Banning letting agent fees paid by tenants – my response to the Consultation

The proposals for a draft bill banning letting agents fees came so soon after the end of the consultation period (2nd June 2017) that it raises a suspicion that the consultation was a ‘tick box’ exercise and was never going to affect the outcome.

We won’t know what the proposals will be until the draft bill is published.  However, just in case my response is languishing in an unread inbox somewhere, I thought I would publish it here – so at least some people will see it.

Some of you will no doubt disagree with what I have said but at least we can have a conversation about it.

The response which follows is exactly the same as the one I submitted (save for a few formatting changes to make it easier to read) and so does not take account of points raised recently – such as the fact that landlords may be disinclined to take pets if only one month’s deposit is permitted.

Question 1

Do you think that the transparency measures introduced in the Consumer Rights Act 2015 have helped to drive up standards and improve competition? Please include reasons

Yes, I do, if only because it has provided legal authority for tenants and others to demand this information from agents.  There is a general reluctance among agents to disclose fees which make it difficult for tenants and landlords to make an informed choice.

Question 2

Do you agree that the ban on letting fees should also include a ban on letting fees charged to tenants by landlords and third parties? Please include reasons.

It depends on the type of fee.

1. So far as ‘disbursement’ type fees are concerned such as the actual cost of getting a credit reference check, it would be bizarre for agents to be forbidden to charge this and for landlords to be allowed to – as agents are simply the landlord’s representative.  I can’t see how they can be prevented from charging something on behalf of their principal which their principal is entitled to charge.

So, the decision needs to be made – should these fees be chargeable at all?  By either the landlord or the tenant?  If they cannot be charged by the agent they should not be charged by the landlord either.  If they are chargeable to tenants by either party then they should be capable of being charged by both.

I think there are strong arguments for some disbursement type fees to be chargeable to tenants as discussed in question 3 below.

2. Then there is a charge for the work done in setting up the tenancy.  Again, I don’t think landlords should be allowed to charge these fees if agents are not.  The reasoning behind agents’ fees being banned is that this is work which needs to be paid for by the agent’s client, the landlord.  So, it would then be unfair if the landlord could charge the tenant for this work if he is doing it himself and not when he is using a letting agent.  So, I do not think this type of work should be charged to the tenants at all.

After all, when you buy a Mars bar or a new TV you just pay for the item.  You do not pay a separate charge to go towards the trader’s rent and wages for his staff.  The work involved in renting out a property is a business expense which should be borne by the landlord, whether he does it himself or via agents.  The rent should be sufficient to cover these expenses.

Question 3

Do you agree that all letting fees, premiums and charges to tenants that meet the general definition of facilitating the granting, renewal or continuance of a tenancy should be banned with the exception of:

• The rent;
• A refundable deposit;
• A holding deposit to take the property off the market whilst reference checks are undertaken; and
• In-tenancy property management service charges that directly relate to an action or service carried out at the request of the tenant or as a result of the tenant’s actions?

If no, please list any fees, charges or premiums aside from those listed above that you think an agent, landlord or third party should be permitted to charge

I think it is arguable that the following should be chargeable:

1 The actual cost of getting a credit check done – i.e. the fee paid to the third party referencing company.  This should not include any work element done by agents or landlords in processing information and reading the reports obtained.

2. Not more than 50% of the cost of having independent inventory checks done at the start and end of the tenancy.  This is because an independent inventory benefits both parties.

3. Costs incurred by the landlord if the tenant wants to break the tenancy early.  It is quite expensive to change tenants mid-way through a tenancy as new tenants have to be found and referenced, a new inventory has to be prepared and a new tenancy agreement signed.

If it is felt unfair that tenants should be tied to a property for a long period of time where there is no break clause, then the landlord’s right to charge these expenses could be chargeable only when tenants want to break the tenancy, say, during the first six months.  However, that would arguably be unfair on landlords as it means that tenants would be able to end, say, a 3 year tenancy, after six months whereas landlords cannot.

The whole question of the enforceability of long (i.e. over 6 months) fixed terms needs to be reviewed.  If tenants want the security of a long fixed term from their landlord, then they should expect to be bound by this themselves.

Maybe one solution would be to provide that both landlords and tenants are able to break longer fixed terms upon say 2 months’ notice after the first six months – unless the tenancy agreements are signed by deed which should be witnessed by a solicitor who should explain to them that the tenancy cannot be ended during the fixed term and  then certify that this advice has been given.

Agency law issues

I am very surprised that no-where in the consultation paper is there any discussion about agency law.

The landlord / letting agent relationship is governed by the law of agency.  Agents (including letting agents) have a fiduciary duty towards their principal.  Therefore, for example, an agent is only legally entitled to charge fees which are authorised by the agency agreement.  If other fees are charged, then this is a secret profit.  Under the law of agency this money does not actually belong to the agent, but to the landlord who is entitled to claim it back from the agent, along with any profit made by the agent with the use of the funds.

So, if a letting agent charges a fee of £250 to tenants but the landlord is unaware of this, then under agency law this money belongs to the landlord.  Likewise, if the agent charges an unauthorised commission to tradesmen.

Agency law also provides that the agent must not put himself in a position where he has a conflict of interest.  For example, this is discussed in the case of Boardman v. Phipps [1967].

Many letting agents nowadays consider that they are acting for both landlord AND tenant and that this, therefore, entitles them to charge a fee to the tenants as well as to the landlord (indeed they often charge both parties a fee for the same thing).

However, if they are truly acting for the tenant this puts them in a position of conflict of interest.  For example, it is professional misconduct for a solicitor to act for both parties in purchase of land – which is a comparable transaction.

Much of the work which agents consider that they are entitled to charge tenants for consists of work which they need to do for the landlord anyway and should, therefore, be charged to the landlord or (perhaps more properly) included within their commission.

There is some work though which agents, particularly the better agents, do to help tenants – for example negotiating special concessions for tenants such as being able to keep a pet.

It is this type of work which agents consider (not entirely without justification) they should be entitled to charge for.  The problem is though that this work will often constitute a breach of their agency agreement as the interests of the tenant may be in conflict with those of their true client and principal, the landlord.

However, if they do not do this work – who will?  Often the tenants they are helping have no other source of help.

This (i.e. agents helping tenants) is now common practice but I suspect that it is a situation which might not have arisen if agents had been properly regulated in the way that solicitors are.

But, if the current situation is illegal under agency law – how can these tenants be helped?  There are two solutions that I can think of:

1- Letting agents could have ‘tenant assist’ departments where they act for and represent tenants when they are taking on a tenancy.  Or there could be separate ‘tenant assist’ firms specialising in this work.  The fees for this could be similar to the fees that tenants are currently paying to the landlord’s agent (and which is the subject of this consultation).  The tenant assist agent would need to be in a different firm from the landlord’s agent – in the same way that different solicitor’s firms must represent buyers and sellers in a house purchase.

2- There could be scope for some letting agents to be authorised to mediate between landlord and agent in certain situations, including setting up the tenancy.  In the same way that they act as stakeholder in a deposit situation.  However, I would suggest that only qualified and regulated agents should be allowed to have this role.

I would also suggest that there should be a total review of the whole letting industry and the role of agents within it, with a view to proper regulation.  Rather than, as now, regulation being applied piecemeal.  Otherwise we will get these inconsistencies between different areas of law.

Question 4

Do you think that refundable deposits, payable at the outset of a tenancy, should be capped? If yes please indicate the level of the cap.

Yes, they should be capped at two months’ rent.

Although consideration should be given to allowing a higher deposit if the tenants wish to keep a pet such as a dog or cat which may cause additional damage.   If this is done then the legislation needs to be amended to provide that such a deposit will not constitute a premium – e.g. s15 of the Housing Act 1988.

Question 5

How can Government best support the sector to expand or develop new approaches to minimise the financial burden on a tenant at the outset of a tenancy? For example, enabling tenants to pay their deposit in instalments over the first few months of the tenancy or using a line of credit approach where an agreed deposit amount is blocked on a tenant’s credit card.

If the tenant is allowed to pay by instalments to the landlord then this places a big burden on the landlord as he must register each and every payment with a scheme or risk being out of time (and incurring the penalty).  Indeed, many cases where landlords find themselves in breach is where they have tried to be kind to tenants and allow them to pay by instalments.

Maybe there could be financial products provided by banks or other financial institutions – a tenancy deposit loan product – where they pay the money to a custodial scheme nominated the landlord or agent (to prevent any chance of the money being misappropriated).  There can then be arrangements for this to be transferred to subsequent tenancies later.

A decision will have to be made as to whether the landlord is required to serve the prescribed information on the financial institution as well as the tenant (as would technically be required now under the current rules)

The line of credit approach is also a good one so long as the credit company is unable to reverse this later – for example if the tenant fails to maintain payments.

Question 6

Do you think holding deposits, to ensure that a property is taken off the market, should be capped? If yes please indicate the level of the cap

It should be limited to the normal time taken to check and reference tenants.  Maybe one or two months?

Question 7

Agents may occasionally provide bespoke, non-standard services to tenants at the top end of the market, for example, when arranging a property for someone currently living aboard who is relocating to the UK. Do you think there are premium parts of the market where a different approach to handling letting fees may be warranted?

This once again raises the issue I discussed in question three, about whether it is appropriate for a landlord’s agent to provide any services to tenants as this may put them in a conflict of interest.  This needs to be given proper attention.

Question 8

What do you think will be the main impacts of the ban on letting fees paid by tenants? Please include any unintended consequences that you believe may arise

If agents are unable to charge tenants for helping them, it may be more difficult for tenants to get assistance.

If agents have to charge all their work to landlords and are no longer able to charge tenants (in some firms apparently tenant fees currently constitute some 20% of their turnover) then they will probably raise their charges to landlords.  This, in turn, may make more landlords decide to manage their properties themselves.

This may result in landlords inadvertently failing to comply with legislation due to ignorance – as they will no longer have agents to advise them and deal with this aspect of letting.

Many landlords just consider their rented property to be an ‘investment’ and completely fail to realise that it is also a service to consumers and therefore heavily regulated.  It is not that they consciously make a decision to break the law, they just don’t know that these laws exist.

The worst case I am aware of in this context is that of Dr Victoria Martindale who failed to realise that she needed to do gas safety inspections every year, which resulted in the death of her tenant in 2013, reported on the BBC website here.

One way to deal with this problem would be to copy the Welsh system where all landlords need to register and landlords intending to manage their own properties need to be licensed and undergo training.

Alternatively, rather than managing their properties themselves, landlords may decide to raise their rents so they can afford the extra agents fees.  However, if the overall amount paid by tenants remains the same (i.e. instead of paying a tenant fee they pay a higher rent), it will probably be better for them to pay over a longer period of time via the rent, rather than in a lump sum at the start of the tenancy.  Which is very difficult for many tenants and often results in their having to take out expensive (e.g. payday) loans.

I would like to mention here however that there are many letting agents who do not charge fees to tenants.  As these agents presumably make a decent profit, it cannot be impossible.  If they can do it – why not other agents?    For example, see this report on Property Industry Eye on 6/4/17.

Question 9

Do you agree that the ban on letting fees should be enforced by Trading Standards? If not, how do you believe the ban should be enforced?

Yes, Trading Standards are the best people to deal with enforcement work.  However, they need to have proper powers.  At the moment if agents (rogue agents) refuse to pay penalties or comply with orders then there is not much that trading standards can do.  They should be given powers, as a last resort, to actually close agents offices down, in the same way that Local Authority officers can do if a restaurant fails the safety checks.

For example, the Property Redress Schemes were criticised in this BBC news item.  However, they do not actually have the legal power to do anything other than impose the fine and, in default of payment, expel agents from the scheme.   Their job is to do the adjudication not to enforce the awards.

The question of enforcement of awards and penalties for agents expelled from the scheme but continuing to trade has always been a potential problem.  It needs to be addressed otherwise the law is seen as an ass.

Question 10

Would you support greater data sharing on rogue agents and landlords across organisations in the letting sector?

Yes. For example:

• Letting agents need to be able to check prospective employees when recruiting staff to make sure they are not on the list and so they do not inadvertently employ a known criminal
• Landlords need to be able to check the list so they can avoid instructing rogue agents to manage their properties
• Tenants need to be able to check the list to ensure that they do not rent properties from rogue landlords or letting agents.

It seems madness to restrict access to the list to Local Authorities unless Local Authorities are willing to carry out checks for agents, landlords and tenants.

Maybe a system could be set up where searches of the list can be done on paying a fee?  This would help fund the maintenance of the data list.

Question 11

Would you support the introduction of a lead enforcement authority for letting agents to develop advice, standards and guidance and to share information? Please include reasons

Yes, provided they are properly staffed and funded.  It would be good to have an authoritative source of guidance in this area. It should be a mandatory requirement though that they have proper legally qualified staff and they should be required to publish regular guidance.

Question 12

Do you think that the penalty for non-compliance with the ban on letting fees for tenants should be (please tick all that apply):

a)   a civil penalty of up to £5,000 in line with the penalty for non-compliance with the requirement to belong to a Government-approved redress scheme or non-compliance with the transparency requirements of the Consumer Rights Act 2015;

b)   a civil penalty of up to £30,000 in line with the civil penalty for committing a banning order offence;

c)    a banning order offence under the Housing and Planning Act; or

Other (please list)?

How about (a) for a first offence, (b) for a second offence and (c) for any subsequent offences.

Question 13

Do you think further action is needed to regulate the letting and management agent sector in addition to the ban on letting fees paid by tenants? What additional action do you think should be taken to regulate the sector?

The private rented sector and the letting agent industry has been allowed to grow and develop without any proper overall regulation or planning over a period of many years.  As a result, bad practices have crept in and are now endemic.

The private rented sector now houses a substantial proportion of our population and this looks to grow further in the coming years.  It is generally accepted that in some respects the sector is ‘broken’ although many individual landlords and agents provide an excellent service.

The main problem is that the system has grown up without any overall plan, and with legislation being passed on an ad hoc basis to deal with individual problems. This has resulted in a very complex system with hundreds of different statutes and regulations – some with criminal law penalties (such as the HMO Management Regulations) and some with civil law penalties (such as the tenancy deposit rules from the Housing Act 2004).

It is not surprising that people are confused.

I think there should be a proper review and report done – ideally by the Law Commission who should be commissioned to report and recommend new legislation to regulate the sector.

The Law Commission last did a report in 2006 when they published their Renting Homes report and draft legislation.  Shamefully this was never implemented in England although it has belatedly been used in Wales.

There should, therefore, be a commitment that the final report from the Law Commission should be implemented and cross-party support should be sought for the project.

The Law Commission should be asked to build on their previous project and advise on future regulation of the sector with particular reference to regulation of letting agents.

Tessa Shepperson
27 May 2017