Latest on tenant fee ban

It’s nearly two years since the Chancellor, Philip Hammond, announced in his 2016 Autumn Statement that there would be a ban on letting fees, so what’s happening?

Well, the ‘Tenant Fees Bill 2017-19’ is currently making its way through the parliamentary process. It’s had its first and second Readings and the Public Bill Committee has reported the Bill to the House. There will be a third and final reading in the House of Commons, before the Bill is passed to the House of Lords, where it follows the same process and any amendments are considered before it’s given Royal Assent and becomes law.

As for how long this is all likely to take, there are no firm timescale and dates for consideration of the Report and a third reading have yet to be announced. However, it seems to have progressed quickly so far - the first reading was on 2nd May and the Committee had its fifth and final sitting on 12th June – so it seems entirely possible that we could see the law come into effect from April 2019.

Exactly what does the Bill propose?

There are two key elements, designed to reduce the financial burden on tenants at the start of a tenancy:

1. A ban on all upfront fees that letting agents currently charge tenants. That includes administration fees, charges for referencing and credit checks, inventory costs and tenancy renewal fees. The only money agents can legitimately ask for will be:

• a refundable holding fee
• a refundable security deposit
• the rent
• and one other, rather vague thing, called ‘default fees’. That’s intended to cover ‘extras’ incurred by any kind of default, such as a charge for a tenant losing their key or paying their rent late. This may be tightened up before the Bill becomes law, as many – including Shelter and Citizens Advice – are worried it’s a loophole that could be exploited by agents and landlords, and unreasonable sums could be charged for minor issues.

2. A cap on deposit amounts. Agents and landlords will be able to charge a maximum of six weeks’ rent for security deposits and one week’s rent for a holding deposit.

The law will be enforced by local authorities and anyone found breaching the law could be fined up to £5,000, even for a first offence, with repeat offenders likely to face criminal prosecution.

How will a ban on tenant fees affect landlords?

Obviously, this ban is going to mean a cut in profits for agents and possibly some landlords. Given that the cost of administering the start-of-tenancy process can run to several hundred pounds, the concern is that agents will increase charges for landlords.

Natural competition for business between agents however means they may not simply pass on the whole cost. Speak to your agent now to find out how they plan to handle the introduction of this legislation, so you can budget ahead or consider moving. If you do move, make sure they already have Client Money Protection in place as this will be a legal requirement from April 2019. Not all agents are expected to be able to secure this kind of insurance, meaning they could go bust, with your rent.

Is it helpful to look at what happened in Scotland?

In Scotland, the original 1984 law banning tenant fees was tightened up in 2012 to specify that only rent and deposits could be charged; the other costs had to be met by landlords. While rents did increase in the years following the new legislation, that was mainly down to a natural trend and the basic market forces of supply and demand. In reality, not enough research has been carried out in Scotland to assess the effect and some reports suggest that where they can get away with it, agents do still charge tenant fees.

Mike Campbell, Director of The Council of Letting Agents (CLA) in Scotland, feels that too many people are focusing on the headline that rents in Scotland went up, simply to support their ‘doom and gloom’ predictions for England, when the two really can’t be compared as it’s not a like-for-like situation.

“It’s important to note that a custodial tenancy deposit scheme had also come into force in 2012, and many agents took the opportunity to review their landlord fee structure in response to this, not the tenant fee clarification”, says Mike. “The amount of money agents were losing was also far less than those in England will lose. Pre-2012, most agents in Scotland charged around £50 in tenant fees per tenancy and those fees accounted for about 6%-8% of income, whereas average fees in England are in the hundreds and account for 12%-15% of agent income. So my feeling is that more agents in England than in Scotland will try and recoup fees through raising rents because they have a bigger hole in their bucket, but the market will ultimately control how far they can rise and there may simply be a short-term spike.”

So if agents don’t want a ‘hole in their bucket’ and rents can’t be raised to cover the loss of tenant fees, it looks as though the more forward looking agents will find ways of plugging the gap without raising landlord fees, while others may be hoping landlords will bear the brunt.

You can follow the progress of the Bill online here.