The Tenant Fees Act 2019 came into effect on 1st June 2019. Like many recent governmental acts aimed at the private rental sector, this one has attracted a certain amount of controversy. In this post, we'll consider what it is, what it seeks to do, and what it means for investors and letting agents.
So What Exactly is the Tenant Fees Act 2019?
Essentially, the Act seeks to protect tenants signing up to new or renewed agreements by prohibiting letting agents from charging fees for certain services. In the past, agents might have charged tenants for services such as handling viewings and tenancy renewals, conducting credit checks and producing references at the end of their tenancies. According to some sources, the combined cost of such services could amount to around £400 per tenancy, equating to some £13 million per month across the country.
The Gov.uk website notes that: "The Tenant Fees Act bans most letting fees, and caps tenancy deposits paid by tenants in the private rented sector in England. The ban on tenant fees applies to new or renewed tenancy agreements signed on or after 1 June 2019.
"The aim of the Act is to reduce the costs that tenants can face at the outset, and throughout a tenancy. Tenants will be able to see, at a glance, what a given property will cost them in the advertised rent with no hidden costs... (The landlord) will be responsible for paying for that service, helping ensure the fees charged reflect the real economic value of the services provided and sharpen letting agents’ incentive to compete for landlords’ business."
This, then, is the officially stated aim, but even while the Act was being developed, various organisations were speaking out against it, asserting that it could have a number of unintended consequences.
Voices of Opposition
Previously, when the government has introduced new measures that raise costs for agents and landlords, an immediate counterclaim has been that at least some of the these extra costs will inevitably be passed on to tenants in the form of higher rents. However, the new Act explicitly prohibits this. BBC News notes that "the new rules prevent (landlords) from simply charging a higher rent for the first month to cover the cost." Nevertheless, it is difficult to see how such a principle could be enforced over time; whether landlords seek to recover increased costs in a single month or over a much longer period, commercial pressures make it likely that the burden will eventually be passed back to the tenant.
Speaking in an interview with the BBC, David Cox, the chief executive of ARLA Propertymark (Association of Residential Letting Agents) said:
"These costs need to be recovered and therefore, whilst this policy may sound great, really, all that is going to happen is the agents will have to pass the costs on to landlords, who will pass them on to tenants, and we’re already seeing that... This is market economics. The agent’s costs can no longer be passed to the tenant, so they will be passed to the landlord. At which point they will be passed back to the tenant... It’s really a question of cutting the pie differently, rather than actually taking out costs that tenants are going to have to pay."
Another concern is that if the legislation has the government's intended effect, letting agents could simply stop delivering those services that it deems unprofitable. Some agents have suggested that this, again, could ultimately hurt tenants. For example, if agents no longer provide referral letters, then it's possible that a tenant seeking to move elsewhere could encounter a number of obstacles and delays when seeking to sign a new rental agreement.
Richard Lambert, chief executive of the National Landlords Association has acknowledged this risk, noting that "letting agents are looking at any way they can limit what they have to do on behalf of tenants, now that the costs cannot be directly recovered.
"Just like private landlords, letting agency businesses are being put under increasing pressure by government regulation. However, they must realise that penalising outgoing tenants by refusing to provide references will ultimately cost them more than just the price of a reference - as landlords opt to do without agents altogether."
Various organisations have set out a range of arguments, but the facts is that the Tenants Act is now law. It only remains to be seen what the implications are in practice. For landlords, the immediate challenge is to be clear about what the Act means, and to adhere to its requirements.
What Is Still Chargeable?
According to government guidance, the only payments that landlords or letting agents can charge to tenants signing new contracts are as follows:
- A refundable tenancy deposit, capped at no more than 5 weeks’ rent (where the total annual rent is less than £50,000, or 6 weeks’ rent where the total annual rent is £50,000 or above)
- A refundable holding deposit - to reserve a property (capped at no more than 1 week’s rent)
- Payments associated with early termination of the tenancy, when requested by the tenant
- Payments in respect of utilities, communication services, TV licence and Council Tax
- A default fee for late payment of rent and replacement of a lost key/security device giving access to the housing, where required under a tenancy agreement
Anything else - from gardening service fees to time spent on general administration - cannot be charged. Any landlord holding a 'prohibited payment' will be ineligible to serve a Section 21 notice until it has been repaid to the tenant. Fines may be charged by local authorities to any landlord who breaches these regulations.
Landlords who are members of the RLA can refer to the organisation's website, where it offers guidance on the new regulations, updated tenancy agreement forms and an online deposit calculator tool.
As the NLA has warned, the new regulations could potentially strain relationships between landlords and those letting agents that seek to cut back on the services they offer. However, this need not necessarily be the case. There has always been a symbiotic relationship between landlords and lettings agents, with each supporting the other, so the new market conditions should favour those that work most effectively and productively together.
It is clearly in no one's interests that tenant-vetting is abandoned, or that the changeover process between tenants becomes chaotic. Both landlord and letting agent rely on reliable, regular-paying tenants, and both must work well together to ensure that they continue to attract a steady supply of appropriate customers.
Likewise, there will always be customer demand for good, professional advice when seeking a new rental property, and landlords will always want to work with the most dependable and effective agents. Consequently, those letting agents that already offer a fair and reputable service should find themselves capturing an increasing share of the market.
The regulations described above apply only in England. Similar requirements are expected to be introduced in Wales in September of this year, when the Renting Homes (Fees etc.) (Wales) Act 2019comes into force.
If you have questions about how the Tenant Fees Act 2019 might affect your plans for investment, please call our advisory team on 01244 343 355.