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Why agents should not attempt to circumvent the fees ban

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I’ve been touring the City the last few days and investors keep asking me, what will be the impact of a tenant fee ban?

A shock, then a rapid correction, I tell them. It might even favour good agents. That puzzles them, but investors are a bright lot and they quickly catch on. It’s what happened in Scotland in 2012, after all.

The legal position in Scotland was very different because legislation was already on the statute book, it just took the Scottish Parliament to clarify that the intended effect was a total ban.

In England (and possibly Wales) new legislation will be required and so its scope and intention are yet to be settled.

Learning from the Scottish experience

So what happened in 2012 to our Martin & Co Scottish franchisees?

Their total lettings income increased 4% in the year after the ban.

While this growth was attributable to a 5% rise in instructions, the ban only impacted on underlying income by 1% in the first year.

Set-up fees have increased – from £200 per landlord at the start of the ban to around £400 now.

Most startling was that our Scottish franchisees’ monthly management commissions increased by 11% in the first year post the ban.

Of this, over half of the growth was attributable to higher rents and the remaining growth was from franchisees winning more landlords’ instructions.

Our Scottish franchisees also reported that less reputable agents who had charged very high tenant fees and not worried about service began to close down.

It presented some opportunities to purchase portfolios (although of poor quality) and reduced competitive pressure.

Down the line it has hardened the attitude of our Scottish franchisees to discounting management commission. Most will hold firm at 10% even for multiple property instructions.

So what will happen in England?

The ‘moderate consensus’ view is that some limits or caps can be negotiated.

For agents this might be a ‘win win’ because there will be a justification to shift the fee burden towards landlords, who will in turn push for higher rents.

Yet agents will still be legally permitted to charge tenant fees, and let’s face it, we are an inventive lot when it comes to fees.

I’ve seen lost key fees, out-of-hours tenancy signing fees, sharer substitution fees, direct debit failure fees etc. All of which, my friends, are illegal in Scotland.

In Scotland, all you can charge a tenant is the rent and the deposit.

Which brings me to two clever ‘wheezes’ which we thought of in 2012, but which ultimately proved futile.

Futile attempts to get round the ban

Our referencing business The Landlord Hub (now in new ownership) was tasked with finding ways to allow our Scottish franchisees to keep earning a margin from tenants.

A ‘tenancy passport’ was based on ID checks, credit score and employment history which ‘pre-authorised’ an applicant to apply for a property up to a pre-determined rental limit. From memory it retailed at £75.

All reputable agents require this information before granting a tenancy so the passport (in theory) put Martin & Co approved applicants at the head of the queue. And because applicants purchased the passport directly from The Landlord Hub, we argued that it was not a tenant fee.

However, behind the scenes, The Landlord Hub paid our franchisee agents a commission.

In practical terms it was a dead duck.

Other agents would not recognise the validity of the passport and Scottish tenants quickly cottoned on to paying nothing.

Our second wheeze was a ‘deposit replacement warranty’ or ‘no deposit’ scheme.

The tenant did not pay any deposit at all but instead bought a warranty (like an insurance but without an underwriter involved). From memory it retailed at £150.

At the tenancy end, if there was cleaning or damage, the warranty company settled with the agent, allowing a quick re-let and no messing about with deposit arbitration. (Scotland was different on this score too but let’s not over-complicate the story.)

And you might think, that sounds like good value, but the sting in the tail was that the tenant would remain liable in full to the warranty provider and was pursued for the debt.

We trialled this scheme south of the border too and its flaws soon became apparent;

Tenants felt mis-sold as they believed that their £150 ‘policy’ afforded them some protection.

The scheme appealed to tenants who would have been financially stressed by paying a deposit. Better-off tenants preferred to pay the deposit in the ordinary way and have the benefit of independent arbitration at the end of the tenancy. As a result the scheme tended to ‘self select’ the worse risks.

Our franchisees sometimes failed to follow the procedures for making a warranty claim, leaving them and their landlord exposed for the losses.

However, the death knell was an opinion which we obtained from a Scottish QC that this was a device to circumvent the tenant fee ban, and allow our franchisees to continue charging by the back door, and in his opinion, it was illegal.

Conclusion

Standing back from the emotion, I don’t see another industry of our scale which behaves as we do. Lettings is essentially the business of supplying risk-managed tenancies to a landlord.

As agents when we conduct viewings, take up references and arrange tenancies, we do so on behalf of our landlords.

If you buy a new car you don’t expect to pay for the test drives, or for pre-delivery checks or the credit check on the finance, do you?

Given that average UK rents now approach £11,000 per annum and the average tenancy lasts 30 months, every tenancy granted is equivalent to a £33,000 car sale. In fact, it is higher, since a £33,000 Audi would at least be worth something after three years. Whereas with tenancies all the use has been extracted.

So, think hard when you complete your Government consultation questionnaire on the proposed tenant fee ban.

Maybe a complete ban would be better for good agents in the longer term?

* Ian Wilson is chief executive of The Property Franchise Group, whose brands include Martin & Co

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