I recently surveyed a group of Milton Keynes Landlords to discover what they understood about the (at the time) pending Tenant Fees Bill and how it would impact their portfolio. The responses shocked me, with over 70% having no knowledge of how the Bill will affect their investments and change how they manage and treat their tenants.
My mission now is to help Landlords fully understand both the issues that will arise from this change and the opportunities it can bring. In early 2019 we have a workshop planned to help Landlords get a good grip on the changes and make informed decisions.
Until then, below is an overview of what we currently know.
The Tenant Fees Bill is still on course to receive Royal Assent and become law next year, most likely in April or October 2019. The bill passed its second reading in the House of Lords earlier this month and remains largely unchanged from its original draft.
What are the new rules likely to be?
The Tenant Fees Bill effectively proposes to make it unlawful for any landlord or letting agent to charge tenants anything other than rent and certain ‘default fees’ for breach of contract, i.e. to replace lost keys, etc.
The most significant effects of the Tenant Fees Bill are to prevent fees from being charged to tenants for the granting or renewing of a tenancy, which includes requiring tenants to pay a fee to a third party, i.e. a referencing agency.
This means that tenants will no longer pay for credit checks, referencing, right to rent checks, inventories, deposit protection, contract creation, renewals and variations, etc.
It is also proposed to limit security deposits to just five week’s rent and refundable holding deposits to just one week’s rent, despite requiring the landlord or agent to then reserve the property for 15 days!
What is likely to be the financial cost of the Tenant Fees Bill?
An impact statement released with the draft Tenant Fees Bill reveals that costs to landlords and letting agents – in just the first full year of the ban – will be £82.9 million and £157 million respectively.
Analysis by Capital Economics shows that letting agents stand to lose £0.2 billion, landlords lose £0.3 billion and tenants pay an increased rent of £103 per annum.
The Office for Budget Responsibility warned government that the Tenant Fees Bill could lead to rent rises as a result of fees being passed onto tenants through higher rents.
According to FixFlo’s forecast 90% of letting agents expect the cost to be passed on to landlords who will then pass it on to tenants in the form of higher rents.
What happened in Scotland after the 2012 ban on lettings fees?
Scotland has been living with a tenant fees ban since mid 2012. According to LSL Property Services & UKtenandata, rents increased from January 2013 to January 2014 (the period immediately following the fees ban) by 4.3%, where they had been relatively static for the previous 12 months. UKtenantdata states that, in the year to January 2017, Scottish rent increases continued, with average rental prices growing faster in Scotland than the rest of the UK – existing tenants renewing their lease saw their rent shoot up by 6.1%.
What will happen in England after the ban on lettings fees?
The experience of Scotland shows that rents are almost certain to increase as a result of a tenant fee ban. The figures in Scotland show that rents increased, but that was against the backdrop of the heavy Scottish dependence on the oil industry and the impact that the depressed oil price had on housing in oil towns like Aberdeen, which saw their rents tumble, thus skewing the national figures.
Had the Scottish oil industry not been in free fall, then rent increases could have been far more dramatic.
As mentioned above, the industry reaction to the draft Tenant Fees Bill has been to suggest that the fees normally charged by letting agents to tenants will need to be passed on to landlords instead.
Letting agency fees to tenants cover the provision of vital services, such as credit checks and referencing charges, as well as covering the administrative cost of arranging right to rent checks, protecting security deposits, preparing tenancy agreements, property inventories, check-in and check-out services, etc
Fees also cover some of the cost to the agent of carrying professional indemnity insurance, client money protection insurance, membership fees paid to governing bodies, staff wages, training costs, premises, vehicles, advertising, etc. Therefore, these fees can’t simply be absorbed by the agent; they will need to be replaced with other income, otherwise agents may reduce their services to landlords and tenants to offset the loss of income.
What do landlords expect after the Tenant Fees bill comes in?
According to Paragon, 73% of landlords use a letting agent to let some or all of their property. However, 30% of these landlords said they would be discouraged from continuing to use a letting agent if their fees were to increase as a result of the Tenant Fees Bill.
The reaction from landlord groups has overwhelmingly suggested that letting agents will have no choice but to pass on the costs to landlords, or risk seeing a reduction in service levels.
Other options include landlords doing tenant credit checks and referencing themselves, or even foregoing a professional property inventory. Obviously, these choices come with an increased time pressure and increased risk to landlords.
Landlords that choose not to use a letting agent and are not fully aware of the many and various rules and regulations could find themselves in hot water and facing fines of tens of thousands of pounds. There are over 140 Acts of Parliament and more than 400 regulations affecting landlords and even full time landlords find it difficult to keep pace. 2017 saw the introduction of civil penalty regulations giving local authorities the power to fine landlords up to £30,000 for breaching housing rules, without needing to go to court. Now is not the time to be a self-managing landlord unless you treat it as a full time job.