says, “but it hasn’t made a huge impact on our business as a whole.” What made more impact on the market as a whole, he thinks, was the retroactive requirement for deposit protection; that sent several less well managed agents out of business as they couldn’t find enough money to pay into the schemes. And he says that while you might think landlords would put rents up to make up for higher commissions, in fact rents have only rocketed in a few hotspots like Edinburgh, Glasgow, and Aberdeen – in other areas, he has properties that have not seen a rent rise in five years.
But he says taking referencing fees away was a mistake. These fees, he says, stop tenants applying for a number of properties at the same time, or applying for properties when they know their references won’t pass muster. “The landlord can end up paying for four references, in the case of a house share,” he says, “but the tenants are running with three or four properties and then don’t end up renting this one. So I do feel the tenants should pay something, and if they don’t tell the truth and their references are bad, then that’s it, they’ve lost their money.”
Political parties are increasingly pitching to tenants… you can ban a fee but you can’t ban a cost. Someone has to pay.”
That forces agents to do more due diligence on applicants before the process starts. He says especially in ‘hot’ markets like Glasgow he sees timewasters pretty regularly – “it’s not an occasional thing” – and there is a cost associated with that. Richard Price, Executive Director of the UK Association of Letting Agents (UKALA), says a balance has to be struck somewhere. “There are legitimate business costs that letting agents will look to recover from tenants,” he says, “but these clearly vary from agent to agent and some examples are far too high. What’s important is that fees are fair and transparent from the outset and that the tenant is aware of what they will have to pay, when and why.” Both UKALA and ARLA expect agents to show their fees to tenants clearly.
Agents are getting better at doing this, as shown by UKALA’s finding that 85 per cent of tenants surveyed said their agents were clear about what fees would be charged. Checking the websites of agents in Norwich, for instance, Kings and William H Brown both show their fees in detail, Haart shows the fees but mentions that the check-in fee is variable, Martin & Co sets out ranges of fees – from zero to £350 for administrative costs, which isn’t particularly helpful – and Watson simply says “various fees will apply.”
But with most of these agents it still looks as if tenants will pay £300 upwards in fees – even online agent Upad charges a £75 reference fee, though no admin fees – and together with rent in advance and deposit, that can make life difficult for tenants moving house. The wide range of fee levels and different ways they are broken down makes comparisons difficult, so tenants can’t easily see what’s a good deal.
Some large landlords and a few agencies don’t charge fees. For instance Heriberto Cuanalo of Collegiate, a student accommodation management company, says, “While a number of letting agents do
charge administration or letting fees to students even if they are unsuccessful in securing accommodation, we do not charge any letting fees to students we cannot offer accommodation to.” Landlords pay the management fees, and while Collegiate charges students a booking fee of £250, this is converted to a refundable deposit once the let begins.
Whoever pays the fee, it’s true that someone has got to pay. As Richard Price says, “You can ban a fee but you can’t ban a cost.” There certainly is a cost to handling tenancies, a cost that has increased with the introduction of immigration checks, though he thinks this can be incorporated into referencing without increasing the fee.
THE REAL COST
There’s still a suspicion though that some agents do far more than covering costs. George says an online credit check costs 14p, a full reference, including phone calls to employers and previous landlords, between £9 and £15; a Rentify survey in 2013 found many agents charging up to £50 for the service. “The average time for an agent to complete all the administration tasks connected to a new tenancy is approximately 90 minutes,” he explains ‘15 minutes for the contract, 45 for the reference check, 15 for the credit check, and 15 other administration tasks. “In London,” he says, “this means tenants are paying agents approximately £146 an hour for such services.” (That’s where the agents are actually carrying out those services themselves. In many cases, they are outsourcing them to external providers.)
What’s happening now is the result of major changes in the way the private rental market works. Not only has renting become more commonplace since 2007, but the use of agencies has become much more widespread with fewer landlords managing their properties themselves. And an ever growing number of sales agents have introduced lettings arms to diversify their income streams and reduce their dependence on a shrunken sales market. At the same time, opposition parties have identified renters, particularly among the young, as a target electorate: Richard Price says, “political parties are in fact increasingly pitching to tenants” – that may include potentially disastrous policies such as a blanket ban on tenants’ fees.
It’s clearly a political hot potato, and while most agents may be doing a reasonable job, the occasional rogue agent will keep the pot nicely simmering.
However, campaign groups like Generation Rent do have a point. Because of the triangular nature of the relationship between landlord, agency and tenant, there’s some confusion about who is getting the service and who ought to pay for it. There is little clarity in the market, and there is still no overall regulation of lettings agents. At the same time, initiatives such as social lettings agents have muddied the waters and because of the differences in applicable legislation appear to allow public sector non-profits to compete with estate agents unfairly, even if that wasn’t the intention.
It’s time to do some serious thinking about the way lettings agencies work, and the charges that to landlords and tenants. The industry needs to get its house in order – which might mean it’s time to take ARLA’s point about compulsory licensing of lettings agents – or it may find the decision taken out of its hands.
What’s your view? Email the Editor: [email protected]