30th November 2016
Having had the busiest week in sales since the recession began I barely had time to take stock of the Chancellor’s Autumn Statement this week. Every time I took a call it seemed to be from a client instructing me to market a property for them. Don’t misunderstand, we haven’t suddenly got everyone and their Auntie Nellie wanting to off-load property in a panic, it’s a consequence of the ground-work I’ve been doing for the last few months which now seems to have come to fruition at the same time. Having been short of stock, with plenty of demand, this can only be a good thing!
Selfishly, my main interest in the Autumn Statement was the subject of estate agent’s letting fees to tenants being banned. This is significant revenue to most estate agents. The Chancellor rather sprung this decision to ban tenants fees upon the industry; there’d been arrangements for a consultation process to commence with our governing bodies (for those agents who belong to NFoPP, ARLA, NALS, etc. – which we do) this winter but we hadn’t been told the Chancellor had effectively ‘made up his mind’. It also didn’t help that the press gave the impression the ban was to be effective immediately – it turns out Parliament needs to pass legislation to make it illegal for agents to charge tenants fees, so we’re looking at 6 – 12 months before we see any changes.
Are we in favour? Taking a balanced view, I can see the logic. It’s the landlord who wants their property letting and therefore should they not absorb all the costs? When we sell a property for an owner the estate agent selling the property doesn’t charge the buyer a penny. So why not apply the same logic to letting a property? One should not forget a buyer has to pay for a survey where a tenant doesn’t – if a tenant moves in to a property and finds a defect the landlord/agent has to put it right at their expense. A buyer also has to pay their solicitor for the contract documentation (fees are rarely less than £500 + VAT). Presently a tenant pays the estate agent for the paperwork. A buyer has to pay Land Registration fees, search fees, and even a fee for a Bankruptcy Search on the seller. A tenant doesn’t pay anything other than perhaps an Inventory fee (which I may add we don’t charge). And a buyer has, in the majority of cases, to pay an application fee to a lender for a mortgage (which naturally includes a credit check) and this can amount to £1,000+. The estate agent only charges the tenant for the credit check and paperwork via an Application Fee whereas buyers have to pay £1,000’s in costs, which if the sale aborts they will lose. The only cost a tenant loses is the Application Fee, and that’s only if they fail the referencing – and they should know whether there’s a risk of that happening before making an application. Perhaps the application costs for renters are not so unreasonable?
One important factor Government seems to lose sight of, is the impact application fees have on tenant selection. Determining the ‘quality’ of applications is always tricky. Landlords want tenants who are able to pay the rent on time, look after the property and not leave any ‘issues’ behind when they move – CCJ’s registered to the property, undesirables visiting at all hours to collect debts, deal in drugs or stolen goods, seek refunds on car deals where the property has been used as a business, etc. For over 20 years I have held the belief that the starting point for determining the ‘quality’ of tenancy applications is with an Application Fee. If the applicant has no CCJ’s and a good credit history, can provide a good previous landlord’s reference, etc. then they will be willing to risk the payment of a fee upfront. If they know they have ‘history’ we are not going to like, they won’t take the risk of paying the fee only to have the application rejected and the fee lost. We know this works in practice as we are occasionally asked by tenants how they can ‘get around’ the referencing (alarm bells ringing!) and very few of the applications fail their referencing. Occasionally, an applicant will discover they have a CCJ they knew nothing about – but this is rare.
Would it be fair on landlords for them to have to pay to reference every applicant only to find that one after another failed the reference? Would an estate agent be allowed to reject applicants just because they didn’t like the look of them? I think not. Discrimination litigation would be rife. Tenancy application fees at present vary from area to area (London being the most expensive of course) and from agent to agent. No one forces a tenant to rent from one particular agent. If a tenant feels the letting agents fee is extortionate they should seek accommodation with another agent. There is greater choice in the rental market than the sales market. Tenants have a greater choice than buyers – especially when the buyer has fallen in love with one particular property and intends to live there for many years to come. I would not be averse to setting a limit on application fees although how Government would determine the maximum we could charge would be questionable. Perhaps it could be made a percentage of the rent? The greater the rental value the higher the fee, reflecting perhaps the greater responsibility for the sums of money involved.
My boss at V. Stanley Walker & Son in the early 1980’s referred to fees the firm used to charge on a quantum meriuit basis, Latin for “what he/she deserves”. In law this seems to refer to reasonable or market value hourly rates for service provided. In Leeds, professional services are charged out at anything from around £100 per hour (lawyers, accountants, surgeons, and the like please forgive me if I am underselling your services here!) yet in London I can imagine that professional services are charged out at £300 per hour. Whatever, the rate will vary from area to area and business to business, depending upon what services are provided i.e. are agents open to set tenancies up on Saturdays and Sundays.
Other fees are also being reviewed. Renewal fees at the end of a fixed term cost anywhere from under £100 to well over £400 in London. If the agent is not to be remunerated for negotiating security of tenure which is in the tenant’s interest, then most agents will seek to terminate the tenancy and simply relet the property, for which they can charge the landlord another letting fee. Where is this in the interest of either the landlord or the tenant?
Sometimes part way through a joint and several fixed term tenancy one sharer will want to leave (perhaps for a new job in a new town) and the other tenant will want to stay, but has a friend who can take over the tenancy. We’re happy to accommodate this subject to adequate referencing taking place. The remaining tenant is happy and so is the landlord. But the landlord won’t want to pay for the administration and referencing as he/she already paid for the current fixed term tenancy which still have time to run. In this case we charge the outgoing tenant a ‘Termination Fee’ which covers the cost of us to re-writing all the paperwork, sorting out the inventory, changing bank account details, sorting out the bond with TDS, etc. It only takes two or three hours but someone needs to cover our costs, otherwise why should we bother. The outgoing tenant would simply have to continue paying rent until the end of the fixed term, when we’d evict his friend and find new tenants and he/she would have to rent in the new town they were moving to. Where’s the benefit to the tenants in that case. A £200 – £300 fee by the outgoing tenant would enable them to move on with their life, unfettered by the tenancy they are leaving behind.
I have no doubt legislation will follow – the buy-to-let market is a ‘soft target’ for Government. Whatever happens the market will adjust, given time. If landlords have to pay all costs for a tenancy set up either the cost will be added to the rent or landlords will pull out of the buy-to-let market given time, and the lack of rental supply will push rents up. Whatever transpires, tenants will not save money in the long run.
Am I concerned? Not from a business perspective. We have adapted to many changes in legislation over the 35 years I’ve been an estate agent, and we will continue to do so. The market will find its own level when it comes to operational costs and profit – as I have been saying with the Brexit outcome. I am slightly concerned for tenants as most have little understanding of the rental market beyond the obvious initial renting of a property, and Government seems blind to how things work in the real world, outside London. Before banning letting fees Government should bring rogue agents to book by formally regulating estate agents, and making it a recognised and respected profession.