Letting Agent Fees (Tenants)

Albert Owen Excerpts

Wednesday 6th September 2017 Westminster Hall

[Sandy Martin]

The hon. Gentleman talks about the delivery of rented sector housing in the free market. Does he accept that there is a big difference between a normal market and the housing market—a market for a service of primary importance to the continuation of human life, with a massive gap between demand and supply? That has put the tenants in an impossible position vis-à-vis the agents. In any normal market, such as groceries, demand meets supply. Someone who goes into a supermarket does not get charged its advertising and transport costs on top of the price of the groceries. The customer knows what they are paying, and we need the same in the lettings market.

[Albert Owen (in the Chair)]

Order. Interventions need to be slightly shorter.

[Kevin Hollinrake]

The hon. Gentleman makes some good points. In the main I support them, though I do not agree with them all. I have made it clear that there is an issue here that we need to deal with.

I have a couple of further points on unintended consequences. It is welcome that holding deposits will remain, and that if a tenant offers false documentation, the letting agent can retain it. I wonder who adjudicates on whether that process is fair; I think it is part of the redress schemes that apply to letting agents. There are also exemptions for tenants’ actions, so that tenants can be charged if they lose keys or break a contract. Again, I believe that that is fair.

The consultation suggests limiting security deposits to one month’s rent. The difficulty with that is that a number of tenants will try to use their security deposit as their last month’s rent. We know that around 50% of tenancies end with condition issues and work required. Limiting the security deposit to only a month’s rent raises the possibility of leaving the landlord out of pocket, because it is very difficult to chase a tenant for a debt once they have left. One month may be too short a limit; we need to look at that.

We really need to consider enforcement. The consultation proposes that local authorities enforce and oversee the regulations, but we know that most local authorities simply do not have the time to do that effectively. We need proper enforcement to ensure that we deliver a level playing field for all companies, in which rogue agents cannot continue to charge while good agents do not. In a recent survey, 45% of local authorities said that they took a “reactive only” approach to regulation in the sector.

The rules will also apply to landlords who let directly to tenants. England is the only part of the UK that does not have a central register of landlords. Who will monitor landlords to ensure that letting agent fees are not simply being transferred to direct charges from landlords? Who will regulate that area? There is a chance that more landlords will self-let after the changes.

There is a simple solution: extending the redress schemes, which have been very effective in raising standards, to landlords, so that tenants who rent directly from landlords have somewhere to press a claim for unfair treatment, rather than going to their local authority. That would be a light-touch way of regulating the sector. It would also have the benefit of improving rental standards, to which the hon. Member for Ealing Central and Acton (Dr Huq) referred. Redress schemes could apply a national rental standard and oversee it to ensure that we raise standards. The Government have been proactive in raising standards, having introduced measures on smoke alarms, carbon monoxide detectors, electrical checks and client money protection.

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[Siobhain McDonagh]

I appreciate what the hon. Lady says. I imagine Bath is becoming part of Greater London as well as people make ever further attempts to be able to afford the sort of home in which they want to bring up their children. I accept that most private landlords and letting agents are good people simply doing a job, but that does not solve our housing crisis. Buying to let causes problems for young people in good jobs who simply want the opportunity that many of us had to own a home, and we have to do something about that. The problem is not bad motives on the part of people, but the fact that buy to let has an implication for the wider housing market, our wider economy and our wider society.

A homeless family turning up in Merton today will be placed in temporary accommodation in Birmingham or Burnley, away from their wider family and away from their support and their children’s schools. That cannot be right for anybody. Let us ban letting fees, but let us not believe that that will help us to resolve our housing difficulties.

[Albert Owen (in the Chair)]

I do not want to impose an official time limit, but I will call the Front Benchers at half past. Those who wish to speak have about four minutes.

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[Helen Hayes (Dulwich and West Norwood) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Owen. I commend the hon. Member for Thirsk and Malton (Kevin Hollinrake) for securing this debate and welcome his support for the ban, drawing on his extensive experience in the industry.

The UK has a housing crisis that is unprecedented since the end of the second world war. By the Government’s own admission, the housing market is broken and they are failing to repair it. The number of new homes being built in the UK is well below the 300,000 homes a year that need to be built to address the shortfall, and the number of genuinely affordable social homes being built with Government funding has atrophied, dropping by a staggering 95% since 2010.

The crisis is manifest in the thousands of people on the waiting list for a secure social tenancy and the thousands who are unable to afford to purchase a home. The number of people renting privately while they wait for a secure social tenancy or try to save to purchase a home has grown enormously in recent years, and increasing numbers of people are living in the private rented sector for the medium to long term, including 1.5 million households with children—three times the number of a decade ago.

We have a private rented sector that is entirely unfit for purpose, in which tenants pay above the odds for lower levels of security and often lower quality accommodation. Private renters spend a higher proportion of their income on rent—41% on average, compared with 19% on average for people with a mortgage—leaving many unable to save and struggling to make ends meet. The ending of a private tenancy is now the single biggest cause of new cases of homelessness. Both my local councils, Lambeth and Southwark, tell me that the number of residents seeking help from the council because their tenancy has come to an end or they face an impossible increase in their rent has gone up by hundreds of cases every year, and I see struggling tenants living in impossible circumstances in my surgeries every week.

The situation is made much worse by the introduction by the coalition Government of the local housing allowance cap, which increasingly means that almost no private sector housing is affordable to people on low-to-average incomes in central London boroughs. The pernicious right-to-rent regulations are increasing prejudice and discrimination in the private rented sector. Councils in London are now seeing people who in the past would never have needed to ask the council for help with their housing being threatened with homelessness as a result of a combination of high rents, the coalition Government’s local housing allowance cap and insecure tenancies.

We urgently need wholesale reform of the private rented sector. We need longer, more secure forms of tenure; intervention to curb spiralling rents; new requirements on the standard of accommodation to make every home fit for human habitation; and an end to the iniquitous practice of section 21 no-fault evictions. Tenants, of course, have contractual obligations to pay rent and keep their rental property in good order, but the balance of power between landlords and tenants in the UK is completely unjust. It needs to be reformed to provide security and stability for the many thousands of residents who are forced to rely on it.

In the context of the need for radical reform, the proposal to ban letting agents from charging fees to tenants is a vital first step. Those fees are presently completely unregulated, and the letting agents are chosen and appointed by landlords. The majority of the services they provide are on behalf of landlords. In the purchase of a home, estate agents—often the same agents who provide lettings services—charge only the vendor. Many tenants move every six to 12 months, so fees are not a one-off cost as they are when buying a home, but a recurring and unaffordable burden. A situation where tenants are spending more than 40% of their income on rent makes it very difficult to save, and paying hefty fees to letting agents on a regular basis is simply another blow that prevents many people from adding to their savings either for a deposit or to create a bit more financial breathing space to cope with unexpected bills.

Some concerns have been voiced by letting agents, but I am not convinced that they are supported by the evidence. The first thing to say is that there are letting agents, including at least one in my constituency, that already do not charge fees to tenants, so it is clear that a successful business model for letting agents can be achieved without the need to charge tenants. The regulation of fees should, in fact, benefit responsible and professional agents, since it is often the least scrupulous agents who charge the highest fees.

Some have argued that tenants will face higher rents as landlords seek to pass any increased costs on to them. I agree with Shelter on that point, which states that predictability beats up-front costs. Although it is to be hoped that landlords would not pass on additional costs to tenants who already pay high levels of rent, an increase of a few pounds a month is clearly preferable to having a small amount of savings obliterated every six to 12 months.

Concerns have been raised that some agents would refuse to check references, resulting in an increase in the number of tenants facing discrimination. Discrimination is already common in the private rented sector. Again, I agree with Shelter: there are better methods, most notably a tenant passport scheme, that would allow checks to be undertaken in an efficient manner and refreshed periodically—rather than taken from scratch at the start of every tenancy—and that would safeguard the interests of both tenant and landlord, while enabling letting agents to operate more efficiently. Any passporting scheme should also apply to tenants’ deposits, which should be transferable from one tenancy to the next, to reduce further the burden of up-front costs.

The Government must act urgently to address the housing crisis, to invest directly in genuinely affordable social housing and to bring forward low-cost homes for first-time buyers. For as long as they fail to do so, more and more people will be living in the private rented sector. We need urgent comprehensive reform of the private rented sector to make it fit for purpose and to address the impact of housing insecurity and homelessness on families across the country. The proposed ban on letting agents’ fees is the minimum first step in that process. I urge the Government to follow through on their commitment.

[Albert Owen (in the Chair)]

I ask Members to be a bit more disciplined. I call Derek Thomas.

[Derek Thomas (St Ives) (Con)]

Thank you, Mr Owen. I am grateful for the opportunity to speak, and I commend my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on securing this important debate.

I welcome the Government’s action. When I first became a Member of Parliament in 2015, I was amazed at the number of prospective tenants who came to see me about this issue. We surveyed all the letting agencies and my office was surprised by the sheer scale and variation of charges, so I completely welcome the opportunity to get rid of charges altogether. I have three points to raise for consideration and clarification, and I hope, Mr Owen, that they will not take too long.

First, is there the potential or a plan to cap the deposit? The deposit is often set at a month’s rent. The difficulty of finding the deposit is often the greatest barrier people face in looking for a home. However, rents vary dramatically from region to region. As a result, a deposit that relates to rent can be thousands of pounds in London and a few hundred elsewhere. If the Government plan to cap the amount of deposit that can be charged, will the Minister indicate how the figure will be established? In my view, the deposit should reflect what would be a reasonable amount to bring a property back to its former condition, rather than a typical month’s rent.

I have spoken with letting agents and tenants about what the deposit might be and how that might be regulated, and it is still necessary to have some flexibility. That is in the interest of the tenant. For example, a prospective landlord may consider allowing a pet into a property in return for a slightly increased deposit. If there is no flexibility or consideration given to accommodate a pet, a person who relies on the companionship of a dog or a cat may find it hard to secure a rental property and, as a result, be discriminated against by the cap on what deposit can be charged. I would be interested to hear the Minister’s thoughts on that issue.

Finally, consideration and clarification are needed on how changes are made during a tenancy and who pays for them. If a tenant requires a change during a tenancy, such as removing a name from a tenancy agreement, that will inevitably incur a cost. Tenants need to feel that changes to their agreement can be made easily and when necessary. We must be careful not to create further barriers for tenants and, when bringing in legislation, we need to be careful that we understand clearly who will cover the cost of changes to a tenancy.

I again commend my hon. Friend the Member for Thirsk and Malton for securing this debate. I am grateful for your patience, Mr Owen, and I look forward to the Minister’s response on how deposits will be capped and on who pays for changes during a tenancy when those changes are in the interest of the tenant.

[Albert Owen (in the Chair)]

I am grateful to the hon. Gentleman. I have not put a specific time limit on speeches, but if people keep to what we have just had from Mr Thomas, we will get everybody in.

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[Sir Henry Bellingham (North West Norfolk) (Con)]

I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on securing this debate.

Hon. Members have given very good examples of the ways in which various agents exploit tenants. The hon. Members for Mitcham and Morden (Siobhain McDonagh) and for Dulwich and West Norwood (Helen Hayes) raised some dreadful examples. I do not doubt that there is a problem in some parts of the country—particularly London and the south-east—but no tenants have complained to me or other Norfolk MPs about letting fees in Norfolk, where we have a strong private rented market. Furthermore, contrary to what the hon. Member for Dulwich and West Norwood suggested is happening in London, since 2010 there have been 600 registered housing association starts in my constituency. A significant number of new housing association houses are coming on stream, which is due to the local council being very proactive.

I have had the chance to talk to a number of local agents, who are extremely responsible, care deeply about the work they do and take great pride in the houses they let. The average application fee in my constituency is £325, and the average renewal fee is £75. That is the situation in Norfolk. I visited a firm of estate agents in King’s Lynn called Brittons, which made it clear that the ban would have an impact on its business model and would undoubtedly lead to a loss of income and jobs. It believes that the ban would have a number of unintended consequences.

We should look at the amount of work that goes into referencing. I am told that, on average, it takes up to five hours to prepare for a tenancy, as agents have to look at all the different documentation, go through the reference requests, check the credit history and liaise with external referencing companies. I had a session with a couple of the agents in Brittons, and they told me about all the work that has to be done. They pointed out that the ban is a blunt instrument, and that it is being proposed to deal with a problem in one part of the country that is not a problem in East Anglia. I therefore ask the Minister, are there no other ways forward that could be looked at? Would a cap on fees not solve the problem? What about taking referencing fees outside the scope of the action the Government are taking?

My hon. Friend the Member for Broxbourne (Mr Walker) said that the landlord should pay the fees, but the potential tenant forms a relationship and signs a contract with the agent, who then carries out the referencing work on the tenant. The tenant then has the opportunity, through the agent, of bidding for various properties. I therefore suggest that, if the onus is put on the landlord, rents will go up, so there will be unintended consequences.

I am very concerned indeed that there could be a particular problem for tenants on low incomes—for example, those who have a particularly poor credit rating or a complex credit history. If an agent takes on the task of the referencing, it takes the onus off the tenant to some extent. If the tenant clears those hurdles, they will be in the position to have their name put forward for a property.

I entirely accept that there is a problem, and the Government are right to deal with it. They are responding to a great deal of pressure from the non-governmental organisation sector and people representing tenants and other organisations, but I believe they have to be very careful indeed that they do not do something that has unintended consequences. In parts of the country with a solid, well-performing market, they must not make changes that may disrupt the market and cause major problems for small businesses, such as the ones in my constituency.

[Albert Owen (in the Chair)]

If Mr Knight and Mr Stewart can share the remaining eight minutes between them, that would be very helpful. I will then call the Scottish National party spokesperson.

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[Melanie Onn (Great Grimsby) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Owen.

I thank all hon. Members who have contributed to this important debate, which was secured by the hon. Member for Thirsk and Malton (Kevin Hollinrake). It is worth recognising the points made by my hon. Friends the Members for Dulwich and West Norwood (Helen Hayes) and for Mitcham and Morden (Siobhain McDonagh) about the specific issues faced by people in London, where supply lies at the heart of many of the challenges in the rental sector, as well as population growth and the expansion of London as a defined area. The perspective of those in the rest of the country, however, is very different, and they have a different set of challenges. In my constituency, that would be to do with security of tenancy and the quality of properties available.

Over the past few decades, the number of people renting privately has increased hugely as home ownership has declined and social housing has been sold. The 4.5 million households who rent their home privately spend far more of their income on housing than either home owners or social housing tenants, with close to half of household income on average going towards rent payments. In addition, over recent years people’s incomes have stagnated, but rents have continued to rise. Private renters also enjoy the least secure tenancies, often moving home after a year or even less. That is not the stability that is needed for bringing up a family, but 1.5 million of households in the private rented sector include children.

There are also the increasingly large numbers of people who cannot afford to buy but are not eligible for a council house. Whether we want to label them as “just about managing” or the “squeezed middle”, they are long overdue a break. As my hon. Friend the Member for Ealing Central and Acton (Dr Huq) mentioned, that is why Labour has been arguing for years that we need to ban letting agent fees. I am therefore pleased that the Government are now following our lead.

Tenants are charged hundreds of pounds a year for any of a variety of fees when renting a property. Before moving in, they can be charged for a holding deposit, a registration fee, an administration fee and a fee for a reference check. Another issue—highlighted by the hon. Member for St Ives (Derek Thomas)—arises when tenants wish to stay in their property beyond the initial length of the contract, because they can be charged a fee for renewing the tenancy. In practice, that might involve as simple a change as the date on the contract, but it can set tenants back by as much as £150. If private renters wish to move, they may have to pay an exit fee, and some even have to pay the letting agent to provide a reference for their new landlord.

For an average cost of £400 per household, private renters are receiving a service for which their landlord has already paid the letting agent. The fees charged by different letting agents vary hugely, which shows that those fees bear little or no relation to the service they supposedly buy. If one letting agent can charge only £6 for a reference check, how can other agents justify charging £300?

Letting agent fees are not only unfair, but distributed unfairly, with those on low incomes paying more than private renters on higher incomes, according to housing charity Shelter. A Shelter survey also revealed that one in four renters had to borrow or use a loan to pay the fees, while one in six was forced to spend less on heating or food.

The issue is not new, and the coalition Government legislated in 2014 to make the system more transparent. Since the requirement to publish details of the fees was introduced under the Consumer Rights Act 2015, however, 33% of letting agents have increased their fees, while only 19% have decreased them. According to Citizens Advice, agency fees have increased by 60% in the past five years—that is an enormous amount of money.

The reason that the reform made no difference was simply because it was tackling the wrong issue. The problem is not one of information asymmetry; everyone knows that the fees are bogus. The problem is that tenants are being charged for services for which landlords have already paid and, in an uncompetitive market, there is not a lot that renters can do to avoid paying.

The hon. Member for Thirsk and Malton expressed concerns discussed widely in the agency sector about what would happen were the fees to be banned. One fear is that the costs will be passed on, from agents to landlords and from landlords through to tenants, which will result in higher rents. Another possibility mentioned was that job losses could occur in the agency sector, but I simply do not believe that to be true. If we look at the examples in Scotland, where letting agent fees were banned five years ago, we see that really has not happened. Rents there have increased by 5% since 2012, but in England rents have gone up by 9%. There is no direct relation between banning letting agents’ fees and rents increasing. It is also worth mentioning that it is easy for landlords to shop around for agents, and if letting agents were to attempt to get away with charging landlords an extra £300 for reference checks, I suspect they would quickly lose an awful lot of business.

We welcome the Government finally coming around to Labour’s policy of banning letting agency fees. Had they realised in 2014 the strain that those fees put on tenants, they might not have voted to reject the amendment to the Consumer Rights Bill proposed by my hon. Friend the Member for Walthamstow (Stella Creasy) to ban letting agency fees. The average renting household has paid an extra £400 for the past three years as a result of the coalition blocking that amendment.

When the Chancellor announced the ban in his autumn statement last year, I had hoped that the Government were seeking to right the wrong urgently. Why was the Bill to ban letting fees announced in the Queen’s Speech only a draft Bill? It has been Government policy for almost a year. The Government said in the autumn statement that the ban would be implemented “as soon as possible”, following the consultation. The consultation has been completed and the policy was part of the Conservatives’ manifesto in the general election, so why the cautious step of just a draft Bill? Will the Minister at least tell us when the Government’s response to the consultation is due and when they plan to move ahead with this?

Will the Minister also explain why there is no action to encourage longer term tenancies in the draft Bill? The Conservatives’ manifesto in this year’s general election said:

“We will also improve protections for those who rent, including by looking at how we increase security for good tenants and encouraging landlords to offer longer tenancies as standard.”

However, there was no mention of that in the Queen’s Speech, when seemingly it could have been easily rolled into the Bill on letting agent fees. Has that commitment gone the way of the dementia tax, workers on company boards, the energy price cap, scrapping free school lunches, cuts to the winter fuel allowance, and the reintroduction of grammar schools and fox hunting, or do the Government remain committed to addressing the scourge of short-term tenancies?

Labour has been clear. We recognise that this is a major issue for private renters. As well as banning letting fees, we would legislate to make three-year tenancies the norm, so that private renters are no longer ripped off but able to put down roots and become a part of their local community.

[Albert Owen (in the Chair)]

Order. I call the Minister to respond to the debate, and I remind him that, if time allows, the mover of the motion may have a few minutes to conclude.