How Will the Letting Fees Ban Impact Landlords?

Come June 1st, the lettings landscape is changing. The long-awaited Tenant Fees Act that began in 2017 comes into force and landlords and lettings agents will no longer be able to charge for a range of services.

The Act is undoubtedly designed to make renting cheaper, with tenants expected to save around £272 on average. So, great news for tenants, but what about their landlords?

In this article, we’ll explore the Tenant Fees Act in more detail, as well as look at the impact it could have on landlords.

Where Did It All Begin?

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The idea of a new tenants bill first reared its head in April 2017, when the Government launched an eight-week consultation and gathered 4,274 views and details on how a potential ban could be introduced.

This consultation was, to many, long overdue, with fees rising in London to an average of £404 for a two-person household and similarly across the country. Critics pointed to credit checks that benefited landlords but where charged to tenants, often at more than £50 for a typically short and simple task.

While the resulting bill was slow to make its way through parliament, with much of the time and focus directed to Brexit, it was, never the less, given Royal Assent and passed into law as the Tenant Fees Act 2019 on 12th February.

What Does the Act Say?

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The Act can be read in full here, but below are some of the key measures imposed.

  • Landlords and lettings agents will be banned from charging tenants for credit checks, inventories and references.
  • The security deposit a tenant pays should not be more than the equivalent of five weeks’ rent. However, if the annual rent is more than £50,000, deposits should not exceed six weeks’ rent.
  • Holding deposits are still legal but should be no more than one weeks’ rent.
  • The amount landlords and letting agents can charge to can a tenancy is capped at £50 unless it can be shown that greater costs were incurred.
  • For each fee that is charged unlawfully, a fine of £5,000 can be imposed, along with a criminal offence when a person has, for the same offence, been convicted or fined in the last five years.
  • Financial penalties up to £30,000 can be issued as an alternative to prosecution.
  • Trading Standards will help tenants recover fees charged unlawfully via the First-tier Tribunal and enforce the ban.

Alongside the obvious charges for rent and deposits, agents and landlords will also be permitted to charge tenants fees for:

  • The early termination or change of a tenancy when requested by the tenant.
  • Utilities, communication services and Council Tax.
  • Payment of damages where the tenant has breached terms in their tenancy agreement
  • Payments arising from a default by the tenant where they have had to replace keys or a respective security device, or a charge for late rent payment.

The changes coming into force will only apply to new tenants or renewals, so landlords who have already charged fees do not have to be worried about retrospective fines.

However, any clauses in existing tenancy contracts that layout fees that will become unlawful will become void from June 2020.

How Could Landlords Be Impacted?

Unsurprisingly, the news of the Tenant Fees Act was met with scepticism and concern from landlords for a number of reasons, including:

Increased Letting Agent Costs

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Many letting agents have built a business on a model that relies heavily on tenant fees. As such, these fees account for around 19% of a letting agent’s income and, presumably, this will need to be recovered from somewhere.

One possible outcome is that letting agents will increase the prices of services they offer landlords for property management. This, in turn, could lead to landlords increasing rents for their tenants.

However, this is no guarantee, as Lisa Simon, Head of Residential at Carter Jonas, points out: “The general consensus among landlords now is that market performance will help balance their books and, although they may not see a rise in profits for the first year, they’re not likely to experience a fall either.

“Ultimately, should rents continue to rise, these diverted fees will have a smaller impact on a landlord’s income year on year.”

If landlords do choose to increase their rents this may have the knock-on effect of increasing void times as well.

More Independent Landlords

If letting agents do increase their fees, one option many landlords may take is the management of their properties themselves. This is one option, but the new ban on fees is evidence itself of how much the buy-to-let market can change.

Using a letting agent provides the benefit of landlords not having to stay up to date with legislation, so moving away from one could result in an unforgiving learning curve.

Moving Out of the Market

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For landlords who are already struggling to balance the books, the prospect of increased letting agent fees or the longer void times expected when raising rents could result in the choice to move out of the market altogether.

Limited Improvements

If landlords do begin to feel cash strapped, one of the first things that could fall by the wayside is any budget for improvements to your property.

This could cause landlords to struggle to make the enhancements they need to reach tenant pools willing to take on larger rents.

Greater Reliance on Digital

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The old fashioned paper approach to tenant admin served letting agents well when they were able to charge, but now that this revenue stream is gone a new focus will be trained on digital.

Digitising elements such as tenancy agreements will allow greater efficiency and appeal to a more tech-savvy generation, both of which are important in minimising the impact of the Tenant Fees Act.

Conclusion

There’s no doubt that the Tenant Fees Act 2019 will have an impact on landlords, but it is important to remember that while the Act has been given Royal Assent, we do not yet have all the information.

The Government is expected to publish further information for lettings agents and landlords to help them make the transition to the new laws.

In short, the full impact of the Act will not be seen until it is implemented. To finish on an optimistic note, though, some experts are predicting growth in the rental market will be enough to absorb any extra costs landlords face, so doom and gloom is by no means a foregone conclusion.