Landlords face losing millions as Government homes in on letting agent fee ban

Landlords and letting agents are set to lose out on millions through a crackdown on rental fees. But will tenants actually benefit '“ and can the new laws be properly enforced? Chris Burn reports.

By The Newsroom Thursday, 5th April 2018, 9:37 am Updated Thursday, 5th April 2018, 9:41 am

The Government is looking to ban letting agent fees

Banning ‘rip-off’ letting agent fees is a key part of the Government’s ongoing efforts to tackle the country’s broken housing market – but despite its popularity with tenants, the idea is being met with a considerable backlash from detractors in the rental industry and scepticism even from supporters.

Recent research by the housing charity Shelter has found that private renters have coughed up almost £700m in letting agent fees in the past five years, with the average fee now £272 per person. In some extreme cases, people have reported being required to pay over £1,000 to letting agents who already charge landlords for their services.

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The Government has already committed to banning letting agents charging such fees to tenants but is now considering extending this measures to include fees charged by landlords and any required payments to third parties like referencing and inventory services companies, in an attempt to reduce the risk of such costs being passed on to renters in other ways.

Clive Betts wants more money for councils to enforce the proposals

But the process has sparked a backlash from landlords and letting agents, who fear it will put some firms out of business while simply resulting in higher monthly rental payments for those who rent their properties. And even those who are generally supportive of the idea are concerned about whether the new legislation can be effectively enforced by financially-stretched local councils.

The draft Tenants’ Fees Bill, which is expected to become law after spring 2019, proposes prohibiting all tenant payments with the exception of rent, security deposits of up to six weeks’ rent, holding deposits of up to one week’s rent, and default fees for different services.

Figures produced by the Department for Communities and Local Government suggest that the proposed changes could result in landlords losing a collective £166m per year and letting agents up to £184m – potentially putting many firms out of business and resulting in thousands of job losses. This has led to industry bodies suggesting the plans are ill-conceived and costs will eventually ‘boomerang back on to tenants’ in the form of higher rents.

However, the same Government estimates also suggest that the proposed changes may save tenants a combined annual £351m from letting fees being scrapped – even when the prospect of higher rents is factored in as well.

Clive Betts wants more money for councils to enforce the proposals

The proposals have also proved popular with tenants, with 96 per cent of those who responded to a public consultation agreeing that the ban on letting fees charged to tenants should be extended to landlords and third parties.

It is intended that council trading standards officers will enforce the new measures, with breaches resulting in fines of up to £5,000 – money that can be reserved by local authorities to help fund future housing enforcement work. But a new report by MPs on the Housing, Communities and Local Government Select Committee has called on the Government to make extra funding available to councils so they can properly enforce the new measures.

The Local Government Association, the Association of Residential Letting Agents and the Northern Housing Consortium all argue that more money will be needed as the amounts raised from the suggested fines are likely to be minimal. Charity Shelter has also raised concerns about a potential loophole allowing agents to continue charging renters potentially-unlimited amounts through ‘default fees’ for things like sending them a letter chasing up a rental payment.

Clive Betts MP, Labour MP for Sheffield South East and chairman of the Housing, Communities and Local Government Select Committee, says while it is positive to see action being taken, it is vital that the new laws are properly enforced.

“Moving home is always expensive. Many people struggle to find large sums of money at the start of their tenancies to put down as a deposit. Finding unjustified agents’ fees just increases the problem,” he says.

“Estate and management letting agents are acting on behalf of landlords in the letting process and it is landlords who should pay them for their services, not tenants and, especially, not potential tenants.

“Therefore, we have welcomed the proposed new laws that will achieve this.

“Despite not welcoming this clampdown, we think that the majority of landlords and agents will play ball. But we also know that there are rotten landlords and agents who will do everything they can to get around the law.

“So the law needs to be capable of responding to those who try to introduce new fees contrary to the spirit of the new rules.

“We know from experience that civil penalties will not pay the additional cost of the necessary enforcement that will have to be undertaken by councils, so we have told Government that councils will require additional funding for this enforcement.”

Dr Julie Rugg, senior research fellow for the Centre for Housing Policy at the University of York, told the committee it is already difficult for local councils to effectively enforce existing laws in this area as increasing numbers of tenants are combined with authorities struggling to balance their books.

She said she was aware of one local council which had just four environmental health officers to deal with 39,000 privately-rented properties.

Rugg says she sees the distinction of “rogue landlords” as “very unhelpful”, because while there is an issue with some criminals being involved in letting properties through issues like deliberately overcrowding properties, there is a wider problem with well-meaning but inexperienced landlords.

“There is a presumption that you do not really need to know a lot to be a landlord. That is hugely problematic when you are talking about something as important as somebody’s living environment,” she said.

“Everybody needs to know that this is not something that you can do on a car boot sale basis; it needs to be done properly if it is going to be done at all. That will take a culture shift in the way we talk about letting.”

Rugg said the complexity of existing legislation means the Government should tread carefully before imposing yet more rules onto the sector. This concern is shared by those working in the sector, who claim the planned law changes could backfire.

Richard Lambert, chief executive officer of the National Landlords Association, says: “If agents are unable to charge fees to tenants, they will have no other option than try to shift it on landlords, who will then want to pass it back to the tenant through increasing rents. But that does depend on tenants’ ability to pay higher rents, and we expect that landlords will have to absorb some of the extra cost, at a time when the Government is already taxing them more. There’s no doubt that some agents have got away with excessive fees and double-charging landlords and tenants for far too long, but agents play a key role in managing properties and the ban will eventually boomerang back on tenants.”

But pointing to the experience of Scotland, where a comparable ban has been in place since 2012, the select committee suggested the risk of rents rising to much higher levels is low.

Its report added: “If rents do increase to recover lost letting agent or landlord income, we believe that would be preferable for tenants as it spreads costs over a tenancy and still reduces the up-front cost of renting in the private rented sector.”

Greg Beales, director of policy and campaigns at Shelter, says: “This ban was wildly popular with renters, which is why it’s so important that it does exactly what it says on the tin by completely scrapping rip-off letting agent fees.

“It’s good to see the ban moving forward, but the proposals would leave the back door open for agents to continue charging tenants in different ways and let down the renters it was supposed to help.

“We need this Government to continue standing up for renters by following through on its pledge to fully ban letting fees once and for all.”

Firms ‘may end up closing down’

Letting agents could go out of business as a result of the planned changes, it has been warned.

Richard Price, director of UK Association of Letting Agents, says: “It cannot be ignored that this ban will seriously affect our members’ ability to run their businesses.

“Small agents in this market are drowning in constant policy interventions. This Bill, along with other proposed regulations such as mandatory client money protection and mandatory recognised qualifications, make running a business all the more difficult.

“The most likely way agents will recoup the losses this ban will cause is to pass the cost onto the landlords, who will in turn pass them onto the tenants through increased rents. However, for some agencies, particularly the smallest ones, this may still result in their business no longer being financially viable.