In the 2016 Autumn Statement, it was announced that upfront fees for tenants would be banned across England, and with the formal legislation due to be implemented April 2019, we take a look at how this Tenant Fee Ban will impact landlords.
Not surprisingly, there has been a lot of confusion over the last two years about how landlords would be affected given that coverage of the draft legislation has not been detailed and mainly referred to letting agents. Nonetheless, it will apply to anyone who charges fees to residential renters for administration and referencing, including landlords.
What tenant fees are banned?
The government predicts that the new law will save tenants £240 million a year in fees, which can amount to hundreds of pounds per new let. Banned fees will include:
• Referencing fees and credit checks • Check-in and check-out inventories • Deposit registration • Administration and paperwork, such as guarantor forms and tenancy agreement signing
In addition, letting agents, property management companies and landlords will not be able to enforce that additional products or services, such as insurance policies, are taken as a requirement of the tenancy. Nor will they be able to charge an inflated rent for the first month to cover income loss from tenant fees.
Are any fees exempt?
Rent and deposits will be payable as usual, although the latter will be capped at six weeks’ rent and it may be the case that only one month’s rent can be charged upfront.
Holding deposits are still acceptable, but this will also be limited to one week’s rent and there are likely to be new rules around the circumstances in which that is paid back to the tenant and when. There will be provisions in place to prevent tenants from ‘wasting time’ and submitting multiple applications, however.
Finer details around acceptable charges during a tenancy are yet to be confirmed, but it is thought that late payment fees, lost key charges and costs of unplanned repairs caused by tenant-related damage, for example, bit likely 'at cost'.
Cost implications to landlords
In reality, pre-tenancy administration is a small tangible cost for both letting agents and landlords, but can be time-consuming. Until now, some letting agents have been taking advantage of the system and not only charging extortionate fees to tenants, but also to landlords for the same service.
As a result, many lettings businesses have become accustomed to this additional revenue and will suffer when this income stream stops dead. Some may attempt to claw it back by encouraging landlords to increase rents and charging them more for management or trying to sell add-on products and services via third parties to tenants.
At a time when buy-to-let profits are already being squeezed, this could cause many landlords to increase rents to cover the additional costs, leave the market altogether or manage the properties themselves.
At Platinum Property Partners, we welcome any new legislation that makes renting easier and more cost-effective for tenants, who will ultimately have more money to spend on the right rental property. Our high-quality Houses in Multiple Occupation (HMOs) are already one of the most affordable renting options for young professionals and as most of our Franchise Partners manage their properties themselves or via an employed property manager, they only ever charge minimal fees to cover costs.
Since the Tenant Fee Ban was announced, many of our Franchise Partners have already stopped charging such fees, which covered direct costs from third parties such as tenant screening services – around £20-25 per let, which is 75% less than the average letting agents charge. Fortunately, the rental income they achieve is up to 40% more than standard single-tenancy buy-to-lets and so they can easily absorb these costs.
The knock-on effect
Increasing rents or selling up will be detrimental to supply and tenants; and becoming a DIY landlord will require buy-to-let investors to educate themselves about the rental market and increasing laws and legislation they need to comply with.
Both landlords and letting agents need to focus on streamlining their processes, while accepting that they’ll need to absorb the upfront costs involved in finding a loyal tenant, with the view that it is a long-term investment with long-term benefits.
Streamlining processes and looking at ways to digitise the pre-tenancy administration is absolutely key and adds to the service a tenant can expect from a Platinum Landlord.
The full scope of the Tenant Fee Ban is expected to be issued in the Autumn when the Bill is taken to committee stage.
