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FREER Mike Conservatives

Mike Freer is MP for Finchley and Golders Green.

The Chancellor always likes to make a surprise announcement in his Budget or Autumn Statement. 2016 was no exception: Phillip Hammond announced in November that letting agent fees charged to tenants would be banned as soon as possible. This is a controversial topic amongst letting agents, tenants and landlords alike (in the interest of transparent, I should add that I have a BTL property).

Some letting agents do seem to have their bread buttered on both sides, charging both the prospective tenant and the landlord. My constituency has an active lettings market, so I thought I’d talk to a few to test the water. Martyn Gerrard are one of the biggest independent letting & estate agents in north London.  Not only are they based in my constituency, but they are industry leaders in the area.

I was surprised to learn that they have long advocated that administration and contract fees charged to tenants by letting agents are indefensible and morally wrong. Their view is that there are only two reasons why agents charge unnecessary administration fees.

First, an agent struggling for stock will cut their fees to landlords to boost stock, and make up income by charging tenants administration fees to make up the income. Or, second -and perhaps even worse – an agent will charge the landlord a full fee to let the property and also charges tenants a range of fees.

Either way, Martyn Gerrard estimate that when letting agents fees to tenants are banned, the move will wipe between 10 and 20 per cent off the turnover of those agents who have been charging these spurious fees to tenants. Although this may mean the loss of cut-price unregulated agents, which would not be a bad thing, the unintended consequence is that tenants will ultimately be worse off!

This is because letting agents, according to the consensus, will shift the lost income generated from tenants to the landlord by chargibg higher fees.  This coupled, with a shortage of stock (as investors are further deterred from entering the buy-to-let market), will lead to an increase in rents. In Scotland, where all but rent and refundable deposits were banned in 2012, the evidence shows that rents have risen as a direct consequence of the ban.
The average fee paid by tenants quoted by the Government is £233, while Shelter quotes an average of £350. The reality for many tenants, especially in London, is a much higher figure. But what is a fee, and what is a reasonable cost?

For example, I would hope that a holding deposit will be seen for what it is, rather than a fee that is banned. It is not unreasonable for a prospective tenant to put down a deposit – which goes towards the dilapidation deposit when the tenancy begins – to show commitment, and to assure the landlord that he or she is serious about taking the property. A ban on non-refundable holding deposits will mean that tenants could express an interest in multiple properties, giving rise to costs to the landlord and agent…and then simply walk away without any consequence. This is surely not the Government’s intention.

Similarly, is it unreasonable to ask a prospective tenant to provide evidence of his suitability as a tenant? This usually involves an independent company providing a report having carried out credit, employment, previous landlord, immigration and right to rent checks. Again, if the tenant does not have to pay for this, what is to stop him showing interest in multiple properties, with each of these landlords paying for separate referencing checks only to be disappointed? Will a landlord be prepared to carry out these checks without any assurance that the tenant is serious, and what will happen if the tenant fails the checks? If the tenant is paying, he will be as certain as he can be that there is nothing in their past that will mean they fail the reference check.

My concern is that if all the costs are to be borne by the landlord, there will be letting agents who will try to compete for business by cutting their fees. This will inevitably be at the cost of the quality of the service and checks they provide. Landlords tempted by the cheap fee will be left dangerously exposed, since the agent may well have had to cut too many corners in order to offer a low fee.

In a speech that lasted 51 minutes, the Chancellor’s announcement to ban fees to tenants took just 26 seconds. Details of what is intended are sketchy to say the least. This will lead to confusion for tenants, since as it is unlikely the ban will come into force until 2018.  DCLG has not given any more information other than ‘Government will begin consultations in due course, and primary legislation will follow to bring the ban into effect’.

The consultation due to begin in the New Year will hopefully allow all sides to give a fair account of the problems that a total ban across the board will bring, and ensure that common sense will prevail before and when the legislation is finally brought before Parliament. Change is coming – and so agents and landlords should seek to shape the legislation.

29 comments for: Mike Freer: The unexpected consequences of a blanket ban on letting agents’ fees

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