Tenant Fees Bill

Written evidence submitted by Residential Landlords Association (TFB41)

1.0 ABOUT THE RESIDENTIAL LANDLORDS ASSOCIATION

1.1 The Residential Landlords Association (RLA) represents the interests of landlords in the private rented sector (PRS) across England and Wales. With over 30,000 subscribing members and an additional 20,000 registered guests who engage regularly with the Association, the RLA is the leading voice of private landlords. Combined, they manage over a quarter of a million properties.

1.2 The RLA provides support and advice to members and seeks to raise standards in the PRS through its code of conduct, training and accreditation, and the provision of guidance and updates on legislation affecting the sector. Many of the RLA’s resources are available free to non-member landlords and tenants.

1.3 The Association campaigns to improve the PRS for both landlords and tenants, engaging with policymakers at all levels of Government to support its mission of making renting better.

2.0 EXECUTIVE SUMMARY

2.1 Contrary to achieving the Government’s objectives, the RLA feels that this Bill could have the effect of reducing tenant and landlord choice when choosing a letting agent; it could see rents increase and reduce, rather than improve, transparency. The Office for Budget Responsibility has itself noted: "It is possible that a ban on fees would be passed through to higher private rents. If this was the case, it could affect our housing benefit spending forecast."

2.2 The Consumer Rights Act 2015 made it a legal requirement for letting agents in England to publicise details of their fees. The Government has so far not made use of any of the powers conferred on it in the Act to make regulations. We believe that doing so would allow for immediate improvements for tenants and landlords without the need for further primary legislation. For example, under section 83 of the Act the Government could introduce regulations to allow for fees to be displayed more prominently and to specify in greater detail the descriptions of fees that are to be given to tenants, making it easier for them to compare fees charged by one agent compared to another.

2.3 Given the Government’s intention to consult on barriers preventing landlords from offering longer tenancies, we see little point in this Bill being promoted as a separate entity. Many agents work to a business model of seeking tenancy renewals on a frequent basis as this provides opportunities for them to charge fees.

2.4 At present, some tenants have to raise a new deposit when moving home before receiving their previous one back. We are calling on the Government to work with the industry to develop a new insurance-based scheme that would enable a tenant to transfer a deposit on one rental property to another. This could be supported through an amendment to the Bill as outlined in this submission.

2.5 The 6 week cap on deposits raises concerns that those tenants deemed to be of ‘higher risk’ will be less likely to obtain rentals in the sector. The RLA proposes an amendment to the Bill that limits deposits to 6 weeks rent unless there are specific extenuating circumstances which would justify a higher deposit. This would allow landlords to balance the risk posed by tenants with pets or tenants with uncertain or unprovable incomes, while retaining the core objectives of the limitation.

2.6 We believe that environmental health departments, given their understanding of private renting, are best placed to enforce the provisions of the Bill rather than Trading Standards.

2.7 Rather than including the list of prohibited payments on the face of the Bill we would suggest that the Bill grants the Secretary of State the power to provide a list of permitted payments via regulations. This would ensure the flexibility needed to respond to new services and initiatives, such as the ability to transfer a deposit from one tenancy to another, without having to resort to changes to primary legislation.

2.8 A loophole should be closed within the Bill which means that whilst fees are prohibited on ‘tenancies’ they would not, as currently drafted, cover situations where properties are rented to tenants under a licence. The RLA has prepared an amendment to rectify this.

3.0 COST PRESSURES ARE EASING IN THE PRIVATE RENTED SECTOR

3.1 Given the Bill’s objective to ease some of the cost pressures faced by tenants, this should be placed within a context of costs beginning to ease.

3.2 Whilst we understand and sympathise with concerns about high costs faced by tenants in areas of high demand for private rented housing, especially in London, the South East and other major urban conurbations, official data shows that rents are increasing by less than inflation.

3.3 According to the Office for National Statistics’ recent Index of Private Housing Rental Prices [1] private sector rents paid by tenants in Great Britain rose by 1% in the 12 months to April 2018, the same rate as in England. In London, the year to April 2018 saw no change in private rental prices. Over the same period inflation, as measured by CPI, was 2.4%.

4.0 WILL THE BILL DELIVER THE GOVERNMENT’S OBJECTIVES?

4.1 At the time of the Queen’s Speech the Government confirmed that it would be bringing forward draft legislation "to improve transparency, affordability and competition in the private rental market." [2] It is the RLA’s view that this Bill is unlikely to achieve any of these objectives.

4.2 In its report [3] for the Association of Residential Letting Agents, Capital Economics suggested that letting agents would respond to the ban in two ways:

4.2.1 Letting agents will simply absorb the financial impact. With around 60% of the letting agent market deemed to be small businesses, this raises the very real prospect of some agents being unable to cope with the likely costs of the measures within the Draft Bill. This would serve only to reduce competition for tenants and landlords, at odds with the Government’s stated objective.

4.2.2 Letting agents pass on the costs of the fee ban to landlords. In a recent survey [4] of over 2,700 of its members, the RLA found that of those who classed themselves as letting agents, 57% reported that they would increase their fees to landlords as a result of the fee ban. 11% of landlords reported seeing increased agent fees since the announcement.

4.3 In such a scenario, landlords would have three options:

4.3.1 They decide to stop using an agent and opt to self-manage their properties instead. One in five landlords told the RLA they would be less likely to use an agent as a result of the fees ban. This raises serious concerns, especially about accidental landlords for whom the use of an agent is vital to ensure that the processes they follow, tenant relations and maintenance of a property meet all the required standards. We would be fearful of anything that might lead some landlords to directly manage their properties without the required skills and understanding of the complex legislative and regulatory framework in which the private rental market work or support from a professional/trade association such as the RLA.

4.3.2 They decide to absorb the costs themselves. Such a route is unlikely to be followed by many landlords. Two thirds of individual private sector landlords are basic rate income tax payers only [5] and they are already facing significant tax increases, growing costs associated with increased licence fees and the costs of meeting an ever growing volume of regulations.

4.3.3 They decide to pass the costs on to their tenants in the form of higher rents. This is a view held by Shelter which, in 2013, noted [6] that: "If letting agencies do not absorb the costs they currently charge to tenants, landlords may be justified in increasing rents to reflect their additional costs." The Office for Budget Responsibility has also warned [7] : "It is possible that a ban on fees would be passed through to higher private rents. If this was the case, it could affect our housing benefit spending forecast."

4.4 Under all these scenarios the cost of fees would become less transparent. Rather than a clear fee at the start, the costs would be included in the rent which tenants would be paying almost permanently on a monthly basis.

4.5 The rationale for the Bill is partly that landlords will be able to use their economic strength to push agents to lower fees in a way that tenants cannot. This is a strategy focused on the South-East and other large towns and cities. In many rural areas there is little or no competition between agents and landlords will have no ability to move agents to encourage fee competition.

5.0 THERE ARE ALTERNATIVES

5.1 Better Use of Powers Already Available to Ministers

5.1.1 The Consumer Rights Act 2015 made it a legal requirement for letting agents in England to publicise details of their fees, whether or not they are a member of a Client Money Protection scheme and which redress scheme they have joined. Measures to promote and encourage transparency such as this are welcome.

5.1.2 The Government has so far not made use of any of the powers conferred on it in the Consumer Rights Act to make regulations. We believe that doing so would allow for immediate improvements for tenants and landlords without the need for further primary legislation. For example, under section 83 of the Act the Government could introduce regulations to allow for fees to be displayed more prominently and to specify in greater detail the descriptions of fees that are to be charged to tenants, making it easier for them to compare fees charged by one agent compared to another.

5.2 The Bill Needs to be Seen Within the Context of the Consultation on Longer Tenancies

5.2.1 Given the Government’s intention to consult on barriers preventing landlords from offering longer tenancies, we see little point in this Bill being promoted as a separate entity. Many agents work to a business model of seeking tenancy renewals on a frequent basis as they provide opportunities for them to charge fees. Action to support the provision of longer tenancies would help to address this problem.

5.3 Transferring Deposits from One Property to Another

5.3.1 The RLA recognises that one of the biggest upfront costs that tenants face is the deposit. This is exacerbated by a system that means that when a tenant moves to a new rental property they need to raise funds for a fresh deposit before being repaid the deposit for their last property.

5.3.2 Whilst we welcome the Government’s confirmation in response to the Housing, Communities and Local Government Select Committee’s report on the Draft Bill that it will explore the merits of alternative deposit models [8] , the RLA believes that any new models would require primary legislation to be made legal.

5.3.3 Specifically, the RLA is calling for the development of a new insurance-based scheme that would enable a tenant to transfer a deposit on one rental property to another while protecting the new landlord from a reduced deposit caused by deductions for the previous tenancy.

5.3.4 This would include provisions for a tenant to be able to top up a deposit being transferred where the new one is higher, or claim some of the deposit back where it is lower than for the previous property. This will allow tenants to save a larger deposit as they move through the sector. Landlords would have the assurance under such a scheme that a deposit would be available in full if the tenant could not top it up between tenancies.

5.3.5 The existing Alternative Dispute Resolution mechanisms which deal effectively with deposit disputes would be maintained under this system. The Bill however does not permit this type of change as the long title does not embrace reform of the current tenancy deposit system.

5.3.6 In the meantime more could be done to encourage alternative deposit schemes that offer an insurance policy to landlords for rent arrears and damage with the tenant paying a modest insurance premium for this. The Bill as drafted only allows such schemes as an alternative to conventional deposit offerings which does little to promote change in the sector. Appendix A provides a suggested draft form of words for an amendment to the Bill that would permit these schemes to be offered as the main deposit mechanism rather than an alternative.

6.0 COMMENTARY ON THE BILL

6.1 Enforcement

6.1.1 Clause Six of the Bill provides Trading Standards with the authority to enforce the provisions of the Bill.

6.1.2 Key to the success of any legislation is effective enforcement and this Bill is no exception.

6.1.3 The RLA is concerned that despite the measure within it, very little enforcement action to ensure compliance with the Consumer Rights Act 2015 has been taken. Legislation without proper enforcement provides no protection to tenants or landlords.

6.1.4 A freedom of information exercise by the National Approved Letting Scheme [9] last year found that two years after it was made law for agents to display their fees, 93% of councils had failed to issue a single financial penalty for non-compliance to letting agents. 59% reported that they did not consider that the display of letting agent fees "represents a high priority for the allocation of resources within Trading Standards". 45% "said they only undertake reactive enforcement activity."

6.1.5 The problems with enforcement have been compounded by the relatively low levels of fines that can be imposed on unscrupulous agents making it not worthwhile pursuing some cases, leaving rogue operators free to continue. This is a problem that remains within the current Bill which would, as a general rule, mean agents or landlords found to be breaching the legislation could initially be charged £5,000 in a fine by a local authority. If a further offences were committed within five years a fine of up to £30,000 could then be levied. The RLA believes that even though they would be able to retain the fine, £5,000 is still too little for councils to cover the cost of enforcement action. As the Chair of the HCLG Select Committee, Clive Betts MP, noted at second reading of the Bill, the Committee argued "that paying the costs the local authority will incur through civil penalties was not sufficient and that local authorities need extra funding from Government."

6.1.6 Enforcement bodies have also sought to rely on commentary provided by what was then DCLG in the document: ‘Improving the Private Rented Sector and Tackling Bad Practice’. This was written before the Consumer Rights Act came into force and does not provide a sufficient explanation of either the legislation or how it might be used. The Department has not produced more detailed guidance at any stage as to how fees should be set out or displayed.

6.1.7 Section 87 of the Consumer Rights Act would enable the Government to transfer enforcement of the agent fee transparency policy from Trading Standards to Environmental Health officers who, we believe, are better equipped to enforce the policy given that they have a better understanding of the private rented sector.

6.1.8 We would suggest also that a better deterrent would be to enable a fine of up to £30,000 to be levied against agents and landlords for a first offence. The offence structure should also be simplified so that charging of fees is an offence rather than having a pre-cursor low-level fine occurring first. A low fine of £5,000 is not likely to deter behaviour and is a poor motivator of local authority action. In addition, it makes the addition of charging non-permitted tenant fees as a banning order offence practically unworkable. A banning order can only be issued where someone has been prosecuted and in practice is unlikely to be given for a first offence unless it is extremely serious. This means that an agent would have to be caught four times in order to be prosecuted twice and then be likely to be banned.

6.2 Security Deposits

6.2.1 Schedule 1 of the Bill permits certain costs to continue to be allowed to be charged to tenants, particularly a security deposit of no more than six weeks rent. We welcome the Government’s decision, as a result of its consultation, to increase this from four weeks, but still feel that two months would be a better limit and in line with the position in Scotland.

6.2.2 At the current time most landlords seek a deposit that will cover a final month’s rent should a tenant decide not to pay, with some money left over to cover cleaning and damage to the property. This therefore amounts to around six weeks rent, the amount being permitted in the Bill. Accordingly, the draft Bill is doing no more than authorising the level of deposit that most landlords will charge an average tenant anyway. It does not take account of the fact that most landlords would seek a higher sum than this for a higher risk tenant. Where a tenant has a pet or is a particular risk, a slightly higher deposit is charged to allow for the potential for extra costs at the end of the tenancy. If landlords are not able to charge an increased deposit for riskier tenants there is a possibility that they will decide not to rent to them and will opt for the lower risk end of the market. This would reduce the availability of property especially for the 44% of tenants who have stated that they would like a pet [10] .

6.2.3 Appendix B provides a suggested amendment to the Bill to help address concerns around higher risk tenants.

6.3 Permitted payments

6.3.1 Schedule 1 of the Bill provides an exhaustive list of payments that would be permitted under the Bill. These are:

· The rent;

· A refundable tenancy deposit of no more than six weeks’ rent;

· A refundable holding deposit of no more than one week’s rent; and

· A payment that is required in the event of a default by the tenant, such as a late payment or breach of the tenancy agreement by the tenant.

6.3.2 We are concerned that putting on the face of the Bill the list of payments that would be allowed could cause problems as new products and services come on to the market that could significantly help and support tenants but which might fall outside of the scope of any of the above list. As an example, it is not clear if products that seek to support tenants to transfer a deposit from one tenancy to another would be allowed given that under this scenario the deposit would not be refunded at the end of a tenancy but transferred to another.

6.3.3 Rather than including the list on the face of the Bill we would therefore suggest that the Bill grants the Secretary of State the power to provide a list of permitted payments via regulations. This would ensure the flexibility needed to respond to new services and initiatives without having to resort to changes to primary legislation.

6.4 Extending Bill’s Provisions to Licensed Rentals

6.4.1 Whilst the Bill prohibits fees from ‘tenancies’, it does not include situations where properties are rented to tenants under licence.

6.4.2 Increasingly tenants are asked to accept property on a licence, especially in the poorer quality sector. Such arrangements provide fewer protections to tenants than a formal tenancy agreement.

6.4.3 Whilst some of these licences are unlawful, not all are. There is a danger that if this loophole is not closed it could push more landlords to offer licences which will leave tenants paying more and substantially reduce their security and rights.

May 2018

APPENDIX A: Allowance of Alternative Deposit Schemes

In page 23, Schedule 1, paragraph 2 add after line 18:

Alternative Deposit Services

2A

(1) A payment of an insurance premium is a permitted payment where:

(a) The premium is as a replacement for a tenancy deposit and no such deposit is being sought;

(b) The premium is for an insurance policy in the favour of the landlord to provide the landlord with a similar level of protection as a tenancy deposit;

(c) The provider of the policy is compliant with the obligations of the Consumer Credit Act 1974 and the Financial Services and Markets Act 2000.

(2) The Secretary of State may by regulations impose a limit on any insurance premium sought under sub-paragraph 1 and any premium in excess of such limit shall be a prohibited payment.

Drafting notes

A key weakness in the Bill is its failure to address one of the greatest areas of cost for tenants. That is the need to have a deposit for the property they are moving out of as well as one for the property they are moving into. The cap on deposits does little in this area. However, there are a range of innovative schemes allowing tenants to pay a much smaller sum as an insurance bond. These schemes then guarantee to pay out to the landlord. Currently, the Bill only allows them if they are offered as an option alongside a more conventional deposit system which leaves landlords reluctant to use them when a more conventional deposit is on offer. The Bill should allow alternative schemes so that providers can offer them as the only option. This would encourage landlords to embrace innovation in this area and in the sector more generally.

APPENDIX B: Allowing for Higher Deposits for High Risk Tenants

In page 23, Schedule 1, paragraph 2(3) delete lines 12 and 13 and replace with:

(3) But any amount of the tenancy deposit which exceeds the amount of six weeks rent is a prohibited payment except if such increased deposit has been specifically agreed in writing between the landlord and the tenant and is such reasonable sum as might be sought by a reasonable landlord in consideration of an increased letting risk posed by the tenant having regard to:

the tenant’s demonstrable earned income;

the stability of the tenant’s income, and

any factors which might lead to the tenant causing a higher level of damage than would be common in the particular type of property.

In no circumstances can the tenancy deposit exceed the amount of 10 weeks rent.

Drafting notes

The Bill limits tenancy deposits to 6 weeks rent. However, the majority of the market seeks deposits at this level for almost all tenants. This is based on a sum equivalent to the last month’s rent plus two weeks extra for possible damage or cleaning. Those tenants who pose a risk higher than the normal will be less likely to obtain rentals in the private rented sector under this Bill. Therefore this amendment limits deposits to 6 weeks rent unless there are specific extenuating circumstances which would justify a higher deposit in which case they are limited to 10 weeks rent. This would allow landlords to balance the risk posed by tenants with pets or tenants with uncertain or unprovable incomes while retaining the core objectives of the limitation.

APPENDIX C: Inclusion of Licences

In page 1, line 4 add after "tenancy", "or licence"

In page 1, line 6 add after "tenancy", "or licence"

In page 1, line 8 add after "tenancy", "or licence"

In page 1, line 15 add after "tenancy", "or licence"

In page 2, line 2 add after "tenancy", "or licence"

In page 2, line 5 add after "tenancy", "or licence"

In page 2, line 7 delete the first instance of "tenancy" add after the second instance of "tenancy", "or licence"

In page 2, line 12 delete the first instance of "tenancy" add after the second instance of "tenancy", "or licence"

In page 2, line 32 add after "tenant", "or licensee"

In page 2, line 34 add after "tenant", "or licensee"

In page 2, line 37 add after "tenancy", "or licence"

In page 1, line 40 add after "tenancy", "or licence"

In page 1, line 42 add after "tenancy", "or licence"

In page 1, line 47 add after "tenancy", "or licence"

Drafting Notes

All of the above amendments extend the prohibition on fees from tenancies to include licences. Increasingly tenants are asked to accept property on a licence, especially in the poorer quality sector. Some of these licences are unlawful but not all are. There is a danger if this loophole is not closed of pushing more landlords to offer licences which will substantially reduce tenant security and rights.

June 2018


[1] Office for National Statistics, Index of Private Housing Rental Prices, Great Britain: April 2018, 23rd May 2017, available at: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/april2018.

[2] Prime Minister’s Office, Queen’s Speech 2017, 21st June 2017, page 36, available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/620838/Queens_speech_2017_background_notes.pdf.

[3] Capital Economics for the Association of Residential Letting Agents, Letting the market down?: A report for ARLA Propertymark (Association of Residential Letting Agents), March 2017, available at: http://www.arla.co.uk/media/1045728/letting-the-market-down-assessing-the-economic-impacts-of-the-proposed-ban-on-letting-agents-fees.pdf.

[4] Simcock, T.J for the Residential Landlords Association, State Intervention into Renting: Making sense of the impact of policy changes, November 2017, page 22, available at: https://research.rla.org.uk/wp-content/uploads/state-intervention-into-renting-2017-report.pdf.

[5] Residential Landlords Association, Challenging the myth: Two thirds of landlords pay basic rate tax, 5th July 2017, available at: https://news.rla.org.uk/two-thirds-landlords-pay-basic-rate-income-tax/.

[6] Shelter, Letting agencies: The price you pay, June 2013, page 17, available at: https://england.shelter.org.uk/__data/assets/pdf_file/0006/671649/Letting_agencies_-_The_price_you_pay.pdf.

[7] Office for Budget Responsibility, Economic and Fiscal Outlook, November 2017, page 107, available at: http://cdn.budgetresponsibility.org.uk/Nov2017EFOwebversion-2.pdf.

[8] HM Government, Government response to the Housing, Communities and Local Government Select Committee Report Pre-legislative scrutiny of the draft Tenant Fees Bill, May 2018, page 11, available at: https://www.parliament.uk/documents/commons-committees/communities-and-local-government/2017-19-Correspondence/Government-response-HCLG-report-Pre-legislative-scrutiny-draft-Tenant-Fees-Bill.pdf.

[9] National Approved Letting Scheme, Enforcement regime on displaying agent fees failing, 1st June 2017, available at: https://www.nalscheme.co.uk/enforcement-regime-displaying-agent-fees-failing/.

[10] HomeLet, Landlord Survey 2017, page 11, available at: https://www.housingnet.co.uk/pdfreport/PDF_HomeLet_Landlord_Survey_2017_28873.pdf.

 

Prepared 4th June 2018