Tenant Fees Ban to Cost Landlords, Letting Agents and Tenants, Government Admits

The tenants fee ban will cost landlords, letting agents and tenants, new figures reveal, following the introduction of the Tenant Fees Bill into Parliament on Wednesday.

In its impact statement released at the same time as the bill came into Parliament, the Government said that, in the first year alone of the ban, the cost to landlords would be £82.9m and £157.1m for letting agents, excluding familiarisation or transition costs.

It acknowledges: “There is a potential negative effect on the closure of letting agents and employment losses, and on third party suppliers to letting agents, such as inventory suppliers.

“However, if it is the most inefficient agents that leave the market, then, in turn, market efficiency would improve.”

It adds: “We are not able to reliably forecast the loss of employment from the ban on tenant fees.”

However, the report estimates that there are 16,000 letting agent branches in England, employing an average of 3.6 people and managing 200 rental properties.

The impact assessment also recognises that letting agents will make up some of their lost income by passing on higher costs to their landlord clients.

It states: “We expect that landlords using letting agents will see their fees rise by an amount equivalent to 50% of what their letting agent was charging their tenant.

“This is in line with a report from Capital Economics, prepared for ARLA Propertymark, which argued that the pass-through rate is likely to be 50-100%.”

Recommendations from Housing Committee

At the same time as the bill was introduced, the Government published both its impact statement and its response to the Housing, Communities and Local Government Committee, which scrutinised the draft Tenants’ Fees Bill.

The Government accepted most of the Committee’s recommendations, including one designed to prevent letting agents from inflating the first month’s rent as a means of circumventing the ban on fees charged to tenants.

The paper speaks volumes about the level of distrust between the Government and the lettings sector.

It says that the ban will prohibit all fees “except those explicitly permitted”, adding: “We believe that this approach, as opposed to listing all fees that are banned, will prevent letting agents from creating new types of fees in order to circumvent the legislation.”

In order to prevent the first month’s rent being inflated, a varied level of rent can only be charged in the unlikely event of being agreed with the tenant after the tenancy has been entered into.

The Government’s response said that it would issue guidance on default fees. It also gives a boost to the expanding deposit replacement sector. The Committee had suggested that the Government assess the merits of alternatives to traditional deposits. The Government agreed to do so and will report back within six months.

Tenants Fee Ban to Cost Landlords, Letting Agents and Tenants, Government Admits

Bill is a missed opportunity, RLA believes

However, the Residential Landlords Association (RLA) believes that the Tenant Fees Bill is a missed opportunity to make quicker and more lasting improvements to the private rental sector.

The organisation notes that the bill will take months to become law and then a considerable time to implement.

It argues that much quicker changes could and should be made to better enforce existing regulations designed to improve transparency around letting agent fees.

Since May 2015, the law has required letting agents to publish details of the fees they charge. Agents found breaking this law can be fined up to £5,000.

Figures published last year by the National Approved Letting Scheme (NALS) found that, after two years of the law coming into force, 93% of councils had failed to issue a single financial penalty to a letting agent for breaking the law. Only three penalty notices had been served across England for failure to display all relevant landlord and tenant fees.

At the same time, 59% of councils admitted that they do not consider the displaying of fees to be a high priority for the allocation of resources within Trading Standards, while 45% said they only undertake reactive enforcement activity.

Rather than banning letting agent fees charged to tenants, the RLA is calling for immediate action to better enforce the law as it currently stands. This includes the Government using powers it has so far failed to use to force agents to display the fees that they charge in more prominent positions and specify them in much greater detail.

The bill comes despite a warning from the Office for Budget Responsibility that banning fees charged to tenants could lead to rent rises, as a result of higher costs being passed onto landlords.

In 2013, housing charity Shelter concluded that, if letting agents did not absorb the cost of the ban, “landlords may be justified in increasing rents to reflect their additional costs”.

David Smith, the Policy Director of the RLA, insists: “Laws without proper enforcement serve only to let tenants and good landlords down.

“Rather than pressing ahead with plans for more legislation in the sector that will take time to be considered by Parliament and enacted, ministers could achieve a greater and earlier impact by using the powers they already have to improve the transparency of fees charged by agents.”

He continues: “With warnings that the policy could lead to rent rises, there is a very real danger that, whilst cutting the upfront cost of renting, tenants will find themselves paying them through higher rents on a permanent basis.

“Instead of using scarce Parliamentary time to make changes to letting fees, much of which could be done by regulation and better enforcement, the Government could do more to reform the deposit system to deal with the need for most tenants to fund two deposits, one for the property they are leaving and one for the property they are going too. This cost is much higher and a much more substantial barrier to tenant mobility than agency fees.”

“Can’t come soon enough” 

However, unsurprisingly, tenant lobby group Generation Rent has a different view.

The Director of the organisation, Dan Wilson Craw, reacts to the announcement: “The ban on letting fees can’t come soon enough. Right now, letting agents can charge what they like to a captive market of renters, which makes moving house too expensive. Without these rip-off fees, renters will find it easier to move out of unsuitable homes and have more confidence to challenge poor practice and rent increases.

“However, there is a risk that not all tenants will be protected, thanks to an exemption that could let some landlords continue to charge fees on spurious grounds and will be hard to police properly. This potential loophole should be taken out of the legislation.”

He adds: “And, setting the cap on deposits at six weeks’ rent leaves in place a big barrier to moving home. The Government needs to look at how to reduce the burden of this, for example, by allowing the transfer of deposits between tenancies.”