The Fee Ban Is Here – So What Are The Consequences?

11th June 2019
David Gurton

Early in May, Homelet (Homepage) said that ahead of the Tenant Fee Ban introduction rents were rising.  Now that it’s here, how are things panning out?

Their monthly Rental Index analysis revealed rents were, on average, up by 2% year-on-year for new tenancies across the UK, but the South East registered the greatest upward movement of 3.2% between March 2018 and 2019.

Since 1st June, letting agents can no longer charge tenant fees so time spent on administration and referencing – plus the associated charges – must either be absorbed by agents, or passed to their clients – the landlords.

So there is a general concern that rents will continue to rise to compensate for the additional cost to landlords.  Alternatively, landlords will shut up shop and sell their buy-to-let property as and when they no longer provide a reasonable return on investment.

Relinquishing an investment property may seem drastic, but landlords have faced an onslaught of measures that have reduced their investment potential.  In an attempt to encourage owner-occupiers and suppress the buy-to-let market, the government introduced a 3% stamp duty surcharge on rental property back in April 2016.  Thus began the exodus from the sector.  More recently, subsequent cuts in mortgage interest relief and expensive to implement energy efficiency legislation was the final straw for some of the 120,000 landlords who have departed the arena in just three years1.

On the positive side, landlords who sold realised an average profit (across the UK) of £80,000 per property.

With the Tenant Fee Ban now in force there is a financial cost that must be met, in many instances by increased fees charged by agents to landlords.  Landlords will then face the difficult dilemma of either increasing rent – if feasible – or selling up.  And both of those options have the same consequence… more expense for the tenant.  If lessons of the past are anything to go by, less rental stock equals less choice and spiralling rents.

The Association of Residential Letting Agents (ARLA Propertymark) warns that the impending ban on Section 21 ‘no excuse’ evictions will just compound the problem.

David Cox, CEO of ARLA said “In order to remain profitable, landlords will increase rents to cover the additional fees they are now faced with and as a result, tenants will continue to feel the burn.”

The National Landlords Association (NLA) raises concerns that letting agents will try to cut costs wherever they can and may no longer provide client references for past tenants.  One result of this could be that landlords breach some local licensing schemes that require tenant referencing prior to them moving in.

At one minute to midnight on 31st May the government published it’s updated How to Rent Guide, which contains details of the tenant fees ban and Section 21 evictions procedure. It is important that tenants are given a copy of the updated guide to avoid problems going forward.

A knock on effect may be that letting agencies whether large – with larger overheads – or small with smaller portfolios, will lose revenue directly because of the ban, and will be driven to cut costs elsewhere by way of staffing levels.  In an ideal world agencies may not want to pass on the costs to their landlord clients, but if their bottom line is impacted they may have to be more creative and recoup their costs as best they can.

However, agencies that have always striven to provide landlords with a first-rate management service at a realistic fee will be well placed to pitch for new business from those who are unhappy with agents passing on lost tenant fees.

Latest government estimates reveal the introduction of the Tenants Fee Ban could cost landlords up to £83m and letting agents £157m a year.

1 Earlier research conducted by Hamptons.

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