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Letting fees ban

It’s a done deal, says Jeremy Leaf, BSc FRICS FARLA but what will the new letting fees bill really mean for estate agents?

Jeremy Leaf
Jeremy Leaf image

Jeremy Leaf

The Government published its Draft Tenants’ Fees Bill on 1st November, banning letting agents from charging tenants for drawing up tenancies and inventory agreements, references, right to rent checks, renewals etc.

Holding deposits will be capped at a maximum of one week’s rent and security deposits at no more than six weeks’ rent.

The National Landlords Association (NLA) believes the security deposit cap may result in more disputes especially about damage at the end of a tenancy as tenants are likely to adopt a more relaxed approach to repairs.

Some landlords will try to let and manage properties themselves, but many lack the expertise…

Landlords and/or agents will probably have to absorb some of the extra costs or try to pass them on in higher rents where affordability allows.

Agents are still expected to be able to charge tenants for late rental payments, management fees for repairs resulting from deliberate damage, breach of tenancy, late rental payments or replacement keys. It appears that those tenants who break their contracts will have to cover the legitimate costs of finding a new tenant under the proposals.

Tenant fees including for renewals and checkouts for tenancies issued before the ban comes into force will remain payable.

As the Bill enjoys broad Parliamentary support, many believe it could become law as early as next Spring. If in breach, letting agents face a fine of £5,000 initially and a criminal record if fined or convicted of the same offence within the previous five years, including a penalty of up to £30,000!

POSSIBLE CONSEQUENCES

Apart from the substantial reduction in fee income for some, the changes could have unintended consequences. Further clarification is required.

Tenants may make offers on various properties with landlords, agents bearing the costs instead. If tenants have to pay, they’re much more likely to ensure references are in order.

Landlords or agents may choose to avoid low-income tenants and those with sharers or pets due to increased risk of incurring extra costs, especially at the end of a tenancy.

The Bill proposes that rent cannot be accepted initially if the amount in one period exceeds succeeding periods in an attempt to stop fees being ‘hidden’ in the first month’s rent. This may pose a problem for overseas students or the self-employed who often seek to pay substantial sums up front as they don’t have guarantors.

Zero deposit warranty insurance will probably prove more popular with landlords, tenants and agents particularly as it can cover, for example, excess damage or unpaid rent at the end of the tenancy and provide them with extra income. Unemployment insurance could be another useful source.

Agents could even pay the deposit as part of an insurance scheme and allow the tenant to move in for free, which will work in areas like London where the balance of power is moving away from landlords

Primary tenancies i.e. where agents effectively assume the role of landlords, reimburse the net rent received and reduce their responsibilities at the same time, may also find favour.

Letting agents and landlords using insured deposit protection, which is free to agents unlike insurance-based schemes, could switch to custodial schemes to compensate for losses as another way of differentiating their services.

THE WAY AHEAD

As the market changes, landlords and agents will want to attract and retain higher quality, longer term tenants, many of whom will be able to move in for free. Agents may try to improve productivity and lower costs by increased use of technology and/or perhaps outsourcing services as well as locking in clients to sole agencies. Additional staff training seems inevitable!

Landlords and prospective landlords may be charged by agents for advice such as buying opportunities, optimising returns from existing property, House in Multiple Occupation (HMO), licensing rules etc.

Certainly, most agents will try to treat the Bill as an opportunity to increase business by expanding their stock of managed properties and obtain higher fees from landlords by showing they can reduce voids as well as take responsibility for some or all of their growing compliance issues.

Agents could offer comprehensive property management in a one-stop pre-tenancy administration service end of tenancy fees including utilities management, council tax notification, broadband, tenant referencing, smart meter and insurances etc.

Some landlords will try to let and manage properties themselves even though many lack the knowledge and expertise to match the high quality service often available.

Clearly, new and existing liabilities can erode many potential benefits of private renting so keeping up to date with future changes will be even more important for landlords and agents alike!

December 6, 2017

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