Of Letting Fees and Rent Controls – Landlords being pushed into a trap

Ban incoming?

A lot was made of letting agent fees in the run up to last year’s general election, and the issue is back again as the fix-all cure of the ills of private renting.

A Conservative Government would normally be the least likely to interfere in the market this way, but then again this is the same Government that stole Green Party economic policy when they introduced the restrictions on finance costs relief (aka the Tenant Tax/Turnover Tax).

The Communities and Local Government Select Committee held an inquiry into the effect of the letting fee ban in Scotland, and at the time the Government was quite clear on its position:

“I believe that the current legislation strikes a fair balance between the rights and obligations of landlords and tenants. In the past over-regulation and excessive red tape drove many landlords out of the rental market. My Department therefore has no plans to further regulate the private rented sector by banning letting agent fees in England, as this would only reduce the numbers of properties available to rent which would not help tenants or landlords.”

Brandon Lewis MP, then Minister of State for Housing & Planning

However, we have a new Prime Minister, new Ministers, and the issue has not gone away. There is currently a Private Member’s Bill in the Lords to ban the fees and loud campaigns from Shelter, Generation Rent et al for MPs to support it.

The Department for Communities and Local Government is due to undertake a review of the transparency regulations that came into force last year for letting fees, and although the Private Members’ Bill will likely fail it is not unheard of for popular causes to be folded into the Government legislative agenda.

Example: The bill to end “retaliatory evictions” was introduced by then Lib Dem MP Sarah Teather and after it failed the provisions were added to the Government’s Deregulation Act later that year.

The trouble with banning fees

The NLA’s position is clear: fees should be transparent (to landlord and tenants) and kept to a minimum. As the letting agent’s client it is quite right that landlords bear the majority of the cost, but an outright ban on tenants fees is not the answer as there can be a legitimate need to charge a prospective tenant a fee of some kind.

To the proponents of a ban, it would liberate tenants from the up-front cost of moving home which would single-handedly outweigh any negative consequences of the policy.

But love them or loath them, letting agents are a business providing a legitimate service to tenants and landlords. This service isn’t free – there are costs. With fees banned the costs will be passed solely onto the landlords and as per any business they will meet those costs by increasing what they charge the customer (i.e. the rent).

Should a prospective tenant approach an agent for accommodation, that agent will expend time and other resources in matching them to potential properties, arranging and facilitating viewings and negotiating a new tenancy. This would normally also include credit/reference checks, and the aggregate cost of this entire process can amount to several hundred pounds per prospective tenant. If that prospective tenant decided to opt out after the process is done, or isn’t found to be acceptable from the credit/reference checks, there would be no way for the agent to recoup the cost of the resources spent. This should not excuse excessive fees, or double charging, but it illustrates the importance of all parties having a stake in the process.

Agents would otherwise be compelled to package those additional costs in the arrangements with landlords. So no upfront fees, but higher longer-term rents to cover the costs. Some campaigners may call that a win but the increased rents are likely to be inflated even further to cover letting agents’ costs.

The Rent Control Trap

But further regulation of the private rented sector should not just be looked at in isolation. Over the past few years financial burdens on landlords have increased, putting upward pressure on rents, including:

  • Finance costs relief restrictions
  • Additional rate of Stamp Duty Land Tax
  • Removal of the wear & tear tax allowance
  • Cut in capital gains tax not extended to residential properties
  • Increasing number of discretionary license schemes, sometimes costing well over £1000 for a 5 year license
  • Upcoming plans for landlords to contribute up to £5000 for energy efficiency improvements
  • Rising court fees

Adding a ban on letting fees on top of this will not help improve the affordability of the rented housing in the UK.

Landlords are finding themselves in a rent control trap: caught between Government policies on one side that are forcing up rents to cover rising costs, and growing calls from opposition parties and campaigners on the other side to introduce rent controls.

Somewhat ironically, the very same campaigners calling for a ban on fees also call for action to be taken on the rising rents.

It would be funny if it wasn’t so depressing.

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