I’m going to start this article with a warning that this is one of my meatier posts. The Tenant Fee Ban is something I’ve been aware of for some time and in a sector which is becoming heavily more regulated (almost by the week it feels), the government seem to have no intention of slowing down.
For those of you who don’t know, from 1st June 2019, landlords and letting agents will no longer be able to charge admin and referencing fees to tenants. Rather staggeringly, across the industry, tenant fee income works out to be 15 – 25% of a letting agent’s turnover.
I’ve spoken with a few landlords this week who have said that some agents who manage their properties have taken the fee ban very seriously whereas others rather distressingly have buried their heads in the sand.
For the avoidance of doubt, from 1st June 2019, the following will not be chargeable:
- Administrative charges
- Credit checks
- Referencing and guarantor checks
- Inventory & checkout fees
- Renewal fees
- Mandatory insurance policy fees
It may be simpler to point out what can be charged following the ban. Other than the standard rent and deposit, the only charges which can be levied onto tenants are:
- Holding Deposits charged to take a rental property off the market will be capped at one week’s rent to be offset against the moving in monies prior to move in.
- Reasonable charges for lost keys/fobs.
- Reasonable charges for a breach of contract including late payment of rent (charged at 3% above the Bank of England base rate, chargeable only when the rent is 14 days overdue).
- A charge of no more than £50 for an alteration to an existing tenancy e.g. adding a new person onto the tenancy agreement.
Will rents rise?
One of the main schools of thought was that as a result of the Tenant Fee ban, the cost will be passed onto landlords and on the back of this, rents will rise meaning that tenants are no better off. Personally, I’m inclined to disagree with the inflated rents debate on two grounds, rental affordability and market forces. To explain, what determines the rent in an area, other than the level of demand is average earnings.
To illustrate my point, at the time of writing there are 330 properties up for rental in the Greater York area on Rightmove broken down as follows:
- 22 detached homes
- 33 semi-detached homes
- 94 terraced houses
- 171 flats/apartments
- 10 bungalows
The average rent across this sample is £800 per calendar month. According to Payscale.com, the average annual salary in York is £24,383.
As a rule of thumb, referencing agencies use income multipliers to assess a tenants’ affordability criteria of 30 x the monthly rent as an annual salary. With the average rent in York being £800 per calendar month, rents are arguably at breaking point compared with average salaries. Should landlords wish to push the rents up by even £25 per calendar month, this will, on average, take tenants over the rental affordability.
As for the market forces angle, even if all landlords unanimously decided to push rents up, this could force tenants to live in the outskirts of York City centre. The consequent lack of demand would result in said landlords having to reduce rents to ensure their investments were occupied.
Fixed term vs periodic status
The most common form of tenancy in the Private Rental Sector is an Assured Shorthold Tenancy which generally commences for a period of 6-12 months. At the end of the fixed term, the tenancy can either be renewed on a further fixed term or be allowed to lapse into a monthly rolling contract. With the impending fee ban, landlords and agents will only be able to charge 5 weeks’ as a deposit (where the annual rent does not exceed £50,000).
This will also apply to existing tenancies and means that if you’ve taken above 5 weeks’ any ‘overpayment’ will need to be returned to the tenant and the balance re-protected in the scheme, and prescribed information re-issued. I expect a vast majority of agents and landlords will allow tenancies to go into periodic status as opposed to renewing on a further fixed term to avoid the administrative and logistical nightmare.
The issue with periodic tenancies for me has always been the lack of security of longer tenure for landlords as tenants can serve one months’ notice in line with their rent due date.
Will there be an increase in rental arrears?
Whereas before agents and landlords could penalise tenants for defaulting on paying rent on time, from June, this will be capped at 3% above the BoE base rate (currently 0.75%) and tenants would need to be in at least 14 days’ worth of arrears before the fee could apply.
Prevention will be the best cure and suffice to say adequate references are conducted, any good tenants will still want to pay their rent on time to secure a positive reference on their exit.
My thoughts on the Tenant Fee Ban have always been, and remain to be, that a cap would have been better than an all-out ban, but for every problem, there is a solution. Looking on the bright side, there is likely to be a vast improvement in condition of the Private Rental Sector not just in York. With much more freedom of movement for tenants, landlords and agents will need to maintain/improve their service levels to ensure their tenants remain in their managed properties.
My advice to any landlord, as a result of what is to come, is to bear in mind that lettings has become significantly more admin heavy and legislative than from years gone by. It’s no longer a case of putting an ad in the paper, getting tenants to sign a few pieces of paper and handing over the keys. However, an agent should be able to provide demonstrable value so make sure that your agent is providing both you and your tenant nothing less than an exemplary level of service.
In all honesty, I’ve not even scratched the surface of the Tenant Fee Ban topic but if you would like clarification on any of the above or have any other queries relating to the Tenant Fee Ban, please feel free to get in touch for some free and impartial advice.