House of Commons - Private Rented Sector: the evidence from banning letting agents' fees in Scotland - Communities and Local Government Committee

Private Rented Sector: the evidence from banning letting agents' fees in Scotland - Communities and Local Government Committee Contents

1 Introduction

Background

1. In 2013, we conducted an inquiry into the Private Rented Sector in England[1] and, as part of our inquiry, we examined the role played by letting agents in finding tenants for housing, letting properties and managing housing on behalf of landlords. We heard evidence of steep fees, sharp practice and abuses by letting agents in the amounts being charged to tenants, and of the lack of transparency on the fees tenants had to pay when looking for a property. We heard, for example, that one in seven renters who had used a letting agency had paid fees of more than £500 and of complaints about "drip pricing", that is charges that were revealed only gradually to the prospective tenant.[2] We were concerned that these practices could prevent tenants from making informed choices about properties and distort the market. In particular, agents had an obvious incentive to keep tenancies short to maximise repeat fees and were also thought to be less than transparent with landlords as to what types of charges and how much was charged to tenants.[3] We called for complete transparency, including a requirement for agents to publish a full breakdown of fees alongside any property listing or advertisement, the forbidding of double charging, and a requirement that landlords be informed of any fees being charged to tenants.[4] In its response to our report, the Government agreed that fees should be "transparent and proportionate".[5]

2. A number of witnesses suggested that the answer was to make fees and charges (other than rents and refundable deposits) to tenants illegal.[6] Our attention was drawn to Scotland where in 2012 the Scottish Government had announced that the law would be "clarified so that all tenant charges, other than rent and a refundable deposit, will be deemed illegal".[7] This raised for us the question of whether what was in effect a ban on fees charged to tenants in Scotland could provide evidence to inform a decision on the impact and operation of a similar ban in England.

3. At the time we considered our report, the Scottish approach to fees had been in operation for less than eight months. Some witnesses suggested that the Scottish approach should be adopted in England as the current arrangements resulted in a lack of transparency and unfair burdens on tenants.[8] We also heard strong opinions from others suggesting that the change had led to letting agents going out of business, tenants paying higher rents and landlords paying higher fees.[9] The representations we received about the impact that the change had had on the private rented sector market in Scotland were not supported with much firm evidence given the timing, and, in our view, they were speculative. As a result, in our 2013 report we reached no firm conclusions on charges to either landlords or tenants and their implications based on the impact of the Scottish ban on agents' fees. We did, however, make it clear in our report that we were "interested in the approach that has been adopted in Scotland" and we considered "that the impact on overall costs and the operation of market should be fully understood before a decision is made to make fees to tenants illegal in England". We stated that we intended "to gather further information on the impact in Scotland of the decision to make fees to tenants illegal, and to return to this issue in 2014".[10]

Our inquiry

4. This report sets out our further consideration of the specific question as to whether the effect of the decision to ban agents' fees to tenants in Scotland provides evidence upon which to make a decision on fees in England. We have therefore examined the evidence available in 2014 on the impact of the ban on fees in Scotland, including the methodologies underpinning the evidence, the questions addressed and the strength of the conclusions drawn from the evidence.

5. The first step in our re-examination was to assemble evidence on the impact of the Scottish Government's decision. In the summer of 2014 we wrote to the Scottish Government asking for an assessment of the impact of the ban. We received a response from Margaret Burgess MSP, the Minister for Housing and Welfare, which emphasised the reasons for clarifying the legislation[11] and described the legal changes made. The Minister said that the Scottish Government had "not assessed formally the impact of the clarification since it came into force in November 2012". She explained, however, that "the available evidence suggests that clarification has had no adverse impact on the operation of the private rented sector, which continues to grow, and that it has not been responsible for any significant increase in rents".[12] No details were provided of the "available evidence" referred to in the reply from the Scottish Government.

6. We are grateful to the Minister for her reply but it did not provide us with sufficient evidence on which we could make a recommendation to the Department for Communities and Local Government on whether or not a similar ban might be introduced in England. We therefore also wrote to organisations representing tenants, landlords and agents in Scotland seeking their analysis of the impact of the Scottish Government's decision to clarify the law on fees charged to tenants. We received four responses from:

a) Shelter Scotland (based on research commissioned from BDRC Continental and Rettie and Co.);

b) a joint response from the Scottish Association of Landlords and the Council of Letting Agents (CLA);

c) the National Landlords Association; and

d) Generation Rent.[13]

7. This report focuses on our examination of the evidence we received and addresses two questions:

a) the strength of the evidence on the impact of the decision to ban agents' fees to tenants in Scotland; and

b) the extent that the evidence from Scotland provides a sound basis to decide whether or not a similar ban should be introduced in England.

8. In our report we set out, in chapter 2, a summary of the evidence we received from the organisations listed above on the impact of the ban on agents' fees in Scotland. In chapter 3 we provide our assessment of the evidence received and consider whether the experience of Scotland provides a sound basis on which to reach a conclusion on how the question of a ban in England should be taken forward.

9. Finally, we put on record our thanks to the Scottish Minister and the organisations for responding to our requests for evidence on the impact of the ban. We also thank Dr Caroline Kenny[14] from the Parliamentary Office of Science and Technology and University College London and Professor Christine Whitehead[15] from the London School of Economics for their assistance in assessing the evidence.

1 Communities and Local Government Committee, First Report of Session 2013-14, The Private Rented Sector, HC 50 Back

2 Communities and Local Government Committee, The Private Rented Sector, paras 79 - 80 Back

3 Communities and Local Government Committee, The Private Rented Sector, paras 79, 81 Back

4 Communities and Local Government Committee, The Private Rented Sector, para 83 Back

5 Department for Communities and Local Government, Government Response to the Communities and Local Government Select Committee Report: The Private Rented Sector, Cm 8730, October 2013 Back

6 See, for example, Communities and Local Government Committee, The Private Rented Sector Ev 150, para 4.2.1 [National Private Tenants Organisations], Ev w249, para 14 [Housing Law Practitioners Association], Ev w162 [Digs], Ev w191, para 22 [Housing for the 99%], Ev 275, para 25 [National Union of Students]. Back

7 "An end to illegal charges to tenants", Scottish Government press release, 26 August 2012. In this report reference to the ban on fees does not include rents or refundable deposits. The Committee was also aware that the change introduced by the Scottish Government in November 2012 was a change to the regulation of the private rented sector in Scotland, which has been regulated since 1984 when the Rent (Scotland) Act made it an offence to charge or receive any premium or require the making of any loan in addition to rent and a refundable deposit (not exceeding two months' rent), as a condition of the grant, renewal or continuance of a tenancy.

The legislative change which came into force in November 2012 clarified that a premium "includes any fine or other sum and any other pecuniary consideration, in addition to rent, and includes any service or administration fee or charge". See Letter to the Chair from Margaret Burgess MSP, Minister for Housing and Welfare, 21 August 2014, in Correspondence from various organisations relating to letting agents' fees and charges in Scotland. This clarification has been widely seen as a ban on agents' fees and has been construed accordingly in this report. Back

8 See, for example, Communities and Local Government Committee, The Private Rented Sector, Ev 150, para 4.2.1 [National Private Tenants Organisations], Ev w249, para 15 [Housing Law Practitioners Association], Ev w162 [Digs], Ev w191, para 22 [Housing for the 99%], Ev 275, para 25 [National Union of Students]. Back

9 Communities and Local Government Committee, The Private Rented Sector, Ev 190 [RICS], Q 724 [Minister for Housing, Mark Prisk MP], See also, for example, Ev w97 [SpareRoom], Ev w183 [Reads Davies Estate Agents and Valuers], Ev 198, para 4.21 [The Property Ombudsman], Ev 167, para 4.5 [Association of Residential Letting Agents], Q 95 [Alan Ward]. Back

10 Communities and Local Government Committee, The Private Rented Sector, para 86 Back

11 Prior to the clarification of the law in Scotland on the charging of premiums, there were concerns about a lack of clarity regarding charges made to tenants by agents and landlords for setting up a tenancy. The Rent (Scotland) Act 1984 prohibited charges for drawing up a tenancy agreement or placing a name on an accommodation list. Furthermore, it was an offence to require any premium as a condition of the grant or continuance of a tenancy. A premium included any fine or other like sum and 'any other pecuniary consideration' in addition to rent. Although it should have been clear that this legislation prevented the making of any charge apart from rent and a refundable tenancy deposit (not exceeding two months' rent), there appeared to be considerable confusion. Some agents interpreted the law as meaning that it was illegal only for a letting agent to charge a fee specifically to grant the tenancy, whereas others took the view that any fee (other than rent or a refundable tenancy deposit) charged by an agent was illegal. Many agents charged an administration fee to cover overheads, costs of background checks and references, etc. Good practice guidance within the industry set out that other administration charges must reflect actual costs incurred. However, it seemed that some agents were charging tenants unjustifiably large administration fees. Overall, tenants had very little awareness of what was legal or reasonable to pay. The Private Rented Housing (Scotland) Act 2011 clarified that a premium "includes any fine or other sum and any other pecuniary consideration, in addition to rent, and includes any service or administration fee or charge". See Letter to the Chair from Margaret Burgess MSP, Minister for Housing and Welfare, 21 August 2014, in Correspondence from various organisations relating to letting agents' fees and charges in Scotland. Back