How will The Tenant Fee Act affect the Private Rented Sector?

A ban on both letting agents and landlords charging their tenants fees is about to come into force in June 2019. This has been a well debated topic since the idea was first tabled in 2016 and one which a lot of letting agents and landlords at first did not think would become a bill.  Despite this many people remain blissfully unaware of the changes that are about to happen and the impact it could have on the lettings industry.

So what does the Tenant Fee act mean in simple terms?  From June landlords and tenants will only be able to charge the following;

Monthly rent
A capped damage deposit
A one week refundable holding deposit
Interest on missed rent payments
Specific capped allowances for changes to an existing tenancy

The list is short and there can be no administration charges / inventory fees or any other cleverly worded ways of charging fees to tenants.  In reality most self-managing landlords do not charge fees but they often use agents to find tenants and it is agents in particular who have been blamed with charging high fees.  Administration fees as high as a full months rent + VAT, though the market average sat at around ½ months rent + VAT, separate fees for inventories, pet clauses, call out charges during a tenancy and many other often “hidden fees”.  But this was not all agents, many charged more reasonable costs.  It could, and has been suggested that a cap on fees being introduced would have been a more sensible approach.  However we are now in a positon where there will be no further debate and the ban will be coming into force in a few short months. As a portfolio landlord and the owner of a north east based lettings agency (Daniel Craig Residential) this is a topic I have been following very closely, having been a tenant myself I also empathise with tenants who in some cases have been taken advantage of by a number of agencies, particularly in London.  So where does this leave the various parties affected within the lettings industry?

It is for the benefit of tenants that this bill has been introduced and they will be rejoicing up and down the country as this now makes renting more affordable, but does it?  There are a few different scenarios and the truth is nobody knows how it will unfold.

The ideal scenario sought from this is that rents stay the same, supply of rented housing stays the same and tenants save a considerable amount of money in fees.  Though the word considerable is relative as saving ½ months rent is unlikely to help any tenants onto the property ladder.

In practice the simple fact is agents have a long list of overheads which include but are not limited to office costs, staffing costs, travel costs, advertising and training. They cannot afford to reduce their fees and so are looking to pass the tenants share of fees onto landlords.  Landlords I have spoken to have responded badly to this suggestion, landlords who have already been hit with a number of changes to regulations surrounding mortgage payments and tax rules.  So they will oppose this, but if their costs do go up from their agents then their rents will have to go up in order to compensate for this.  This could actually make renting less affordable for tenants because a monthly rent increase could easily equate to a larger payment than upfront fees would have been from an agent.

If letting agents are not able to pass on the fees to landlords then this will inevitably lead to poorer quality management services or landlords trying to manage properties themselves.  In a market where tenants are often already complaining of poor service this could quickly lead to sub standard living conditions for tenants.

With more and more fees being passed onto Landlords many will simply refuse to invest in property and a flood of rented property could come to the market, this would reduce capital values of housing for both landlords and home owners.  It will also reduce the number of rented properties available for tenants. For tenants wishing to become home owners it may be a benefit as it could make housing more affordable to purchase but in reality houses purchased by investors often require huge sums of money to refurbish and bring them back into habitable condition.  Most first time buyers don’t have the funds or the experience to do this.  This leaves the door open for large scale corporate funds who are actively buying up property across the UK and could replace the smaller private landlords. The result of this is rents will likely be higher than they were previously and tenants are still worse off, letting agents and their employees will be hit hard and a number will lose their jobs. Property remains unaffordable for tenants wishing to become home owners and the end winners are the large scale investors with disposable funds available to take advantage of a huge swing in the property market.

So as a letting agent what is our response?

I do not believe the tenant fee act is fair on letting agents and I have several reasons but the most basic is this.  I bought a house at an auction, I paid an administration fee to the auction house, I also paid an administration fee to my mortgage broker, who incidentally also receives a payment from the mortgage lender. I paid a fee to the mortgage company and I also paid a fee to a valuer, who was valuing the property for the mortgage company to ensure it was worth what I was paying, then I also have the privilege of paying an extra 3% stamp duty because I won’t be living in the property myself. Despite this long list of fees being charged by companies which are comparable to that charged by letting agencies I’ve not heard any mention of fees being prohibitive or unfair for landlords buying property, fees in comparison to which administration charges from letting agents pale in significance.  Fees which are common across a host of different markets.

This is not to say I don’t think some agents, as with any industry, took advantage of being able to charge ridiculous fees in times of high demand and that is why I would have supported a cap on fees and more regulation to ensure reputable companies are looking after the nations housing.  But my feelings will not change the situation we find ourselves in.

For all the bad publicity landlords receive they provide 20% of the housing supplied in the UK.  As an economy, I believe the UK needs small private landlords investing in its property market and as a landlord myself I have cringed at some of the proposals my management agents (in areas I cannot manage my own properties) have sent me.  I face my let fees doubling and my ongoing management fees being increased by as much as 50% depending on the agency.  On one small rental property of £500 per month rent this would equate to £660 over the space of one year, across a larger portfolio of 10 properties this would increase a landlords fees by over £6,000 per year!

The fact is almost every letting agent I have spoken to is increasing their fees to landlords, some are lumping all of their lost tenant fees onto the landlord whilst others are trying to absorb part of the loss and only pass on a portion alongside reducing costs within their business.  Whilst I believe it’s an unfair restriction on letting agents I do not understand how it is fair that the landlord is expected to foot this cost.  Did letting agencies agree to absorb costs when mortgage relief was dropped or did estate agencies reduce fees for landlords when extra stamp duty costs were brought in?

Within our agency at Daniel Craig Residential we are adapting to a lower overhead model and embracing a number of the cost saving elements online only agents have been using in the last few years as a response to the tenant fee ban.  Our fees have always been ½ months rent + VAT for a let fee and 10% + VAT for management fees and we intend to keep them that way and make up for lost income from tenants by increasing the number of landlords and properties we have on our books.  We have also brought in new products such as guaranteed rent schemes for as little as 2.5% + VAT which has proven popular with our landlords. We are doing this to stop the flood of landlords I would expect to leave my company if I were to suddenly double their management costs.

It is up to landlords to make sure they aren’t taken unaware by sudden changes in fees from their agents and ensure they either negotiate with their current agent over fee changes, take a more active role and self manage their property or move to an agency who are better able to adapt to an ever changing market.  Many letting agencies have been sending notices over the last few months advising of their response to the fee ban, if you haven’t had confirmation from your management and letting agents I would suggest you get in touch now to find out how this is going to affect you.