Ban on tenant fees – an urgent update for buy-to-let landlords

The Draft Tenant Fees Bill is out. Now is the time to prepare

In last year’s autumn statement, Chancellor Philip Hammond said that the government intended to ban tenants’ fees levied by letting agents. Finally, almost a year later, on November 1st 2017, the Draft Tenant Fees Bill has been published.

Now I’ve had a chance to read and digest the draft bill (what a weekend of reading that was!), I thought I’d give you an update. A condensed version of the draft bill, highlighting all the major points it contains. Some are good, some not so good. Overall, not as bad as it could have been. It appears that the government has learned from the mistakes made in Scotland, where similar legislation was introduced a couple of years ago.

Why ban tenants’ fees?

The government believes that tenant fees are a bad thing. It thinks that tenants shouldn’t have to foot the bill for landlords or agents to do things like check a tenant’s background, credit record, employment history, and rental history. And it doesn’t think that tenants should have to pay for third-party charges to do all this work, either.

Once more, it’s an attack on buy-to-let landlords… Oops, a political rant there!

Who does the Draft Tenant Fees Bill apply?

The bill affects all letting agents, property managers, and landlords in the private rented sector. However, under Clause 22, the ban will not be retrospective. So, if you have a tenancy in place for which renewal and check-out fees were payable before the ban comes into force, they will still be payable. See a little later in this post for when enforcement may begin.

What are the main points you need to know?

First, the good news: you can still charge rent and still take a tenancy deposit. And you will still be able to take a holding fee, though it may have to be returned. However, there are several fees and charges that you won’t be able to make once the ban comes into force.

Let’s look at the main points in turn:

Tenancy deposit

You can still take a tenancy deposit, and the government have backed down from their threat to limit this to four weeks’ rent. The amount of deposit you can take will now be limited to six weeks’ rent. Of course, it will still have to be held in an appropriate tenancy deposit protection scheme.

Holding deposit

If a prospective tenant wants you to hold a property for them and take it off the market, you can charge to do so. But the charge will be limited to one week and will have to be repaid to the tenant if:

  • They go ahead with the tenancy
  • You decide to pull out of the proposed tenancy

The holding deposit must be repaid within 15 days and could be used to either form part of the first month’s rent or part of the tenancy deposit.

If the tenant doesn’t have the right to rent under the Immigration Act, provides false or misleading information (when verified by vetting), or decides not to rent, you may keep the holding deposit. You may also keep the holding deposit if they don’t start renting your property within a reasonable time.

Other tenant ‘fees’ you can still charge

Some charges can still be levied on tenants. And quite right, too! For example, you can still levy late payment fees for defaults on renewal payments, and if your tenant should lose the keys to your property, you can still charge for replacement and a new lock.

When will the Tenant Fees ban start?

At this time, it’s not certain when the ban will come into force. The Bill has to pass through Parliament, and there may yet be some amendments. However, it’s been indicated that the government would like to get it into law by October 2018. This said, the wheels of law can turn slowly, and with Brexit, there are other pressing decisions to be made and laws to be passed. I wouldn’t be surprised to see enforcement delayed until the first quarter of 2019, perhaps later. So, plenty of time to prepare.

What are the penalties if you don’t comply with the Tenant Fees ban?

If you don’t comply with the ban, make a charge in error, or don’t return a holding deposit promptly, you could face fines of up to £30,000. Yes, you read that right. £30,000! You will have a right to appeal to the First-Tier Tribunal.

What are the consequences of the ban on tenants’ fees?

Whether you are a DIY landlord or operate through an investment property manager like Ezytrac, there are fees to pay when finding, vetting, and agreeing to a new tenancy. Up to now, most letting agents and landlords have charged the tenant these fees. The government has estimated that they average around £340 per tenancy.

You can’t expect good letting agents to eat the fee

This fee is essential. It covers admin and other costs. Without it, a letting agent’s profits or DIY landlord’s profits will be hit.

The government thinks that letting agents will eat the cost. We’re not convinced. We think the industry will recoup these costs by increasing fees to landlord clients. The knock-on effect, of course, will be that landlords will increase rents to make up for their extra costs. The likelihood is, therefore, that tenants will end up paying at least as much as their previous tenant fees in higher rents, and probably more.

Working with agents who don’t recoup their costs could cost you

Of course, there may be agents who waive the fee and don’t increase fees to landlords. But you would have to question how they can afford to do so. Are they cutting corners, and not vetting tenants properly, for example? If so, landlords could end up with more than their fair share of tenants from hell. Or, perhaps, such agents will cut back on their marketing spend, meaning their landlord clients have longer void periods. Either way, it doesn’t sound like good news for landlords who work with agents that don’t increase their fees to make up the government-inspired shortfall in their revenue.

Tenants could find landlords unwilling to hold a property for them

We also think that the holding fee could mean nothing, and even put tenants at risk of losing their favoured home.

Let’s say that a tenant wants to rent your property, but cannot do so for five weeks. You have the option to take a week’s rent as a holding deposit and take the property off the market or tell the tenant that you will leave it on the market without a holding deposit. If you decide the former, then the week’s holding deposit forms part of the tenant’s first month’s rent! Effectively, holding the property has cost you five weeks’ rent.

If you tell the tenant they will have to take their chances, and you find another tenant within a couple of weeks who can move in and start paying rent immediately, you start collecting rent much sooner and have a better cash flow position. And if a different tenant is not found sooner, then the first tenant can rent your property.

What should you do to prepare for the ban on tenants’ Fees?

Now that we know the direction in which we’re heading, our advice would be to start planning. Prepare for the worst (higher fees or a worse service), and hope for the best.

We’ll be consulting with landlords ourselves in due course, and will do everything in our power to keep our fees as low as possible (as we do now) without harming the service we give our clients. In the meantime, consider how much you should increase rents to make up any revenue shortfall that will be caused by the ban on tenants’ fees when it comes into force.

Contact one of the Ezytrac team today on +44  01522  503  717. We help maximise your buy-to-let profits through great investment property management, and by keeping up to date with the market.

By |2018-06-22T02:49:25+01:00December 4th, 2017|Property Management, Tenant Management|0 Comments

About the Author:

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Ezytrac. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids. Brett holds both the Level 3 Property Mark Qualifications for Property Sales and Property Lettings and Management.