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This post looks at the proposed ban from the position of Landlord, Tenant and letting agent.
The Autumn Statement
As you are aware the statement on 23-NOV stated that fees charged to tenants by letting agents will be banned “as soon as possible”. It was not made clear if this was just the upfront fees or also included other fees such as Guarantor fees, renewal fees or check-out fees at the end of Tenancy.
ARLA (Association of Residential Letting Agents) have stated that the DCLG (The Department for Communities and Local Government) will consult ahead of bringing forward legislation in the New Year although it is not clear what this entails. DCLG also confirmed that this will require primary legislation¬†through an Act of Parliament. This will give agents time to plan for the ban coming into force in whatever form it takes. Govt have at least asked for ARLA’s input to represent the industry.
It has been suggested by experts that this process could take as long as 2 years though, not quite “as soon as possible” but perhaps dare I say a sensationalist diversion from all the other more negative stuff in the statement.
Letting agents generally are very upset that this has occurred without prior consultation to the industry and are fearful of yet more legislation to deal with.
Why has the Govt done this?
Before the 2000’s many letting agents did not charge fees to Tenants, and the increase over time has happened organically rather than via regulation. The Private Rental Sector has nearly doubled in size from 9% to 18% since 2001 and there are now approximately 4.5 million Tenants in the UK.
The credit Crunch played its part in shifting focus from buying homes to renting and then stricter lending criteria came into play in 2014 which made it harder to borrow. The current market is one where demand has outstripped supply more often than not and Tenants have little choice but to pay the fees if they want to rent the property. This has led to a small portion of letting agents taking advantage and charge sometimes eye-watering fees and an understandable outcry.
Low income earners are struggling with the upfront payments of fees, rent and deposit. With Brexit coming up and cost of living already increasing reducing Tenant fees will offer some form of financial assistance to these 4.5 million voters.
To be fair the industry does need a shake up and has a different model to many service based industries as the consumer (Tenant) pays for the service as well as the client (Landlord).
What will it mean to Tenants?
Once the legislation has been changed Tenants will not be liable for at least upfront fees for a Tenancy, only the rent and deposit. As above there is no indication if other fees such as Guarantor admin, renewing the Tenancy or check-out fees will be included or excluded.
What does a letting agent actually do from a viewing to move in?
Most agents need to carry out the below tasks from offer to move in (TT – if Tenant task/charge, LL – Landlord):
- Application letter drawn up and signed by the Tenant (TT)
- Holding fee (usually ¬£250) received (TT)
- References sub-contracted to a referencing agency who invoice the agent, agent often required to move things along (TT)
- Tenancy Agreement (sadly to do this correctly it is not just ‘a few clicks and presto’!) (TT or LL, sometimes both)
- Prescribed information document covering the deposit (TT or LL, sometimes both)
- Guarantor referencing and Agreement (if required) (TT)
- Arrange a clean if required (LL)
- Arrange safety certificate if required (LL)
- Carry out maintenance if required (LL)
- Copy Tenants passports and (if you are thorough) proof of address (TT)
- Inventory report created by professional clerk who invoice the agent (LL)
- Check-in with inventory report and keys handed to Tenant by professional clerk who invoice the agent (TT or LL)
- Register the deposit with one of the three schemes who usually invoice the agent annually (TT or LL)
- Forward copies of all paperwork to Tenants (contracts, safety certificates, deposit certificate, How to Rent guide, info on Legionnaire’s disease) (TT)
Commission charged to the Landlord is additional, the amount depends on the service (usually Introduction, Rent collection and Managed).
While most Letting agents do charge fair amounts some have been taking advantage of the market conditions. In this area the highest I have come across is ¬£440 inc VAT per Tenant, yes per Tenant! The average is roughly ¬£220, Bishop Sullivan charge ¬£168 for 1 TT, ¬£306 for 2 and ¬£444 for 3 etc… As a Hybrid agent we are local but do not have a high street window so have lower overheads meaning we can charge less, this we believe is the future. When was the last time you actually looked in a letting agent’s window?
What will happen next?
Scotland banned letting agent fees to Tenants in 2012 which resulted in most agents charging these fees to the Landlord and a short lived increase in rent levels before they stabilised.
Whichever way you look at it the work from the offer stage to move in still has to be done, much of which is a legal requirement. Work as you know takes time and time means money, ask any solicitor. Once the legislation is finalised the Tenant fees will most likely be charged to the Landlord, as with Scotland, since most businesses will struggle or fold without some or all of this income. This is likely the logic behind the move as Landlords will then become the driving force behind improving service standards. If Landlords are paying for the admin service in full then they are going to want to ensure they get the best Value for Money. This is also an effective way of sorting the wheat from the chaff as rogue agents, those who provide a shoddy service or charge way too much will get found out pretty quickly. I know what I’d do if my house insurance premium suddenly went up. Surely this will be a good thing for the industry as a whole.
Letting agents will have to find a way to survive with lower revenue as I really cannot see a Landlord wanting to pay (EG) the average fee for 3 Tenants coming to ¬£660 + his/her admin fees + commission. With reduced revenue staff redundancies and even office closures are very real, which will have a negative impact on the level of service provided generally.
It is quite likely Landlords will put rents up to cover their extra costs initially. If you take the average rent of a 2 bed in Brighton at ¬£1250 PCM, the average fee for 2 Tenants at ¬£440 and the average Tenancy at 18 months rent will need to be increased by ¬£24 PCM to cover the increase in fees to the Landlord which equates to roughly a 2% increase.
There is an affordability ceiling, especially for low to middle income earners and if rents are too high few will choose to move meaning the only option would be rents fall back down again, the market may end up stabilising itself. The evidence in Scotland shows that this is quite likely.
Longer Tenancies are more likely as Landlords will not want to keep paying these extra fees every time someone moves out. Anyone remember the last election and 3 year Tenancies being guaranteed? No-one in the industry thought it would happen, call it spin, but with the average Tenancy over 18 months it may become a bit more real.
Due to this the quality of Tenant provided by the agent will become VERY important; you wouldn’t want to pay extra for the same pair of Nike shoes as last year and then find out you got Plimsolls. Bishop Sullivan ask 15 questions before we show an applicant a property as we want to be sure we match the Landlord, property and Tenant correctly to avoid wasting anyone’s time and prevent potential issues in the future.
Section 24 of the Finance Act
There is concern that with the new tax legislation on 01-APR-17 some Landlords will not be able to cope with losing the ability to reclaim mortgage interest, losing wear and tear allowances and now extra admin fees. If there is a sell off it will undoubtedly reduce stock levels and in turn increase rent to some degree. Approximately 35% of Landlords have mortgages and it is likely to be those with highly geared borrowing that notice the change first. If you have not spoken to your tax advisor yet you had better hurry up.
You can find more information on Section 24 of the Finance Act here.
The Govt created this legislation and lets just hope it does not end up having a larger affecting on Tenant’s lives than letting agents have.
- Good for Tenants in the long term, possibly not the short term
- Not so good for Landlords in the short term
- Not good for letting agents in general but will level the playing field for smaller agencies with lower overheads and a modern mindset
Landlords – Click here to view an insiders guide on how to choose a good letting agent based on 17 years experience in this industry
Tenants – did you know the below?
- If you enquire about a property by email or voicemail and the agent does not call back within 24 hours you should consider if they are the one for you, regardless of the property
- The agent should know facts about the property such as rent, availability date, deposit, distance to transport, council tax. If they do not how good are they going to be at everything else?
- If you receive disability benefit and an agent refuses to show you a property or refuses to take an offer to their Landlord because of this they are in effect actively discriminating as it is not their choice, it is the Landlords
- ¬†If you get asked to pay any figure of money before you have viewed a property or agreed terms and signed a letter confirming these terms (and any fees) you should walk away
- If you decide to pull out of the Tenancy before contracts have been signed the agent can only deduct fees for work actually carried out
- The process from offer to move in, or at least signed contracts, should take no more than 2 weeks
- (managed properties) An urgent maintenance issue should take no more than 48 hours to resolve, especially safety related
- (managed properties) If an agent takes more than 2 weeks to start progressing a maintenance issue it can affect the Landlord‚Äôs ability to regain possession of the property, this can be a valuable tool to use
If you need any assistance letting your property in Brighton, Hove, Kemptown and surrounding areas or if you just have some general queries please feel free to contact us on +44 (0)1273 862221 or firstname.lastname@example.org
You may be interested to hear our fees are lower than 95% of local letting agents.