I’ve been touring the City the last few days and investors keep asking me, what will be the impact of a tenant fee ban?
A shock, then a rapid correction, I tell them. It might even favour good agents. That puzzles them, but investors are a bright lot and they quickly catch on. It’s what happened in Scotland in 2012, after all.
The legal position in Scotland was very different because legislation was already on the statute book, it just took the Scottish Parliament to clarify that the intended effect was a total ban.
In England (and possibly Wales) new legislation will be required and so its scope and intention are yet to be settled.
Learning from the Scottish experience
So what happened in 2012 to our Martin & Co Scottish franchisees?
Their total lettings income increased 4% in the year after the ban.
While this growth was attributable to a 5% rise in instructions, the ban only impacted on underlying income by 1% in the first year.
Set-up fees have increased – from £200 per landlord at the start of the ban to around £400 now.
Most startling was that our Scottish franchisees’ monthly management commissions increased by 11% in the first year post the ban.
Of this, over half of the growth was attributable to higher rents and the remaining growth was from franchisees winning more landlords’ instructions.
Our Scottish franchisees also reported that less reputable agents who had charged very high tenant fees and not worried about service began to close down.
It presented some opportunities to purchase portfolios (although of poor quality) and reduced competitive pressure.
Down the line it has hardened the attitude of our Scottish franchisees to discounting management commission. Most will hold firm at 10% even for multiple property instructions.
So what will happen in England?
The ‘moderate consensus’ view is that some limits or caps can be negotiated.
For agents this might be a ‘win win’ because there will be a justification to shift the fee burden towards landlords, who will in turn push for higher rents.
Yet agents will still be legally permitted to charge tenant fees, and let’s face it, we are an inventive lot when it comes to fees.
I’ve seen lost key fees, out-of-hours tenancy signing fees, sharer substitution fees, direct debit failure fees etc. All of which, my friends, are illegal in Scotland.
In Scotland, all you can charge a tenant is the rent and the deposit.
Which brings me to two clever ‘wheezes’ which we thought of in 2012, but which ultimately proved futile.
Futile attempts to get round the ban
Our referencing business The Landlord Hub (now in new ownership) was tasked with finding ways to allow our Scottish franchisees to keep earning a margin from tenants.
A ‘tenancy passport’ was based on ID checks, credit score and employment history which ‘pre-authorised’ an applicant to apply for a property up to a pre-determined rental limit. From memory it retailed at £75.
All reputable agents require this information before granting a tenancy so the passport (in theory) put Martin & Co approved applicants at the head of the queue. And because applicants purchased the passport directly from The Landlord Hub, we argued that it was not a tenant fee.
However, behind the scenes, The Landlord Hub paid our franchisee agents a commission.
In practical terms it was a dead duck.
Other agents would not recognise the validity of the passport and Scottish tenants quickly cottoned on to paying nothing.
Our second wheeze was a ‘deposit replacement warranty’ or ‘no deposit’ scheme.
The tenant did not pay any deposit at all but instead bought a warranty (like an insurance but without an underwriter involved). From memory it retailed at £150.
At the tenancy end, if there was cleaning or damage, the warranty company settled with the agent, allowing a quick re-let and no messing about with deposit arbitration. (Scotland was different on this score too but let’s not over-complicate the story.)
And you might think, that sounds like good value, but the sting in the tail was that the tenant would remain liable in full to the warranty provider and was pursued for the debt.
We trialled this scheme south of the border too and its flaws soon became apparent;
Tenants felt mis-sold as they believed that their £150 ‘policy’ afforded them some protection.
The scheme appealed to tenants who would have been financially stressed by paying a deposit. Better-off tenants preferred to pay the deposit in the ordinary way and have the benefit of independent arbitration at the end of the tenancy. As a result the scheme tended to ‘self select’ the worse risks.
Our franchisees sometimes failed to follow the procedures for making a warranty claim, leaving them and their landlord exposed for the losses.
However, the death knell was an opinion which we obtained from a Scottish QC that this was a device to circumvent the tenant fee ban, and allow our franchisees to continue charging by the back door, and in his opinion, it was illegal.
Conclusion
Standing back from the emotion, I don’t see another industry of our scale which behaves as we do. Lettings is essentially the business of supplying risk-managed tenancies to a landlord.
As agents when we conduct viewings, take up references and arrange tenancies, we do so on behalf of our landlords.
If you buy a new car you don’t expect to pay for the test drives, or for pre-delivery checks or the credit check on the finance, do you?
Given that average UK rents now approach £11,000 per annum and the average tenancy lasts 30 months, every tenancy granted is equivalent to a £33,000 car sale. In fact, it is higher, since a £33,000 Audi would at least be worth something after three years. Whereas with tenancies all the use has been extracted.
So, think hard when you complete your Government consultation questionnaire on the proposed tenant fee ban.
Maybe a complete ban would be better for good agents in the longer term?
* Ian Wilson is chief executive of The Property Franchise Group, whose brands include Martin & Co
We rent out our Scottish home with Martin & Co, the manager said lots of smaller agents shut up shop when the tenant fee ban hit, rents have increased. The quoted landlord fees are way off, we pay just £150 tenant find fee and management fee is less than the amount quoted in this article.
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I am sure Landlord Hub will be thanking him for that ringing endorsement!
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“If you buy a new car you don’t expect to pay for the test drives, or pre-delivery checks or for the credit check on the finance do you?”
You do if you lease. I’ve just paid £165 application fee and I’ll pay £2142 deposit for something I’ll have the benefit of for three years and then will have to give back, which lets face it is a much closer analogy to renting a house.
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Having somewhere to call home is a basic human need.
Having a leased car is not
Most people in London have no option but to rent
even though I am an agent, I fully understand the poliitical reasons for the tenant fee ban
I have rented numerous times, and I begrudge paying the fees when I knew, that the agents I used did very little for the money I paid. Most things were outsourced and a premium added on top.
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So when you go to the cinema and you pay over the odds for popcorn and drinks do you feel that that’s unfair
How about the increase in stamp duty?
I think the Car Leasing option is a fantastic analogy actually . Because many people can’t afford to buy a car and have to lease.
Many tenants choose to rent as it is a lifestyle choice.
this article doesn’t mention the legal fees being taken under the table . For example multiple applications have been received on one property, “however Mr and Mrs Smith if you slept me £200 in cash under the table I will see that you get the property.”
I also understand the reason for the fee ban however it’s a very short sighted approach bearing in mind the consequence it will have on the PRS. Report the facts are catastrophic when you actually sit down and go through it in greater detail.
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Ian makes some excellent points. In fairness, the clarification of the tenant fee ban in Scotland was of little consequence as it had been Law since 1984. The level of charges was minimal so the effect was small.
The consolidation of agents north of the border was significantly driven by the compulsory payment of deposits in to custodial schemes as monies were not always where they should be. This allowed large agents to mop up those who were unable to remedy the situation.
Fees have increased in some areas, but this is in part due the resultant reduced competition.
Interestingly, some agents in Scotland still charge fees, or increase rent in month 1 yet to date there have been ZERO prosecutions due to lack of enforcement.
Without enforcement, there won’t be a level playing field. The key will be to ensure tenants awareness of their rights and let them police the ban. In the meantime, it’s imperative agents have their say and complete the consultation.
The biggest concern is how some agents with small profit margins already will continue to trade. It’s immensely hard on those who provide a great service for a modest return, staff whose jobs may be at risk and sadly, perhaps inevitably, those who underwrite client’s money.
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Yes I agree with the month 1 rent increase. After all it is an agreement by both parties and it would be interesting to see how that could be illegal. I guess if it is not acceptable then the first six months rent is slightly increased instead! Either way its the tenant that will ultimately pay, because tenants out number homes and this will continue for the forseeable future. Wait until interest rates rise that will put even more pressure on increasing rents. Just saying.
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Interesting analysis from both Ian and Eric, and only time will tell as to the true implications of any ban.
One thing for sure the sector will change be that by legislation or technology.
One point re Deposits it is clear the government has indicated that the consultation and any proposed legislation will also look at tenancy deposits, as they deem this an unnecessary cost burden when only 3% of deposits are disputed.the recent comments by Steve Harriot Chief Executive of the Tenancy Deposit scheme (TDS) explains
The recent comments by Steve Harriot Chief Executive of the Tenancy Deposit scheme (TDS) shows the intent of the scheme providers:
Custodial schemes aren’t currently permitted to charge a fee for deposit protection but in a period of low-interest rates, this is becoming very challenging……. we might see governments across the UK having to allow the custodial schemes to charge a modest fee for this service.”
https://www.property118.com/steve-harriott-chief-executive-tds-looks-back-ten-years-tenancy-deposit-schemes/97401/
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why have deposit schemes in the first place?
adds costs to the running of a letting agent, provides tenants with numerous reasons as to why a section 21 is not compliant i.e. superstrike
personally I am looking at other ways of not taking a deposit full stop.
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Ding dong
I’m sure when you liaise with the landlord and tell them you won’t be taking a deposit from a tenant they would jump at the chance at instructing you as their agent.
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