Letting Agent Fees (Tenants)

Julian Knight Excerpts

Wednesday 6th September 2017 Westminster Hall

[Kevin Hollinrake]

The first-time buyer difficulty is huge. We are not debating that today—we are talking about tenants—but as I stated, we need to consider the plight of those on low incomes, and I will do that shortly.

The point is that tenants do not have a choice. This is not a free market for tenants in terms of levying fees on them. Landlords choose agents; tenants choose properties. When a tenant has chosen a property, the agent can charge them whatever they feel is the right fee. It is a completely closed market at that point. Most agents take a very responsible view of that and provide their services at fair rates, but from the research done in the consultation by the Department for Communities and Local Government, we know that there is huge variation in those charges. DCLG suggests that the average tenant fee is £318; the industry says that it is much lower. One thing that we would all agree on is that there is huge variation. DCLG says that tenant fees are between £120 and £747.

I was recently at a roundtable of letting agents discussing this issue. A high-profile London agent said that they charge a £400 tenant fee, which they justified on the basis that they provide viewings for tenants. To me, that is clearly a service they provide for their landlords. Another leading figure in the estate agency industry talked to me about his daughter, who went to college in Manchester. She rented a house with four fellow students, and they were charged £500 each as a tenant fee. That is simply unfair.

Some agents exploit this opportunity. They use it as a way to compete unfairly in the marketplace, which is not good for people who operate a fair system of charges. They use it to lower their charges to landlords, so that they attract more of them, and transfer that cost to the tenant. That cannot be right. Others use it simply to maximise profits. There is a loophole, and I welcome the Government’s action in looking to close it. I think that tenants should welcome that, as well as housing charities and Members across this House.

However, it is right that we consider the potential impacts of this change, and there are impacts and unintended consequences. First, there is the issue of rent increases. All rules and regulations have a price tag. A similar ban was introduced in Scotland in 2012. It was a kind of secondary ban, because a ban was put in place some years earlier that had not been totally effective. Having talked to agents in Scotland, I know that they had to make more efficiencies after the ban. They cut jobs and transferred some of the costs and charges to landlords, which is bound to result in higher rents. In terms of landlords and the private rented sector, the lettings market is an effective free market, and those markets do not lead to excessive profits if there is sufficient competition, which there is. Research by LSL Property Services—a property company that looked at the Scottish situation—said that there was a 4.3% increase in rents in 2013, compared with a nil increase in 2012.

The likelihood is that there will be a rise in rents, and that will disproportionately affect some tenants. Tenants who move more frequently will probably be better off; tenants who stay in properties for longer—usually tenants on lower incomes—would potentially be worse off if the fees go into rents. Overall, in their consultation, the Government recognise that this is a potential, if not desirable, outcome. The housing charity Shelter, which has been campaigning on this matter, also sees it as a potential outcome. On the forum that we held on Money Saving Expert, we asked tenants about that, and they said that the transparency of that is better than the lack of transparency and the closed market regarding tenant fees.

I see in the Gallery a number of people who are involved in the industry. The industry is very concerned about the impact on jobs and businesses. The industry position is that we should have a cap, rather than a ban, on fees. I understand that, and at one point argued for it, but the trouble with a cap is that it is a contrived device. Putting a cap in place potentially allows for a race to the top. It does not afford the opportunities of a free market, which I see as the best regulator. What charges would we allow and where would those be capped? That was one of the issues with the original Scottish scheme that was supposed to ban fees. It created a loophole that allowed other types of charges. The Government’s position is clear, and the reality is that the direction of travel is towards a complete ban.

We must consider businesses, which are hugely important. Their investment in our economy and the jobs and wealth that are created are very welcome, and we should do whatever we can to ensure that we create a fair, level playing field for business. According to Companies House, the number of letting agents in Scotland has increased since 2012, so some of the worries about businesses seeing difficulties are probably overblown. One of the leading lettings-only agents in Scotland has had no office closures since 2012.

As somebody who believes in competition, I see market failure and closed markets as protecting weak companies that do not compete on a level playing field, and that do not really work, in terms of their services and in terms of efficiencies, which businesses are so good at.

[Julian Knight (Solihull) (Con)]

My hon. Friend is making an excellent and balanced speech. He mentioned that there has been no decline in the number of letting agents in Scotland since the new regime. How does he account for that? What is the key reason why the industry has continued to prosper?

[Kevin Hollinrake]

I like to think, although I have no definitive evidence, that a dynamic market has been created. New entrants have come into the market that are willing to work harder and provide different, more efficient services. Some agents will find it difficult and there will have to be job losses, but hopefully those jobs will be transferred to new businesses that come into the market and compete. We should see this as a definite challenge, but also as an opportunity within the sector.

One of the biggest concerns is the unintended consequences, particularly for tenants on low incomes. Agents are allowed to charge tenants for very important services such as references and inventories, but in future they will not be, so the costs will be borne by the letting agent. When faced with a tenant whom we might call borderline—somebody who is on a lower income, who might fail a credit check or who is on housing benefit—the letting agent may not want to carry out a reference check, if they will not get paid for if the tenant fails it, so they may plump for a safer bet. This may result in some tenants being unable to rent the properties they seek.

--- Later in debate ---

[Mr Charles Walker (Broxbourne) (Con)]

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

There are many good landlords, but it is clear that there are some pretty shocking ones as well. It is in the interests of good landlords to get a grip and ensure that the bad landlords and letting agents are pushed or driven out of the market. It is perfectly reasonable for landlords to fund searches and referencing. I do not think that is a problem; it is a price that landlords should pay.

There is a competition out there among letting agencies for those with properties to let. So if someone goes along to a landlord and says, “We will let your property, but we will charge you £1,000 for referencing,” they will probably get short shrift. However, if they say, “This is a market. We do thorough and good referencing that will cost you £250,” the landlord is probably more likely to use that agency. Landlords will do their research, look online and see an agency has positive endorsements, but with the great internet it is possible to find the agency out there that will let their property to tenants.

I think we need to go a little further because check-in and check-out can cause problems. It is hugely important that check-in and check-out is done by an independent person. My hon. Friend mentioned that 57% of properties are self-let, which creates a problem when the owner—the landlord—checks the tenant in and checks them out. That is not an independent check-in and check-out. It is possible that some landlords allow self-interest to interfere with what is fair and just. I want to see independent check-in and check-out so that when a property is let there is certainty that the person looking at the inventory does not have a stake in the game. It would be reasonable for the landlord to fund that.

[Julian Knight]

I take my hon. Friend’s point entirely; I am greatly in sympathy with him. However, in the case of an independent landlord doing the checking in and checking out, if it is not done properly and agreed with the tenant at the time, under the tenant deposit scheme any withdrawal of money or holding back of the deposit means it becomes null and void, so there is an onus on the landlord to ensure the tenant agrees with the check-in and check-out process.

[Mr Walker]

That is a very important point. At the time, the tenant may agree with the landlord that something was damaged before they moved in, but there is no guarantee that the landlord will fix it and then in 12 or 24 months’ time—this is particularly prevalent in student accommodation at universities—try to charge the tenants again for it. Of course, the landlord is often in an economically stronger position. I welcome the fact that there is a third-party deposit scheme, but it only works properly where a letting agent is used. If the landlord is self-letting, they are not obliged to lodge the money with a third party. They keep the money, but are required to insure it with a third party. So at the end of the tenancy, the landlord still has the cash, can hold back what he or she wants and can then say, “If you want to contest it, go and contest it with my deposit.”

I have spoken to Mr Hooker, the chief executive of MyDeposits, and we have a meeting coming up. He sees the flaw in the system. If someone is self-letting, they keep the cash and simply insure against it if there is a claim against them. A lot of tenants have not got the time, the wherewithal or the understanding to challenge the deductions. We particularly see that in student accommodation. I welcome what we are doing, but we need to do more.

--- Later in debate ---

[Julian Knight (Solihull) (Con)]

I refer the House to my entry in the Register of Members’ Financial Interests. I am both a landlord and, like many in this House, a tenant. I rent out my family home, and I rent a home in my constituency.

I have scribbled out part of my speech, not just because of the time limit but because of the excellence of the speech by my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake). I agree with nearly everything he said. He took a balanced view and, drawing on his wide experience, made some very important points, which I echo.

We have all heard horror stories about letting agents’ fees. I concur with what other hon. Members said; I have experienced that in my surgery and seen the advertising when I have been looking for property, particularly in the south-east of England. Some practices are, frankly, unacceptable, but we have to remember certain things about the fees. If we transfer referencing fees on to landlords, what happens if a tenant comes back with very poor references? That means that the landlord would have multiple fees to pay. That is one unintended consequence.

There is also the unintended consequence of rents going up. My hon. Friend said that there has been an increase of 4.3% in Scotland. That is not a few pounds, as the hon. Member for Dulwich and West Norwood (Helen Hayes) and Shelter said. On a rent of £1,200 a month, 4.3% is approximately £40 a month. That is a substantial sum of money, and would affect most of all those who are in the property for the long term, rather than those who shift between properties. We have to think about that.

I agree that letting agencies can shift their models and become more innovative in the services they provide and in levying charges for things such as broken keys. There is also the potential to sell insurance and products to landlords. That is an underutilised sector, which could be expanded and could bring greater guarantees to the sector, given time.

We should not be too damning of landlords. We hear a lot of propaganda about private landlords, but the environment for landlords has become much more difficult. Small landlords who own only one, two or three properties have a less favourable tax regime than they did. Perhaps it would have been better if we had targeted interest-only mortgages, rather than all landlords who have mortgages. Perhaps a higher up-front stamp duty would have been a better, more income-generating way of producing the same result.

Landlords have had a difficult time in many respects. Quite rightly, they have had to meet new higher standards, but without landlords we would end up in a bipolar world with just social housing and large faceless corporate landlords or large property owners. That would not be ideal, and could impact the property market and the most vulnerable of tenants.