2Aim of the draft Bill
Introduction
5.According to the Secretary of State, the intended objective of the draft Bill is to deliver “a fairer, more competitive, and more affordable lettings market where tenants have greater clarity and control over what they will pay and where the landlord is the primary customer of the letting agent”.2 The Government stated that:
Tenants have little control over letting fees because the agent is appointed by the landlord and as a result those fees can run into hundreds of pounds. This is not fair… a ban is necessary to recognise the stronger market position of landlords and to reflect that agent services are primarily provided on their behalf.3
6.With increasing numbers of people living in the private rented sector, it is important that where the lettings market is found to be unfair to tenants, the Government intervenes.
7.This chapter considers the broad policy aims of the draft Bill. Later chapters raise specific instances where we consider that these objectives could be better achieved in a different way.
Fairness
8.The Government identified the power imbalance between tenants, landlords and letting agents as a key justification for the legislation.4 We have heard the current relationship described as “dysfunctional” and “artificial and rather unhelpful”.5 The Government stated that “tenants have little control over letting fees because the agent is appointed by the landlord”.6 The Northern Housing Consortium (NHC) agreed: “tenants, as the consumers of the service, have no choice in using a particular agent and are therefore being subjected to whatever charges the agent uses”.7 Kate Webb, Head of Policy at Shelter, told us that if tenants do not accept the fees, they are likely to lose the property.8 She went on to say that “at the moment agents are strongly incentivised to make the most attractive offer to the landlord, who is the active consumer, knowing full well that they can pass it on to the tenant, who is far more passive in this situation”.9
9.The dysfunctional nature of the relationship was also recognised by some industry bodies. The National Landlords Association (NLA) told us:
Traditionally, property agents treat landlords as ‘clients’ and as such the law of agency applies. However, increasingly as chargeable services are provided to applicants and tenants these individuals are taking on a status as secondary clients. The NLA has long been concerned that this represents a potential conflict of interest should the agent need to negotiate concessions on the part of the tenant.10
In clarifying that the transactional relationship is between the landlord and the letting agent by prohibiting fees chargeable to tenants, the draft Bill ensures that tenants are no longer financially impacted by the landlords’ choice of letting agent. Mette Isaken, Senior Policy Researcher at Citizens Advice, welcomed this relationship shift. She told us that “the landlord is paying for a service from the letting agent in order to get their income from the rent, so that is where the service should be provided and the payment should be made”.11 Shelter also welcomed the principle, saying that “landlords will be clearly established as the primary consumer of agents, removing concerns about double-charging”.12
10.However, some concerns were raised that the shift in power would negatively affect tenants.13 Chris John & Partners said:
Tenants will no longer be clients of ours at any point in the process. We will continue to try to represent their interests as far as we can and to act as a buffer between landlord and tenant when things get difficult, but many agents will no longer bother. There will be a power shift towards landlords.14
11.The National Approved Letting Scheme (NALS) contended that “the ‘customer/provider’ relationship between the tenant and the agent will be broken. This will call in to question the current arrangements whereby tenants can seek redress for poor service via the agent’s complaints procedure and a redress scheme”.15 However, The Property Ombudsman contested this. It told us:
We have had concerns raised with us from within the industry, that the enacted Bill will mean that tenants or prospective tenants will have a non-fiduciary relationship with the agent and that this will result in a weaker claim for consumer redress. For the Committee’s reference, we do not agree with this view having regard to the Ombudsman’s Terms of Reference which makes provision for complaints to be received from all consumers and allows compensatory awards to be made on the basis of actual proven financial loss and/or distress, aggravation and inconvenience.
12.The relationship between tenants, landlords and letting agents is unusual in that letting agents see themselves as providing services to both tenants and landlords. Landlords choose letting agents and tenants choose properties. In doing so, tenants have little choice but to accept letting agents’ fees. We agree that it is right that the Government has sought to rebalance the relationship.
Competition
13.In rebalancing the relationship between tenants, landlords and letting agents, the Government hopes that the draft Bill will increase competition in the lettings market as:
It will sharpen and increase letting agents’ incentives to compete for landlords’ business resulting in a more transparent market with lower overall fee levels and a higher quality of service. A ban will also reduce the risk of unfair practices in the form of double charging … thus making the sector more competitive, more affordable and of a higher standard.16
This view is shared by tenant groups. Shelter told us:
The Bill will lead to a more competitive lettings market because to remain financially viable, agents will need to offer fair prices and high-quality services to attract and keep a landlord’s business …
Shelter anticipates the Bill will result in landlords receiving a better and more transparent service from agents. Landlords will be clearly established as the primary consumer of agents, removing concerns about double-charging, and agents will need to offer landlords services at a price which fairly reflects the quality of services provided.17
14.However, we heard widespread concerns from letting agents that the loss of revenue would lead to job losses and business closures, thereby reducing competitiveness in the sector.18 According to the Government’s assessment of impact, the draft Bill, if enacted in its current form, is likely to deprive letting agents of £80 million per annum in revenue.19 ARLA Propertymark (ARLA) believed that job losses are inevitable as a result of the draft Bill and that in the worst-case scenario 16,000 jobs will be lost in the sector and a further 8,000 in the supply chain.20 Chris John & Partners shared this view, telling us: “it is unlikely that landlords will accept much in the way of fee increases. There will be job losses. In an already difficult post-Brexit sales market some mixed service agents will go to the wall”.21
15.To survive in the market, Dr Julie Rugg, Senior Research Fellow at the Centre for Housing Policy at the University of York, told us that service levels of some letting agents may decline:
Markets are such that a rental level will be maintained, but the quality of the property might decline. The landlord’s willingness to attend to repairs might go down if the letting agent fees go up … It might be things such as people [letting agents] not doing as many inspections of a property as they might have done in the past so that there is a cut in service rather than a cut in rent … They [letting agents] might not be training their staff in a way that you would want them to.22
ARLA agreed:
Letting agents deliver a hugely valuable service in ensuring that properties are safe, compliant and professionally managed… An outright ban on letting fees will likely mean that agents become unable to continue offering a full service to tenants.23
16.While the Government stated that “agents will need to consider their business models” in light of the draft Bill, it contended that the legislation is only “likely to have a negative impact on agents that are unable to adapt to a market where letting fees to tenants are banned”.24 Shelter concurred:
There is no reason why agents who offer a good quality service will not be able to adapt. Shelter’s most recent private landlord’s survey showed service quality was far more important to landlords than price, with 74% of landlords saying they choose their agent “because they have the best reputation for service overall”, compared to only 18% who choose based on price … agents have shown their adaptability on previous occasions.25
The NHC agreed that there is no reason why letting agents cannot adjust to a new operating environment.26
17.Indeed, some letting agents already operate without charging fees to tenants. OpenRent told us that:
OpenRent’s combination of (i) being the largest letting agent and (ii) not charging agency fees to tenants, constitutes proof that a ban on letting fees is not ‘bad for business’ as so many in the industry insist. Our existence is an argument that cannot be ignored.
We have grown, from founding in 2012 to today’s market-leading position, without charging the huge fees our competitors have. Tenant fees are simply not a necessary part of a letting agent’s business model in the age of online property search, digital signatures and ecommerce technology.27
18.If the prohibition of fees does lead to letting agent closures, Shelter believed that the “loss of some agents will not necessarily be negative for the market. The ban may additionally help to drive the worst performing agents from the market, as they are least likely to be able to offer a good quality service to landlords”.28
19.While we acknowledge that the draft Bill would deprive letting agents of an income source, we agree that the draft Bill will increase competition in the sector by improving fee transparency, which will reduce unfair practices, and is to be welcomed given existing irregularities in the market.
Affordability
20.The obvious improvement in affordability for tenants is that they would no longer be required to pay fees to landlords and letting agents as the draft Bill would prohibit all payments with the exception of rent, security deposits of up to six weeks’ rent, holding deposits of up to one week’s rent, and default fees. The Government estimate that the average household in the private rented sector will benefit by between £18 and £50 annually as a result.29 However, we heard that tenants could benefit by much more given that the Government found that renters pay an average of £200–£300 per tenancy in letting agents’ fees, with some respondents to the Government’s public consultation saying they had paid over £1,000.30 Mette Isaken from Citizens Advice told us she “anticipates that tenants would save hundreds of pounds every time they move”.31 Shelter stated that “with average fees of more than £200 and many renters being forced to pay more than this, the Bill will significantly ease the financial pressure on tenants”.32
21.However, despite repeatedly hearing from landlords and letting agents that the draft Bill would result in job losses, business closures and decreased service levels, we heard—mainly from the industry—that it would not improve long-term affordability as rents would rise to recover lost income.33 The Royal Institute of Chartered Surveyors (RICS) stated that “a ban on fees for tenants could lead to additional charges for landlords who will then pass on the cost in the form of higher rents”.34 A survey conducted by ARLA supported the RICS’s claim by finding that 90% of letting agents thought that rents would increase.35 Cheshire West and Chester Council also identified this risk.36 The Residential Landlords Association (RLA) stated that “the market 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”.37 ARLA believed that this would disproportionately disadvantage “lower income families who will probably move less often than younger, wealthier millennials … the proposed ban will financially disadvantage tenants unless they move on a regular basis”.38 RICS went on to state that “clearly such an outcome is at odds with the stated objective of creating a more affordable PRS [private rented sector]”.39
22.Shelter do not believe that rents will rise.40 Research, which they commissioned, found that landlords in Scotland, where that has been a comparable tenant fees ban fully in place since 2012, were no more likely to have increased rents since 2012 than landlords elsewhere in the UK.41 Kate Webb from Shelter told us that the risk of rent increases as a result of the draft Bill was an issue that Shelter considered thoroughly.42 She told us that:
It is very difficult to make predictions about what will happen to rents… When you look at the range and size of fees being charged across the sector, it is very difficult to argue that a landlord, who has the choice of whether to go with that particular agent and has the consumer power to question the fees, will accept some of the costs that are being charged to tenants. Our assumption is that they just will not.43
Mette Isaken from Citizens Advice agreed. She told us that “judged on the fact that there are inflated fees at the moment and there is double-charging of landlords and tenants, we would at least anticipate that tenants would definitely save money and that letting agents will absorb at least the vast majority of the cost of it”.44 Brittons Estate Agents supported this argument by stating that fees are unlikely to be transferred to landlords and will be absorbed by agencies.45
23.While Shelter disputed that rents will rise, it argued that even if some landlords do increase rents, this is preferable for tenants as it is more transparent and costs are spread over time.46 The results of the Government’s public consultation supported this argument; 24% of tenant responses explicitly stated that a rise in rent was preferable to upfront fees.47 Dan Wilson Craw, Interim Director of Generation Rent, also supported this assertion. He told us that “a lot of tenants will prefer to avoid costs at the start of the tenancy, even if it means that they are paying slightly more”.48
24.Given the comprehensive ban on letting fees, we conclude that the legislation will improve affordability for tenants in the private rented sector at the start of a tenancy. The draft Bill has the potential to save tenants hundreds of pounds. We acknowledge concerns that rents may increase, but believe the risk to be low as demonstrated by the recent experience in Scotland and the expected effect of improving the competitiveness of letting agents. If rents do increase to recover lost letting agent or landlord income, we believe that would be preferable for tenants as it spreads costs over a tenancy and still reduces the up-front cost of renting in the private rented sector.
2 Secretary of State Sajid Javid, Written Statement (HCWS212), 1 November 2017
3 Secretary of State Sajid Javid, Written Statement (HCWS212), 1 November 2017
4 Secretary of State Sajid Javid, Written Statement (HCWS212), 1 November 2017
13 See also ARLA Propertymark, DTF0036; National Landlords Association, DTF0030; UK Association of Letting Agents, DTF0037; and Lifestyle Property, DTF0012
18 See The National Approved Letting Scheme, DTF0050; ARLA Propertymark, DTF0036; Q137; LSL Property Services, DTF0040; National Landlords Association, DTF0030; Brittons Estate Agents Ltd, DTF0038; Leaders Romans, DTF0027; Regal Lettings, DTF0002
27 OpenRent, DTF0057. We note that OpenRent do charge a set fee of £20 if a landlord requires a reference from a tenant.
Published: 29 March 2018