Tenant Fees Bill

Lord Best Excerpts

2nd reading (Hansard): House of Lords
Wednesday 10th October 2018 Lords Chamber

[Lord Best (CB)]

My Lords, I am very pleased to follow the noble Baroness, Lady Hayter, who has done such great work in this field. I declare my interests in lettings and letting agents: my wife and I own rental property, managed by a reputable firm of letting agents; for eight years, until last year, I chaired the council of the Property Ombudsman, which handles complaints about property agents; I am a vice-president of the Chartered Trading Standards Institute, which has enforcement powers for property agents, and of the Local Government Association. I co-chair the Home Office’s right to rent consultative panel and have recently been very pleased to accept an invitation from the Minister for Housing and Homelessness, as mentioned by the Minister today, to chair a working group to advise government on the regulation of property agents. In these various capacities, I greatly welcome this Bill and a number of other welcome measures where legislation is needed to catch up with the phenomenon of the extraordinary growth of the private rented sector.

At later stages, we will no doubt consider some of the Bill’s finer points of detail—as highlighted by Shelter, Citizens Advice, Generation Rent, the LGA and others—and there may be some modest amendments to the Bill which we can pursue, but in this Second Reading debate I will stick to the big picture and the reasons why this legislation is definitely good news. In the light of some criticism of the Bill in the other place, I want to address two broad questions: first, what exactly is the market failure here? We pay fees for many services and we shop around for the best deal, so what is so different about letting agents charging fees to tenants? Secondly, will a ban on fees overcome the alleged market failure, or could it have unfortunate side-effects?

A spin-off from the astonishing growth of the PRS, which now numbers some 2.3 million landlords, is the growth in the lettings industry. Many firms provide an excellent service to both landlords and tenants, but the rapid expansion of the sector has also meant a proliferation of unregulated new letting agents, often with no qualifications or training. In order to secure a share of the market, agents need to attract local landlords, and a way to do this is by undercutting the fees charged to landlords by rival firms. This may sound like healthy competition and good news for landlords. However, it has changed the basis on which private sector lettings are handled. In order to make their profits, despite cutting fees to landlords, many agents have charged the tenant instead. The trouble is that, unlike landlords, tenants cannot shop around for another agent; they must go through the agent chosen by the landlord if they want to have the house or flat, and then they must pay any extra fees which that agent demands.

We will all have our stories of tenants with no option but to pay rip-off fees to agents alongside big deposits and many weeks’ rent in advance. This can lead to tenants borrowing the money needed, incurring expensive credit card debts or, worse, having to go to loan sharks. In securing references, credit checks and right-to-rent checks, a letting agent is acting for the landlord. The agent cannot simultaneously act for the tenant. My intern showed me the list of agent fees for her flat: each of the three sharers had to pay £275 up front to the agent: a total tenant letting fee of £825 for the agent on top of the fees charged by that agent to the landlord. When she moved out and her sister took her place after a few months, the agent required £250 for early termination from her and another £275 from her sister: total fees of £525 for the most minimal input by the agent and not a day’s rent lost, but the tenants—the consumers in these circumstances—cannot exercise any choice in the matter.

The problem here goes deeper. If the agent’s profits depend on charging fees to incoming tenants, the agent is incentivised to bring in new tenants as often as possible, rather than to encourage the landlord to grant longer tenancies or to renew tenancies. This creates insecurity and disruption to the lives of tenants, who are forced to keep moving around and paying more fees when short, fixed-term tenancies end, and the ending of tenancies is now the most common precursor to homelessness. Yet, while high turnover may be good for agents, it is most unlikely to be in the best interests of landlords. Every changeover costs them money in lost rent, redecorating and so on. Banning the charging of tenant fees, as envisaged by this Bill would, therefore, be helpful for landlords as well as for tenants by removing this trigger for some agents to act against the interests of their landlord clients.

I turn to my second question: could a ban have downsides or untoward consequences? It is said that, if agents can no longer extract fees from tenants, they will have to charge more to landlords, and landlords in turn will then instruct agents to raise rents. I have several responses to that. First, rents are set by the market, not the whim of landlords or agents. The experience in Scotland when a ban on fees was imposed was for rents to rise by no more than in the rest of the UK. Secondly, not all landlords use agents to manage their properties; perhaps only 40% pay for a full management service, so a ban would by no means affect all landlords, and the market for rents is made by the whole sector. Thirdly, some reputable agents charge tenants only nominal fees so they will be able to absorb the loss of these without noticeably increasing their charges to landlords. Fourthly, some landlords will gain financially from greater stability in their lettings once there is no incentive for agents to move tenants on, so they will be better off even if management fees rise. Finally, if rents rise—by £2 per week, for example, according to one guesstimate—it could still be better for tenants since they would be spared the up-front charges that they must currently find, often by borrowing on expensive terms. One other effect of the ban is certainly likely to emerge: a number of the here-today-gone-tomorrow letting agents that have appeared on our high streets are likely to go out of business. Those that make their money mostly from tenant fees will not survive. Frankly, that is no bad thing.

I conclude that the Bill’s provisions are very necessary to correct an inherent market failure and that the dangers of untoward, unintended consequences are negligible. When we move to the details of the Bill there may be more to say about enforcement of the legislation, although I know the Ministry of Housing, Communities and Local Government has worked very hard to close loopholes and prevent avoidance and evasion of the new measures. At this stage, I warmly welcome the intent and the content of the Bill. I applaud the noble Baroness, Lady Grender, for first raising the matter in your Lordships’ House, and I congratulate the Secretary of State and his housing Ministers on bringing it forward.

Tenant Fees Bill

Lord Best Excerpts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 20th November 2018 Lords Chamber

[The Earl of Lytton (CB)]

My Lords, I rise to speak to Amendment 29. I entirely understand the points made by the noble Baroness, Lady Grender. A number of individuals collectively forming “tenant” particularly occurs in London and other metropolitan areas. Those of us who inhabit the countryside tend to have single tenants in a building, rather than a system of sharing.

I have absolutely no problem with the idea of ensuring that landlords are not overcharging beyond reasonable cost. My concern is that this is beginning to look like micromanagement of the letting process. The question is, “reasonable” by whose standards? For instance, a group of tenants—perhaps four of them—decides to take on a property on a two-year term. Let us suppose they collectively decide that they want to finish the tenancy after one year and want to move out in the run-up to Christmas, which is known to be a difficult time for the letting market because things tend not to get going again until into the new year. By whose standards would “reasonableness” be measured? Would it be by reference to the tenants, who, after all, have agreed to take on the property on a two-year basis and wish to terminate after one year; or by reference to the reasonable costs the landlord would run up in that process? All sorts of things hang on that—for example, rent voids and running costs such as heating and security while the place is unoccupied, were that to happen.

I appreciate that things get more difficult when you have a number of tenants and one wants to go, because that creates a dynamic which, as the noble Baroness rightly said—and has said previously—affects the other occupants. It would be really undesirable if landlords responded by simply deciding not to agree to early termination. That would be the worst of all possible worlds. As a private sector landlord, I have never used that other than when someone wants to terminate at short notice and before the property can reasonably be re-let. That tends not to happen in the high-pressure circumstances of inner-London shared residential, but with a freestanding property in the countryside, where things are quite different. The Bill will apply across the nation.

I counsel a little caution here, and perhaps the Minister would care to comment. If the culture creeps in whereby no early termination of a lease is possible or will be agreed, we will be back here later with another measure to say that landlords must provide that facility. I do not see this as necessarily being the endpoint, and I should like to tease out that issue to give some closure on what we are doing with residential landlord and tenant. Hopefully, the situation can stabilise so that everyone will know where they are for, at any rate, the reasonably foreseeable future.

[Lord Best (CB)]

My Lords, it is worth underlining that this part of the Bill is an important measure to prevent what is a pretty common abuse, which is, when there is a change of tenancy, at little or no cost to the landlord, the agents involved making serious amounts of money, which the Bill would prevent them doing in future.

At Second Reading, I cited an illustration from my last intern, whose sister was taking her place in a flat share of three. Each of them, on entering the flat, needed to pay the agent a fee of £275 for the privilege of signing up. When one of the occupiers left and was replaced by her sister, the outgoing one was charged £250 for termination of the tenancy agreement and her sister, who was moving in on the same day with her packed suitcase, was charged £275 as a new tenant. The agents got £525 for this transfer from one sister to another. The landlord received exactly the same amount of rent, because there was no discontinuity in the rent paid.

In such circumstances, paying £50 as a takeover fee for the privilege of signing a photocopied document when one person moves in in place of another sounds quite enough. The guidance may be the best place to put this, but the test must be whether the landlord has suffered a loss of rent. If there is no such loss, surely the £50 should kick in as the maximum which the agents can take. One can understand the need to compensate if there has been a loss of rent because of a gap when one tenant has moved out and no new one has arrived. Otherwise, £50 sounds like a maximum not a floor.

[Lord Young of Cookham (Con)]

My Lords, I am grateful to all noble Lords who have taken part in this short debate relating to the charges that can be imposed for variation, assignment, novation or termination of a tenancy where these are requested by the tenant. We have previously set out that it is not fair to ask landlords and agents to pay reasonable fees where these arise from the action or request of a tenant. Following pre-legislative scrutiny, we clarified that both early termination and change of sharer costs were permitted, so long as these were fair. As a result, the Bill provides that a landlord or agent can charge a tenant in these circumstances, but such fees are capped at £50—one-tenth of the fee charged in the case cited by the noble Lord, Lord Best—or reasonably incurred costs if higher.

Amendments 27 and 28 seek to impose a hard cap on the amount that can be charged and to prohibit this charge in relation to a change of sharer. When considering how to manage these amendments, we share the caution mentioned by the noble Earl, Lord Lytton. We want to ensure that landlords and tenants can agree reasonable requests to vary a tenancy. Although we do not expect this charge to exceed £50, it is only fair that, where it does so, landlords and agents are able to recover their reasonably incurred costs. For example, if a landlord is required to undertake a search, conduct reference checks and amend tenancy deposit protection arrangements for a new tenant with no help whatever from the outgoing tenant, those costs may be higher than normal. Landlords and agents will need to be able to demonstrate, if challenged, that their costs are reasonable. They will have to justify them and, if they cannot do so, trading standards officers may have a case to investigate.

Crucially—this point was mentioned by the noble Earl, Lord Lytton—we do not want to create a situation where landlords are reluctant to agree to a change of sharer because they do not believe they can recover their reasonable, justifiable costs. This would not help tenants, who would be required to break their contract if they wanted to leave, nor would it help those hoping to move in to replace the sharer moving out. This matter was discussed during pre-legislative scrutiny and tenant representative bodies recognised the need for the ability to charge in such circumstances, provided that the risk of abuse was mitigated, which we have done by imposing a cap of £50 and requiring any additional costs to be reasonable. In its report, the Housing, Communities and Local Government Committee said that:

“We welcome the Government’s intention to clarify the legislation and to permit charges related to a change of sharer where these are requested by the tenant”.


Amendments 29 and 30 would place an obligation on the landlord to take reasonable steps to re-let the property where they have agreed to terminate a tenancy early. These amendments would also limit the loss a landlord can recover to the period reasonably required to find a new tenant, even if he was unable to find one.

An assured shorthold tenancy is a contract where a tenant commits to pay the landlord rent for a given period of time, the fixed term. The landlord is entitled to the rent for the entirety of that term. If the tenant seeks to leave the tenancy before the end of it, then they would need to seek agreement of the landlord to do so. Where possible, landlords should agree to this, and can ask the existing tenant to find a suitable replacement. We encourage them to do so through our guidance.

Turning to the amendment introduced by the noble Baroness, Lady Grender, paragraph 6(2) of Schedule 1 says:

“But if the amount of the payment exceeds the loss suffered by the landlord as a result of the termination of the tenancy, the amount of the excess is a prohibited payment”.


In other words, the landlord can only recover any loss they incur in permitting a tenant to leave early. They cannot double-charge for the same period of time. They are entitled to recover only the sum of any rental payments which would not be met by the start of a new tenancy. If a replacement tenant is found and there are no void periods, we would expect no early termination charge to be levied to the outgoing tenant. This has been reiterated in the consumer guidance for tenants and landlords, and we welcome the constructive comments made by the noble Baroness on our draft guidance.

However, looking at the amendment, we cannot necessarily expect landlords to know how long would reasonably be required to find a replacement tenant. This depends on several factors, including the rental market in the local area. Therefore, we expect landlords and tenants to consider on a case-by-case basis the likely void period and any reasonable charge for early termination. Again, we do not want to harm tenants by disincentivising landlords agreeing to a reasonable request to end a tenancy early or to a variation of a tenancy. That is not what this Bill is seeking to achieve, but there is a real risk of this if the amendments are agreed to. On that basis, I hope that the noble Baroness will withdraw her amendment.

--- Later in debate ---

[Lord Best]

My Lords, I take an opposing view. I am sad to do so on the noble Baroness’s amendment, since she does so much good work in this sector. I declare my interest as a co-chair of the Home Office’s right to rent consultative panel, which looks at the right to rent that people require before taking up a letting.

For sure, somebody has to pay for the identity and immigration status check which now has to happen. The question is whether tenants should pay the agent for this—they would do so whether British citizens or not—or whether the landlord should ultimately expect to pay, getting their agent to do it on their behalf. It is one of the functions of an agent to check whether the tenant is an illegal immigrant or has the right to be in this country. That task is for an agent to perform, just as they need to make sure that the landlord’s property has a gas safety certificate or an energy performance certificate. This is part of the process that an agent is paid for. There is a fundamental principle that the landlord is ultimately responsible for the letting, along with the agent who acts for that landlord, and they and not the tenant should be the ones who pay. In the same way, the tenant does not have to pay for their own reference—that is something that the agent takes up. This is part of the process taken on by an agent and it justifies the fees that agents charge their landlords. What else do we want agents to do but look after the landlord’s interests in cases of this kind?

Therefore, I think that the Government have this right. This is not an area where the tenant should be asked to make a supplementary payment to the agent, and the agent may well charge the landlord a good deal already. As the Bill spells out, it is a matter on which no fee should be payable by the tenant.