Last week the chancellor announced in his Autumn Statement that they would be introducing a ban on letting agent fees to tenants ‘as soon as possible’.
This post looks at why this is actually a good thing for some agents (ie those who do not charge these excessive fees) and why, if you’re one of those agents, you should have nothing to fear.
You can still charge fees
Some of the reactions I have seen from agents make it look as if they are being banned from charging any fees at all! All the ban is doing is saying that agents can’t charge fees to tenants. You can still charge your LANDLORDS!
Which when you think about it is right and proper – as tenants are not your clients. Landlords are. So landlords should pay the fees.
You could be breaking the law by charging tenants
No-one thinks about the law of agency but the lawyers. To quote Giles Peaker on Nearly Legal
As one agent put it to me on twitter
“In practice an agent a person who acts on behalf of the landlord. The customer is still the tenant”.
Well… No. If you are the landlord’s agent, you are the landlord’s proxy. You are entitled to charge the landlord for that service, but technically, legally, you should then account to the landlord for any profit that you, as agent, make from charging the landlord’s tenant.
One big element of agency law is that an agent is in a ‘fiduciary position’ and therefore cannot make a profit out of his agency work unless this is known of and approved by their principal – in this case, the landlord. If the agent makes a ‘secret profit’ which the principal has not authorised – the principal can claim it back through the courts.
Do you think most landlords know that their agents ZXY Ltd are charging £350 to their tenants as well as to them for drawing up a tenancy agreement (total fee haul for one ‘fill in the blanks’ document – £700)? Me neither.
If that landlord finds out, arguably he could bring a claim to recover the £350. Under agency law – it’s his. This is the basis of the case being brought against Foxtons which I discussed here.
If you don’t charge any fees to tenants, you will not be vulnerable to this sort of claim.
Think – what would it do to your business if all your landlords clubbed together and sued you for the recovery of all the fees you had charged to tenants without their knowledge? Remember, they have a six year limitation period in which to do this.
NB Some agents try to justify their tenant fees by saying that they provide a service to tenants and may even fight for their rights against the landlord. That may be so but if you are the landlord’s agent, that work is still a function of your service to the landlord. In law, the tenant is not your customer. Period.
Good agents will have the last laugh when the ban comes in
Some agents (the ‘good’ agents) only charge very modest fees (or sometimes no fees at all) to tenants. Others charge massive fees of up to £700 or more.
But I would be interested to know whether the agents who charge the high tenant fees charge a correspondingly low fee to their landlords. I suspect not.
If they under charge their landlords (ie give their landlords the benefit of the tenant fees) – then when the ban comes in they could maybe get away with increasing their landlord fees to make up. For new customers that is – they will be tied into their agency agreement fees for existing customers.
If they are charging eye-popping fees to tenants AND to landlords, though – when the ban comes in, they are going to lose half their income. Which will probably make their business unsustainable.
However, if you just charge, say, £60 for credit referencing – you are going to be a lot better placed. You should survive the ban easily.
I have been reading in the press that there is a bit of an oversupply of agents in the marketplace just now. Maybe this is how the problem is going to resolve itself …
(Note for the purpose of this article, I have referred above to agents who don’t charge tenant fees as ‘good’ agents. I realise this is not a complete definition of agent goodness …)
Simon Davey says
November 29, 2016 at 10:02 AMI totally and wholeheartedly agree with this. I have never charged tenants anything as I have always held the belief that I am working for the landlord. No right minded landlord would ever consider letting a tenant rent their property without some sort of referencing process. Therefore in my view it is the landlord that is ordering this procedure, and therefore the landlord who should pay for it. A full advanced check costs about £30 lets not loose sight of that fact. Therefore agents who charge tenants £200 each for this are ripping them off and as you point out, more than likely breaching the fiduciary position they are in with the landlord.
I believe this will result in many “flash” high street agents going to the wall as they have such high overheads with their high street shop, staff and a handful of sign written Mini Coopers lined up outside. Many of the smaller agencies like us are rubbing our hands together at the though of all these extra tenancies that may materialise as a result. Who knows I may even put the modest charges to my landlords down as a result!!
Chris says
November 29, 2016 at 1:33 PMThat’s all well and good in principle, and I cannot disagree some agents are total rip off merchants.
However, when one orders a product or service that is specific to that person it is quite normal and correct that the customer, i.e. prospective tenant, is charged a reservation deposit to discourage time wasters and protect their outlay. Without this deposit an applicant for a property may be running around town initiating tenancy applications at will, as he / she has no responsibility to complete the undertaking when there is no financial penalty for not doing so.
As a private landlord managing my own properties I have always taken a reservation deposit and clearly explained the applicants obligations to avoid any dispute if the applicant subsequently pulls out of the application. I also consider such a deposit as a good will deposit to allow me time to conduct references whilst holding the property exclusively for that applicant. If the applicant pulls out without good reason and I have lost 1 – 2 weeks rent and referencing fees in the process I feel fully justified in retaining said deposit.
If the government wish to meddle in these procedures and create an all out gazumping market so be it, as I shall no longer retain exclusivity for the applicant and they will effectively be in a race to see who comes up with the best and quickest reference and commitment to signing an agreement. Furthermore I will make arrangements for the applicant to pay my referencing company direct thereby precluding my acceptance of any such upfront fees to satisfy the latest legislation.
The government need to realise one size does not fit all… Yes there should be far more transparency and explanation of agency fees, and a serious assessment of the level of some of these agencies fees. I do not believe a blanket ban on agents charging applicants fees is the answer, the landlord will simply increase rents to cover their additional burden.
Is it so much different to booking a hotel wherein the agency charges a booking fee to cover administrative costs and profit for the service provided to the guest using the agencies facilities and listings to find a suitable hotel?
Tessa Shepperson says
November 29, 2016 at 1:40 PMIf you are a private landlord managing your own properties, I can’t see how this will apply to you.
The prohibition will be for AGENTS charging directly to TENANTS. The point being that any fees that agents charge for their work must be charged directly to the landlords. Not to the tenants.
There has been no mention of any prohibition against LANDLORDS charging fees to tenants.
Whether the fees that landlords charge are valid and enforceable will though depend on whether they are ‘fair’ under the unfair terms rules, now in the Consumer Rights Act 2015. But this is the case now – the agent’s fees rules will (presumably) not change this.
Chris says
November 29, 2016 at 2:35 PMThank you for your answer 🙂
Tracy says
November 29, 2016 at 4:30 PMWe are a small agent, so from this I guess if would be ok for us to tell the “prospective tenant” that in applying for the property he/she will have to pay the Landlord direct a deposit/fee so he can do the said checks.
Tessa Shepperson says
November 29, 2016 at 4:51 PMAs always the devil will be in the detail. We will have to see what approach is taken, after the consultation, about fees which are for repayment of money paid out, for example for credit checks.
I would hope that the prohibition will just cover fees for agents work (which should be paid by the landlords) rather than repayment of money expended on essential third party services such as reference checks.
silly sailor says
November 29, 2016 at 9:27 PMWe have this in Scotland. People still take deposits to reserve a property. I doubt they would get rid of this it would be nuts. It’s more you can’t charge the Tennant for referencing or drawing up a tenancy etc.
To be honest doest bother me I think us landlords are better at getting a good deal than tenants. If somebody was to charge me 200 quid for a tenancy agreement I’d been on my bike pretty quick.
Nearly Legal says
November 29, 2016 at 2:21 PMAs Tessa said, the proposal only appears to be that agents can’t charge tenants, not landlords.
Agents charging is, however, a very different situation to an agency booking a hotel room. The agency is (or should be) unambiguously acting on behalf of the hotel guest in making the booking and it charges the guest a fee accordingly.
The letting agent is acting on behalf of the landlord – always. They can’t be acting for both landlord and tenant and any service they provide is a service for and on behalf of the landlord.
As for landlords increasing rents – well maybe, but that will also depend on whether agents look to recover the lost profits from landlords AND whether landlords don’t bother to shop around for better deals. After all, it should make the fees to landlords rather more transparent.
Chris says
November 30, 2016 at 1:09 AMThank you all for your input. I neglected to say I do use an agent also when I’m away.
I agree wholeheartedly that some agents charge a ridiculous fee for ‘admin’, I took an agent (Countrywide) to the ombudsman for just that reason, as they were acting on my behalf and I was disgusted to hear from my new tenants how much they had been charged, a young couple just starting out in life and part student part working needing a guarantor paid £830 to secure my property, of which a £365 holding deposit went towards the bond when they moved in, so £465 in ‘reference / admin fees plus additional contract preparation / signing fees, outrageous! Suffice to say the ombudsman ruled against me in this issue.
I charge my actual costs for references at £20 and a lot of agents with bigger business pay around £15.
The majority of hotel booking agents do charge a fee to the customer and all of them are acting on behalf of the hotel owner when listing their properties for rent, look up Booking.com, Agoda.com & Airbnb as examples and you will see a service charge included in the cost of the room, alongside which they charge the hotel a percentage commission.
Simon Davey says
November 30, 2016 at 10:08 AMNot sure where hotel bookings come into this. That is a totally separate industry and as far as I know not bound by the new legislation which is only aimed and letting agents and not any agent. Hotel bookings is not on an assured shorthold tenancy and so nothing to do with the new laws.
When we conduct a viewing we take a refundable holding deposit from the tenant before we carry out referencing. There are two circumstances when this holding deposit is not refunded. Firstly if the potential tenant gives us fraudulent information on the referencing forms. Trying to gain access to a property by deception would not be tolerated by any agent or landlord so at that point they would be deemed to have wasted our time. The other instance is if for no apparent reason the tenant pulls out. If the tenant gives legitimate information and the referencing comes back as a risk that the landlord is not prepared to take then the holding deposit is refunded. It would be the landlords choice as there are usually other ways round those situations, guarantors etc. If the tenant is accepted then the holding deposit is technically repaid although in reality it is put towards the tenants main deposit.
Whether not paying the holding deposit back to the tenant if either of the two instances mentioned crops up means we at that point are making a charge to the tenant is something we are looking into and maybe something Tessa can comment on. We at this stage do not believe it is a charge as a charge is a set amount charged for a specific item every time. We rarely have a situation where a tenant pulls out (although it has happened) and only once have come across someone who gave us fraudulent information in order to try to get the property, which incidentally was discovered by the referencing process and so we declined the tenant.
Lettings Manager says
December 2, 2016 at 12:24 AMWe used to charge the tenant nothing. When the tenant has no commitment into the proposed contract they could go round and propose to rent many dwellings. This prompted us to charge a non refundable application processing fee of about £60 per person who was to be named on the tenancy agreement.
If the landlord rejected the tenant on the basis of the results of the referencing, the results of the referencing could be used to apply for accommodation provided by another landlord with no further fees payable by that prospective tenant, and the information would be valid for 3 months.
A separate contract was created with the prospective tenant. We tried to avoid collecting say a months deposit off the prospective tenant and putting that at risk if the prospective tenant changed their mind or their circumstances changed in the meantime.
We have had prospective tenants pull out just before taking up the property because they found out their partner was unfaithful to them. We feel that a smaller application processing fee which they know is their unreserved commitment is less of a risk to them than a larger amount which would cost them dearly if their circumstances changed.
J says
December 14, 2016 at 4:56 PMYou wouldn’t believe the amount of handholding that is required for many of our elderly tenants (we specialise in retirement property). The majority do not have internet access and could not easily obtain their own references. Some cannot see, hear or write very well, or struggle to get to the post office due to lack of mobility. Some have memory loss and possibly the onset of dementia.
Have you ever tried doing a right to rent check with a 90+ year old tenant who doesn’t have a passport and who lost their birth certificate sometime during WW2?
We offer the security of long term tenancies (often Assured Tenancies) so the agreements cannot be easily created and signed electronically as they have to be a deed.
We spend a huge amount of time advising tenants and helping them, liaising with their advisors/social workers/probation officers/family etc. That’s the lucky ones who actually have a support network – many are alone and vulnerable and desperately need our advice. They’re often the people who have fallen through the gaps and have never heard of Citizens Advice or Age UK or have no clue about the benefits they may be entitled to. We often act more like social workers but we’re not a housing association.
As you can imagine this is all very labour intensive and regardless of what the law says about our role as an agent, we manage the potential conflict of interest and we charge tenants a £200 flat fee (including VAT) and I think we earn it. It is very transparent and our landlords know about it. We don’t charge anything else, not for extra tenants, pets, guarantors, renewals, inventories, check-ins, or check outs etc.
The problem is that all agents are seen as under-handed, money-grabbing, opportunists. That simply isn’t true and niche agents like ours who do a good job will struggle to adjust when the inevitable new law comes in that doesn’t take our situation in to account.