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Why letting agents should not charge fees to tenants

Tags: agent tenants

A post from The Landlord Law Blog:

Which fees are illegal?There is a big argument going on about letting Agent fees. And in particular – letting agents charging fees to tenants.

For example, there is the private members’ bill, the Renters Rights Bill, which wants to ban letting agent fees to tenants, which has had its second reading in the House of Lords.  I understand that this has little chance of getting onto the statute book right now, but it clearly expresses what many people think.

I wrote a post about agent fees to tenants here  but in that post, I was looking specifically at the legality of these fees. Not whether they were right or wrong.

It’s a difficult question.

On the whole, I am against agents fees.  But let me clear up one point first.

I’m not anti letting agents

In fact, I think good letting agents perform a valuable and important service – not just for landlords but often also for tenants. Indeed I wrote here about seven benefits of using a really good letting agent.  I have known many fantastic letting agents.

However, there is a problem. Many agents are not ‘really good’. In fact, some of them are terrible. Greedy, incompetent, even dishonest sometimes.

And the problem is that it is very difficult for the ordinary landlord or tenant (who are often unaware of the issues or the importance of such things as ARLA membership) to tell the difference between a good agent and a bad one.

Focusing on tenant fees

If we look specifically at fees charged to tenants – there is a huge difference in what is actually charged. By which I mean fees in respect of agents’ charges as opposed to things like the rent and deposit.

  • Some agents will just make a modest charge to cover the cost of referencing.
  • Others will charge tenants hundreds of pounds, not just for referencing, but also fees for ‘admin’ and tenancy agreements, plus fees for renewing the tenancy and for sending letters.

Which means that:

  • Some tenants, the lucky ones, will just pay a modest £100 or so, the deposit and their rent.
  • Others, the unlucky ones, will end up paying hundreds, maybe over the period of the tenancy, thousands of pounds in addition to their rent – which will be in respect of the agents work for that tenancy.

Who is the agent’s client?

But here’s the thing. The agents’ customer is the LANDLORD. It is the landlord who employs the agent.

So why should the tenant have to pay anything at all towards the agent’s fees?

Surely this should come out of the agent’s commission. After all, that is what the landlord is paying the agent FOR – finding a tenant and then (if there is a management contract) managing the property.

Charging tenants means that the agent gets paid twice. And sometimes they charge twice for extras too.

Double payment

Take tenancy agreements. You would have thought the cost of drafting a tenancy agreement would be included in the agent’s general admin fees, paid by their landlords – via the commission.

However, many agents charge extra, not just to their landlords but also to the tenants. Some agents are raking in combined fees of £500 or more for what is essentially a simple task – filling in the blanks of a standard document. It’s not as if they employ solicitors to draft tenancy agreements from scratch every time.

Which is outrageous – when perfectly acceptable tenancy agreements can be bought off the shelf for under a tenner (and agents can get unlimited use of my tenancy agreements service for £20 pm).

Frequently landlords are unaware of the charge to tenants.  Indeed one of the bases of the claim being brought by Leigh Day on behalf of landlords against Foxtons is this double charging without the authorisation of the landlords.

Double charging in many cases is a breach of the agents’ duty to act in good faith and not make a secret profit – a duty which is implied into all agency agreements. Unfortunately (for tenants) it is only the landlords who have a cause of action and can bring a claim. On this basis anyway.

But won’t the rent go up if tenant fees are banned?

This is the big argument that’s always raised. That it’s against tenant’s interests to object to this practice as their rent will go up.

Which of course it probably will. If agents are unable to sustain their business on the basis of the landlords’ commission payments alone, and if landlords end up paying more to their agents, then, of course, this will result in higher rents.

Rent is charged to cover the landlord’s costs of maintaining the property, the running and administrative costs, and to give him (or her) a reasonable profit – or ‘return on their investment’. Landlords renting out property are engaged in a business activity so naturally, they will want to make a profit. Otherwise, there is no point in doing it.

But why is this a problem?

Tenants are paying these fees anyway. Surely it’s better for them to pay via higher rents meaning that the payment will be spread over a long period of time? At least then they know from the start what they are paying and won’t be ‘ambushed’ by massive admin fee demands at short notice when they have committed themselves to the property (as apparently often happens).

I think if I were a tenant, I would prefer to pay just the deposit and rent, even if that rent were a bit higher than have to fork out substantial additional sums at the start of the tenancy.

Exceptions

If there is a ban on agents fees I would support an exception for the following fees:

  1. The actual cost of reference checks – normally, I understand, in the region of £15-£65
  2. Half of the cost of an inventory check.  (NB At the moment a tenancy agreement contract clause is considered fair if the landlord pays for either the check in or check out and the tenant pays for the other – but not if the tenant pays both)
  3. Fees if the tenants want to change tenants mid term or end the tenancy early

The reasons I support these exceptions are that:

  1. Paying for reference costs will discourage tenants applying for multiple properties when they know they will not pass referencing, and
  2. The inventory checkin/checkout is of benefit to tenants as well as landlords
  3. It is unfair for landlords to have to pay the additional costs which would be incurred in these circumstances

However, I suspect that if agents fees to tenants are banned – these will be included (although I think agents will still be able to make a charge to tenants for the third item as a condition of agreeing to the tenants’ request).

A more transparent system is needed

If agents are not allowed to charge tenant fees, and if all their costs are paid by the landlords, who then pass them on to rent, it is easier for tenants to assess the true cost of renting the property.

Because at present – a more expensive property might actually work out as cheaper long term if the tenant is not faced with large admin fees to find at the start. But the tenants often don’t know this until it’s too late.

Plus it is easier to absorb an overall higher charge if it is spread over 12 months – as opposed to having to find it all at the start.

Let the good agents shine

I also think (and if I am wrong no doubt they will correct me) that this would, on the whole, be good for the good agents. The ones that either don’t charge tenant fees at all or if they do, only make a modest charge.

They would be revealed as being considerably better value for their customers, the landlords. At the moment they are at a disadvantage as their less scrupulous competitors are able to appear more attractive to landlords because they get part of their income from tenants (often without landlord’s express knowledge or permission).

Conclusion

I am therefore largely on the side of those who would wish to ban tenant fees.

I suspect that this will happen eventually – although it is unlikely to be via the Renters Rights bill – unless this does considerably better than expected.

The post Why letting agents should not charge fees to tenants appeared first on The Landlord Law Blog.



This post first appeared on Home Page » The Landlord Law, please read the originial post: here

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