Tenant Fees Bill - Second Reading

Part of the debate – in the House of Lords at 4:38 pm on 10th October 2018.

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Photo of Lord Best Lord Best Crossbench 4:38 pm, 10th October 2018

My Lords, I am very pleased to follow the noble Baroness, Lady Hayter, who has done such great work in this field. I declare my interests in lettings and letting agents: my wife and I own rental property, managed by a reputable firm of letting agents; for eight years, until last year, I chaired the council of the Property Ombudsman, which handles complaints about property agents; I am a vice-president of the Chartered Trading Standards Institute, which has enforcement powers for property agents, and of the Local Government Association. I co-chair the Home Office’s right to rent consultative panel and have recently been very pleased to accept an invitation from the Minister for Housing and Homelessness, as mentioned by the Minister today, to chair a working group to advise government on the regulation of property agents. In these various capacities, I greatly welcome this Bill and a number of other welcome measures where legislation is needed to catch up with the phenomenon of the extraordinary growth of the private rented sector.

At later stages, we will no doubt consider some of the Bill’s finer points of detail—as highlighted by Shelter, Citizens Advice, Generation Rent, the LGA and others—and there may be some modest amendments to the Bill which we can pursue, but in this Second Reading debate I will stick to the big picture and the reasons why this legislation is definitely good news. In the light of some criticism of the Bill in the other place, I want to address two broad questions: first, what exactly is the market failure here? We pay fees for many services and we shop around for the best deal, so what is so different about letting agents charging fees to tenants? Secondly, will a ban on fees overcome the alleged market failure, or could it have unfortunate side-effects?

A spin-off from the astonishing growth of the PRS, which now numbers some 2.3 million landlords, is the growth in the lettings industry. Many firms provide an excellent service to both landlords and tenants, but the rapid expansion of the sector has also meant a proliferation of unregulated new letting agents, often with no qualifications or training. In order to secure a share of the market, agents need to attract local landlords, and a way to do this is by undercutting the fees charged to landlords by rival firms. This may sound like healthy competition and good news for landlords. However, it has changed the basis on which private sector lettings are handled. In order to make their profits, despite cutting fees to landlords, many agents have charged the tenant instead. The trouble is that, unlike landlords, tenants cannot shop around for another agent; they must go through the agent chosen by the landlord if they want to have the house or flat, and then they must pay any extra fees which that agent demands.

We will all have our stories of tenants with no option but to pay rip-off fees to agents alongside big deposits and many weeks’ rent in advance. This can lead to tenants borrowing the money needed, incurring expensive credit card debts or, worse, having to go to loan sharks. In securing references, credit checks and right-to-rent checks, a letting agent is acting for the landlord. The agent cannot simultaneously act for the tenant. My intern showed me the list of agent fees for her flat: each of the three sharers had to pay £275 up front to the agent: a total tenant letting fee of £825 for the agent on top of the fees charged by that agent to the landlord. When she moved out and her sister took her place after a few months, the agent required £250 for early termination from her and another £275 from her sister: total fees of £525 for the most minimal input by the agent and not a day’s rent lost, but the tenants—the consumers in these circumstances—cannot exercise any choice in the matter.

The problem here goes deeper. If the agent’s profits depend on charging fees to incoming tenants, the agent is incentivised to bring in new tenants as often as possible, rather than to encourage the landlord to grant longer tenancies or to renew tenancies. This creates insecurity and disruption to the lives of tenants, who are forced to keep moving around and paying more fees when short, fixed-term tenancies end, and the ending of tenancies is now the most common precursor to homelessness. Yet, while high turnover may be good for agents, it is most unlikely to be in the best interests of landlords. Every changeover costs them money in lost rent, redecorating and so on. Banning the charging of tenant fees, as envisaged by this Bill would, therefore, be helpful for landlords as well as for tenants by removing this trigger for some agents to act against the interests of their landlord clients.

I turn to my second question: could a ban have downsides or untoward consequences? It is said that, if agents can no longer extract fees from tenants, they will have to charge more to landlords, and landlords in turn will then instruct agents to raise rents. I have several responses to that. First, rents are set by the market, not the whim of landlords or agents. The experience in Scotland when a ban on fees was imposed was for rents to rise by no more than in the rest of the UK. Secondly, not all landlords use agents to manage their properties; perhaps only 40% pay for a full management service, so a ban would by no means affect all landlords, and the market for rents is made by the whole sector. Thirdly, some reputable agents charge tenants only nominal fees so will be able to absorb the loss of these without noticeably increasing their charges to landlords. Fourthly, some landlords will gain financially from greater stability in their lettings once there is no incentive for agents to move tenants on, so will be better off even if management fees rise. Finally, if rents rise—by £2 per week, for example, according to one guesstimate—it could still be better for tenants since they would be spared the up-front charges that they must currently find, often by borrowing on expensive terms. One other effect of the ban is certainly likely to emerge: a number of the here-today-gone-tomorrow letting agents that have appeared on our high streets are likely to go out of business. Those that make their money mostly from tenant fees will not survive. Frankly, that is no bad thing.

I conclude that the Bill’s provisions are very necessary to correct an inherent market failure and that the dangers of untoward, unintended consequences are negligible. When we move to the details of the Bill there may be more to say about enforcement of the legislation, although I know the Ministry of Housing, Communities and Local Government has worked very hard to close loopholes and prevent avoidance and evasion of the new measures. At this stage, I warmly welcome the intent and the content of the Bill. I applaud the noble Baroness, Lady Grender, for first raising the matter in your Lordships’ House, and I congratulate the Secretary of State and his housing Ministers on bringing it forward.