Written evidence submitted by the Department for Communities and Local Government [DTF 044]

Introduction

1.     The Government wants a private rented sector that provides fairness, security and stability for tenants and landlords and is keen to see all tenants receiving a good and affordable service. We continue to promote competition as the best driver of value and service. However, the Government is prepared to act where markets are not working for all consumers, and the lettings market is a clear example of this since tenants have limited power to negotiate or opt-out of the letting fees charged.

2.     The Government intends to ban letting fees to make renting in the private sector fairer and more affordable for millions of tenants. We published the draft Tenant Fees Bill on 1 November 2017 to set out our implementation approach. The Bill reflects feedback from the recent public consultation.

3.     We firmly believe that the Bill will achieve its objective of delivering a fairer, more competitive, and more affordable lettings market where tenants have greater clarity and control over what they will pay and where the landlord is the primary customer of the letting agent. Implementation is subject to Parliamentary timetables but will not be before Spring 2019.

Policy background and objectives

4.     Letting agent fees are also not always clearly or consistently explained with the result that many tenants are unaware of the true costs of renting a property. The competitive pressure on tenant fees is very weak as agents are chosen by landlords. Letting agents can therefore impose unfair or excessive fees because tenants have a very limited ability to negotiate or opt-out. This restricts movement in the private rented sector and reduces affordability.

5.     Renters pay an average of £200-£300 in letting agent fees per tenancy. In the recent consultation on banning letting fees paid by tenants, agent responses suggested that the average fee charged at the start of a tenancy is £238 per tenant, whilst tenants said it is £327. However, many pay significantly more than this with some tenants responding to the Government’s consultation saying that they had paid over £1,000. The Government response document is at Annex A for reference.

6.     Understandably, many households struggle to pay these fees. Responding to the Government’s consultation,  69% of tenants reported that letting agent fees have affected their ability to move to a new rented property and 85% reported that letting agent fees have affected a decision in the past to use an agent.

7.     Fees are not a one-off cost for tenants. Given that the majority of tenancies are granted for between six and twelve months initially, tenants can expect to pay letting fees regularly either to secure a new tenancy or renew an existing one. These repeated and often significant charges can have a real and detrimental impact on individual finances, particularly for those tenants on low to middle income. The end of an assured shorthold tenancy is now the leading cause of homelessness in England.

8.     Government intervention in the form of a ban on letting fees to tenants is necessary to reflect that the primary customer of an agent is the landlord, to prevent agents from exploiting their position as an intermediary between the tenant and landlord and to increase transparency and affordability in the lettings sector to the benefit of all consumers. Tenants will only be required to pay their rent and capped deposit when securing a property.

9.     Landlords will choose the agent that provides the quality of service that they are seeking at a price that they are willing to pay. Banning letting fees will sharpen and increase letting agents’ incentives to compete for landlords’ business, resulting in a more transparent and competitive private rented market with a higher quality of service.

10. The ban will make renting fairer for tenants by enabling them to see what a given property will cost them in the advertised rent level without any additional hidden costs. This will result in clearer choices available to tenants over what they will pay, improving transparency and affordability as well as facilitating better movement into and around the private rented sector. Tenants will have confidence that they are only committing to a property that they know that they can afford.

Government Consultation

11. On 7 April 2017, the Government launched an eight week consultation seeking views on the detail of how a ban should be introduced. The consultation closed on 2 June and 4,724 responses were received from a range of individuals and representative bodies. 50% of responses were from tenants, 32% were from letting agents, 10% were from landlords and 8% were from other interested stakeholders. We are very grateful to everyone who took the time to respond. The Government’s consultation response summarises the comments received and how this has informed the Tenant Fees Bill.

12. The Tenant Fees Bill reflects feedback from the recent public consultation. More than 9 out of 10 tenants who responded to the Government consultation backed the action to ban letting fees.

Overview of the Tenant Fees Bill Provisions

Scope of the Bill

13. The bill applies in relation to Assured Shorthold Tenancies (ASTs) and licenses to occupy in the private rented sector (i.e. rented housing that is not social housing). ASTs cover the vast majority of tenancies in the private rented sector. The ban will also cover licensees to ensure that lodgers and tenants of houses in multiple occupation cannot be charged fees.

Banned Fees and Exemptions

14. The ban will prevent landlords and their agents from:

1. Requiring tenants and licensees in the private rented sector to make any payments as a condition of granting, renewing or continuing a tenancy (or of arranging for those things), with the exception of the rent, a refundable security deposit a refundable holding deposit and any fees related to a default by the tenant (such as losing a key or failing to make a rent payment);
2. Requiring tenants and licensees in the private rented sector, as a condition of granting, renewing or continuing a tenancy (or of arranging for those things), to secure and pay for services from any third party or to make a loan.

15. 58% of respondents to the consultation (93% of tenants) agreed with the Government’s proposed approach.

16. 65% of respondents agreed that the ban on letting fees should also include a ban on letting fees charged to tenants by landlords and third parties, such as companies providing referencing or inventory services, to avoid tenants having to pay letting fees via other routes. It will also avoid creating a situation where landlords are encouraged to self-manage their properties purely on financial grounds and ensure that all tenants are treated equally under the ban.

17. With regards to third parties, the Bill prevents agents and landlords from requiring tenants to secure and pay for services from any third party since this could lead to tenants paying agent fees through other routes. This approach reflects feedback received during the consultation process and ensures that tenants are not restricted from seeking their own references or other services should they wish to do so.

18. A number of agent and landlord representatives requested through the consultation process that fees for reference checks should be exempt. We do not agree, since it is the landlord, either directly or through an agent, who contracts the services of a referencing agency to provide assurance that the tenant is capable of meeting the terms of the tenancy.

19. A concern raised in the consultation was that agents will seek to recoup monies from tenants by charging an inflated first month’s rent. To mitigate this we have set out in Schedule 1 of the Tenant Fees Bill that charging an increased level of rent in one month as compared to a later month would be prohibited.

20. The consultation explored including an exemption for high end rental services. It is not proposed to include any such exemption. This is because it is important to ensure that the ban on letting fees paid by tenants can be clearly understood by all, and applies to all parts of the market. No compelling reasons were presented throughout the consultation process to exempt high-end rental services, or any other part of the lettings market, from the ban. Services procured by tenants are outside the scope of the ban as long as they are not a requirement of the granting, renewal or continuance of a tenancy (or of arranging for those things).

21. The only payments that we are proposing should be exempt from the ban (aside from the rent and a refundable tenancy deposit) are a refundable holding deposit and fees related to a default by the tenant. Both the refundable holding deposit and the refundable tenancy deposit will be capped.

22. 68% of respondents to the Government’s consultation agreed that tenancy deposits should be capped. The Tenant Fees Bill caps deposits at six weeks’ rent to ease the financial burden tenants can face at the start of a new tenancy, while ensuring a reasonable level of security for landlords. We listened to concerns about capping deposits at four weeks’ rent. A cap of six weeks’ rent gives landlords greater flexibility to accept higher risk tenants, such as those with pets, as well addressing concern around tenants leaving without paying their final month’s rent. We expect landlords to consider on a case by case basis the fair and appropriate level of deposit to ask of their tenant.

23. We are not proposing to cap the fees that can be charged in the instance of a default by the tenant – but such fees may only be charged in accordance with the tenancy agreement, which will ensure that tenants are aware of potential default fees.

24. It is also proposed to take a power to create further exemptions or amend the list of existing exemptions, such as the capped level of the deposit. There are no exemptions currently envisaged for which it would be necessary to use this power but we believe it is necessary to respond to any developments in the market or any issues that arise through implementation.

Holding Deposits

25. 4 out of 5 respondents to the Government’s consultation agreed that holding deposits should be capped. The level of refundable holding deposit cap is proposed as one week’s rent. The majority of tenants supported a cap of one week’s rent whereas a number of agents preferred a flat cap of between £100-500. We believe tying the cap to a rental amount will compensate the landlord more fairly should a tenant withdraw. Tying the cap to a rental amount also means that the cap should remain more reflective of market costs and thus is less likely to require amendment in the future.

26. The holding deposit can be retained by the landlord in instances where the tenant withdraws, fails a right to rent check or provides false or misleading information, which materially affects the suitability of the tenant to rent the property. This is to mitigate the concern that a number of agents and landlords expressed during the consultation process that they would be financially penalised if a tenant withdrew from a property despite reference checks having been undertaken.

27. Holding deposits will act as a deterrent to tenants from registering in multiple or unsuitable properties and also help to mitigate the risk of landlords opting not to risk to tenants that they deem more financially risky.

Enforcement

28. We have aimed to be ambitious and tough in our approach in order to provide a sufficient deterrent to the continued charging of fees. The proposed approach is aimed at also being fair, ensuring that an inadvertent first breach of the ban is not criminalised and to provide tenants with means to recover any illegally charged fees.

29. Our proposed approach is:

1. the ban will be enforced by Trading Standards
2. to have provision for recovery of banned fees by tenants via the County Court with powers for local authorities to assist a tenant to recover banned fees / illegally withheld holding deposits
3. the initial breach of the ban should be a civil breach with a fine of up to £5,000
4. any further breach within 5 years will  be a criminal offence but civil penalties can be issued as an alternative to prosecution
5. officers of a body corporate which commits a breach can be liable for a fine/prosecution as is the case under the Housing and Planning Act 2016
6. local authorities can retain the money raised through civil penalties with this money reserved for future local Trading Standards housing enforcement in the private rented sector
7. a power to provide statutory guidance on the exercise of enforcement powers under the Act (this may cover, for example, when to prosecute versus when to deal with the offence administratively)
8. provision to appoint a lead enforcement authority to provide oversight, guidance and support with the enforcement of requirements on letting agents. This includes the ban on letting fees and related provisions, the requirement to be a member of a redress scheme under the Enterprise and Regulatory Reform Act 2013, the fees transparency requirements of the Consumer Rights Act 2015 as they apply to letting agents in England, and the requirements to be a member of a client money protection scheme under the Housing and Planning Act 2016.

30. We propose that a repeated breach of the ban is a criminal offence, which will be a banning order offence under the Housing and Planning Act 2016.

31. The consultation responses demonstrated that all groups were supportive of a robust enforcement approach. 69% of respondents agreed that the ban on letting fees should be enforced by Trading Standards and 86% supported the introduction of a lead enforcement authority.

Transitional Provisions

32. It is intended that the fees ban should only apply in relation to tenancy agreements entered into after the ban has come into force but with a coming into force date that allows a reasonable lead in time for agents to make adjustments. Fees charged to or agreed by a tenant before the ban comes into force would still be payable by the tenant. For example, if a tenant had signed a contract to pay for an inventory check at the end of their tenancy.

33. The requirements regarding the treatment of holding deposits only apply in relation to holding deposits paid after the relevant provision comes into force.

Amendments to the Consumer Rights Act 2015

34. The letting agent transparency requirements of the Consumer Rights Act 2015 do not apply in relation to property portals (e.g. Rightmove, Zoopla). This was a concern that was raised in the consultation since these websites are often used by tenants to search for properties in the private rented sector.

35. It is proposed that the Bill applies the transparency requirements to property portals, clarifies the circumstances in which local authorities can issue further civil penalties in the case of an on-going breach and specifies that agents must display the name of their client money protection scheme, rather than simply whether they have the protection.

Impact of the legislation on local authorities

36. Local authorities (Trading Standards) will be required to enforce the provisions of the Tenant Fees Bill. The consultation responses agreed that Trading Standards were best placed to act as the enforcers. Concerns were raised through the consultation over the resources available to Trading Standards. The enforcement of the provisions contained in the Tenant Fees Bill is intended to be fiscally neutral since Trading Standards may retain the proceeds of any financial penalties for the purposes of any of its enforcement functions relating to the private rented sector under this Bill or any other legislation.

37. To support local authorities, we are also proposing to appoint a Lead Enforcement Authority and to enable tenants to recover any illegally charged fees via the County Court. Tenant enforcement of the ban will be encouraged through effective communication of tenant rights, for example in our ‘How to Rent’ guide.

Impact of the legislation on key stakeholders

38. Since the commitment to ban letting agent fees paid by tenants was first announced at the Autumn Statement 2016, the Government has been working closely with the sector to consider the potential impact of the policy proposal on all those affected, including tenants, landlords and letting agents. This included the eight week consultation from April - June 2017. Implementation is subject to Parliamentary timetables but will not be before Spring 2019.

39. We believe that tenants will see a net saving as a result of the ban. Our analysis indicates that households in the private sector will see an annual benefit of £215m on average over a 10 year appraisal period. This will result in savings of between £18 and £50 per household, with larger savings for households that use letting agents and/or that move or renew tenancies frequently.

40. Tenants will be able to see what a given property will cost them in the advertised rent level without any additional hidden costs. This will help to make entering and moving around in the private rented sector easier and less costly.

41. Greater competitive pressure in the lettings market will ensure that landlords and letting agents will be unable to fully pass on the costs to private rented sector households.

42. Agents will need to consider their business models in light of the ban on fees paid by tenants. The time of, and services provided by, letting agents should be reimbursed but this should be by landlords rather than tenants. Landlords are better able to shop around for the agent offering the service that they are seeking at the price they want to pay. It is also worth noting that landlords, unlike tenants, can claim tax relief on letting agent fees.

43. Good letting agents that provide services that represent value for money to landlords will continue to play an important role in the market. Furthermore, such letting agents will be on a fairer footing to compete for landlords’ business since it will be much harder for rogue agents to exploit their position between landlords and tenants.

44. A more detailed analysis of the impact of ban on letting fees is provided in our Assessment of Impact at Annex B.

Annex A: Banning letting fees paid by tenants

Government response

Contents

Introduction

Summary of draft legislative proposals

Summary of consultation findings and Government response

Part A – Existing regulation

Part B – Banning letting fees

Part C – Capping deposits

Part D – Enforcement

Part E – Wider regulation

Next Steps             

List of organisational responses

Introduction

The Government is committed to ensuring a private rented sector that provides security and stability for both tenants and landlords. The private rented sector is a substantial part of our housing market. It houses 4.5 million households in England and an increasing number of families. The sector now represents 20% of all households, and houses a quarter of London’s population.[1]

Letting agents are engaged by many private landlords to let and manage rental accommodation on their behalf. Good agents provide a valuable service in ensuring that properties are safe, compliant and professionally managed; they help landlords comply with their legal responsibilities and ensure that tenants have safe, secure and good quality homes.

The duties of letting agents might include finding tenants, collecting rent, and responding to queries from tenants (for example, in relation to repairs). Landlords pay fees to letting agents for carrying out these duties on their behalf. Letting agents also charge fees to tenants for a variety of reasons, including seeking references, inventory services and contract negotiations.

Letting agent fees to tenants vary considerably and can run into hundreds of pounds. Tenants have little control over these fees because the agent is appointed by the landlord. It is not simple for tenants to understand and compare agent fees (despite the increased focus on transparency) since there is significant variation in the way that agents charge for their services. Further, agents charging fees to both landlords and tenants increases the risk of unfair practices in the form of double charging.

The Government committed in its manifesto to banning letting agent fees paid by tenants following an announcement at the 2016 Autumn Statement. The ban will enable tenants to see what a given property will cost them in the advertised rent level without any additional hidden costs; this should help to make entering and moving around in the private rented sector easier and less costly.

Landlords will be able to shop around for an agent that provides the quality of service they are seeking at a price they are willing to pay. The ban will sharpen and increase letting agents’ incentives to compete for landlords’ business, resulting in a better and more transparent service.

On 7th April 2017, the Government launched an eight week consultation seeking views on the detail of how a ban should be introduced. The consultation closed on 2ndJune and 4,724 responses were received from a range of individuals and representative bodies. 50% of responses were from tenants, 32% were from letting agents, 10% were from landlords and 8% were from other interested stakeholders. We are very grateful to everyone who took the time to respond. This document summarises the comments received and sets out the Government’s approach and next steps.

Summary of draft legislative proposals

The Government intends to bring forward proposals to implement a ban on tenant fees in a draft Bill. This was announced on 21 June 2017 in the Queen’s Speech at the state opening of Parliament. The responses to the consultation have informed the Government’s approach and publishing the Bill in draft will ensure that there is scrutiny of the Government’s proposals by parliamentarians and stakeholders before introducing legislation. 

The Government proposes to introduce provisions to ban landlords and their agents in England from (as a condition of, or of making arrangements for, the grant, renewal or continuance of a tenancy):

1. requiring tenants and licensees in the private rented sector to pay fees or other charges on top of the rent, with the exception of a capped refundable security deposit, a capped refundable holding deposit and tenant default fees (such as replacing a lost key);
2. requiring tenants and licensees in the private rented sector to secure and pay for services from any third party or to make a loan.

We propose extending the commitment to ban letting agent fees to tenants to include fees charged by landlords and any required payments to third parties. This is to mitigate the risk of tenants being charged fees through other routes. This will also avoid creating a situation where landlords are encouraged to self-manage their properties purely on financial grounds and where some tenants can be subject to letting fees whilst others are not.

The Government proposes that tenancy deposits are capped at no more than six weeks’ rent and that holding deposits are capped at no more than one week’s rent to improve affordability at the outset of a tenancy whilst retaining financial security for landlords. The draft Bill will also set out the proposed requirements on landlords and agents to return a holding deposit to a tenant.

It is proposed that the enforcement of the ban would be carried out by local authorities (Trading Standards). The penalty for an initial breach of the ban is envisioned to be a civil penalty of £5,000. It is proposed that subsequent breach of the ban within 5 years (where a civil penalty is issued or conviction secured in respect of the earlier breach) would be a criminal offence but with a civil penalty of up to £30,000 as an alternative to prosecution.

The Government proposes to bring forward legislation that will enable local authorities to retain the money raised through civil penalties with this money reserved for future local housing enforcement. Tenants would be able to recover unlawfully charged fees and holding deposits that have been unlawfully retained via the County Court.

The Tenant Fees Bill will propose a lead enforcement authority to provide oversight, guidance and support with the enforcement of requirements on letting agents. This includes the ban on letting fees and related provisions, the requirement to be a member of a redress scheme, the transparency requirements of the Consumer Rights Act 2015 as they apply to letting agents in England, and the forthcoming requirements to be a member of a client money protection scheme under the Housing and Planning Act 2016.

The Government proposes to make some amendments to the Consumer Rights Act 2015 to state that the requirements on letting agents to display any letting fees, which redress scheme they are a member of, and whether they have client money protection should apply to property portals (e.g. Rightmove, Zoopla). This is to ensure that property portals, which are used by a large number of tenants to find properties in the private rented sector, are subject to the same transparency requirements as agent websites and offices. 

The Bill also proposes a new provision regarding fines in the event of a continuing breach of the requirements in England and will also require letting agents in England to display the name of the client money protection scheme to which they belong (if they are required to belong to such a scheme).

The Government intends that the ban on tenant fees will apply only in relation to tenancy agreements and licenses entered into after any legislation has come into force.

Finally, to support the implementation and enforcement of the ban on letting fees paid by tenants and to better protect consumers in the lettings sector, the Government intends to require all letting agents to be regulated in order to practice. Currently, anyone can operate as a letting agent without any qualifications or professional oversight. We intend to change the law so that all letting agents must register with an appropriate organisation. This will mean that letting agents would be required to satisfy minimum training requirements, abide by with an industry code of conduct and demonstrate compliance with existing legal requirements. Further work with the sector will be carried out to shape the regulatory framework.

Summary of consultation findings and Government response

Part A – Existing regulation

Q1. Do you think that the transparency measures introduced in the Consumer Rights Act 2015 have helped to drive up standards and improve competition?

Q1. Consultation findings

The most frequent comment from both agents and landlords was that “tenants are better informed” as a result of the transparency requirements.

A significant proportion of both tenants and letting agents commented that “not all agents comply with the regulations” either because fees listed are unclear, incomplete or not displayed at all.

The findings show that more than three-quarters of tenants do not believe that the regulations have led to an improvement in standards and competition. The most recurrent point raised by tenants was that transparency alone is not sufficient, and that “tenants have no choice” regardless of whether fees are more transparent or not.

A number of responses across all groups mentioned that letting agents are not displaying their fees on online portals such as Rightmove and Zoopla and that there is no requirement for them to do so, which is unhelpful since these websites are often used by tenants to search for properties in the private rented sector.

Transparency

Question 14 asked tenants “Do you consider that letting agent fees are clearly and transparently displayed?” To which 15% of tenants responded ‘yes’ and 85% responded ‘no’.

Question 18 asked landlords “Do you consider that letting agent fees charged to landlords are clearly and transparently displayed?” To which 69% of landlords responded ‘yes’ and 31% responded ‘no’.

The disparity between landlords’ and tenants’ views on the transparency of their respective fees suggests that the fees charged to landlords are clearer and easier to understand.

Fees charged by agents

Question 15 asked tenants “Were you aware of letting fees at the outset of your interest in a rental property either through your own research or through your landlord or agent?” 51% of tenants answered ‘yes’ and 49% answered ‘no’.

In response to Question 17, 69% of tenants reported that “letting agent fees have affected my ability to move to a new rented property” and 85% reported that letting agent fees have affected a decision in the past to use an agent.

In response to Question 22, 60% of landlords reported that letting fees had affected their decision in the past to use an agent and 76% said that increased fees would affect their decision to use an agent in the future.

Question 23 asked agents what fees they charge tenants. Based on the responses by agents, the average fee at the start of a tenancy is £238 per tenant. In addition to this, some agents charge a renewal fee (average of £70), an inventory fee (average of £117) and a check out fee (average of £91). 1% of the agents that responded to this question stated that they charge no fees to tenants.

Question 16 asked tenants what fees they are charged by a letting agent. The responses demonstrate the average fee charged at the start of a tenancy is £327.

Fees charged by landlords

Question 21 asked self-managing landlords what fees they charge tenants. 30% of landlords that responded to this question stated that they charge no fees to tenants. Of the remaining respondents that do charge fees, the average charge at the start of a tenancy is £107.

As part of their response to the consultation, the Deposit Protection Service (DPS) conducted their own survey and received more than 1,900 responses from landlords. The DPS survey found that 78% of landlords said that they either don't charge any fees or simply just pass on the costs of the referencing/credit checks.

The Residential Landlords Association (RLA) stated that most of its members either charge no fees to tenants or charge in the region of £25 per person.

Q1. Government response

The transparency requirements introduced in the Consumer Rights Act 2015 were intended to better enable tenants and landlords to compare letting agents and to shop around on the basis of their fees and services.

Responses from all groups acknowledge that there is significant variation in the way that agents charge for their services, with some agents still not displaying their fees clearly. The Government will work with councils to consider how to enforce the existing legislation more effectively.

The responses from tenants indicate that the transparency measures are not sufficient to enable tenants to compare the fees and services of letting agents and landlords. The most frequent complaint from tenants was that even if all agents were fully compliant with the transparency requirements a tenant would still be unable to negotiate or opt-out of letting fees since the decision to appoint a letting agent sits with the landlord.

The landlord is able to choose both whether to use a letting agent and to negotiate the fees charged for the services provided. Landlords can also off-set fees charged by letting agents against tax liabilities whereas tenants do not have the option to do so. The landlord is therefore in a much stronger position relative to the tenant. This is also reflected in the lower levels of dissatisfaction with fee transparency among landlords compared with tenants. The Government believes that transparency alone will not drive sufficient competition and affordability in the market and that a ban on letting fees paid by tenants is needed.

We recognise that it can be confusing for consumers not to be able to see clearly whether an agent is a member of a client money protection scheme, the redress scheme of which it is a member and the level of any relevant fees when using property portals such as Rightmove and Zoopla. Given that a large number of tenants use these portals to find properties in the private rented sector, we intend to bring forward proposals to amend the Consumer Rights Act 2015 to specify that the letting agent transparency requirements should apply to property portals.

Part B – Banning letting fees

Q2. Do you agree that the ban on letting fees should also include a ban on letting fees charged to tenants by landlords and third parties?

Q2. Consultation findings

The findings indicate opposition from agents and landlords to the proposal to include letting fees charged by landlords and third parties in the ban. The reason given by many of those landlords and agents that responded ‘no’ was that they were opposed to any form of ban on letting fees. The most frequent comment from those voting ‘no’ was that some fees should remain chargeable.

Of the 22% of agents that responded ‘yes’, the most common reason was that it would be unfair to allow landlords to charge tenants fees for services that letting agents are not permitted to charge tenants for. This point was strongly made by many of the leading industry groups.

The most frequent remark from landlords was that they should be permitted to charge tenants to undertake reference checks. Both the National Landlords Association (NLA) and the RLA emphasised that fees charged by landlords are purely for cost-recovery, not profit.

Tenants were strongly in favour of extending the ban on letting agent fees to include letting fees charged to tenants by landlords and third parties. The main reason given was to minimise the possibility of loopholes.

A number of responses, particularly from agents and industry suppliers to the sector, raised a concern about a blanket ban on third parties charging fees related to lettings, for example reference and inventory services. Many industry groups proposed that these services remain available to tenants. This point was also made by organisations that provide these services.

Q2. Government response

The Government agrees with the majority of leading industry groups and tenants that the ban on letting fees charged to tenants should also apply to landlords. This would ensure that letting fees are not charged to tenants via other routes and avoids creating a situation where landlords are encouraged to self-manage their properties purely on financial grounds. 

The Government agrees that tenants should be able to choose to procure services from third party providers but proposes that agents and landlords would not be able to require that a tenant pays a third party any fees. This will allow tenants to procure services that are outside the ordinary scope of a letting arrangement if they so wish.

The Government intends to bring forward proposals to ban letting fees paid by tenants of Assured Shorthold Tenancies (ASTs) and holders of licenses to occupy. ASTs cover the vast majority of tenancies in the private rented sector. The proposal for the ban to also cover licensees would ensure that lodgers or tenants of houses in multiple occupation cannot be charged fees. We propose that the ban would apply to housing associations where they are letting an AST in the private rented sector to ensure that all tenants are treated the same.

Q3. Do you agree that all letting fees, premiums and charges to tenants that meet the general definition of facilitating the granting, renewal or continuance of a tenancy should be banned with the exception of: The rent; A refundable deposit; A holding deposit to take the property off the market whilst reference checks are undertaken; and In-tenancy property management service charges that directly relate to an action or service carried out at the request of the tenant or as a result of the tenant’s actions?

Q3. Consultation findings

There is strong agreement from tenants on the proposed measures for the ban. Of the 7% of tenants that disagreed with the approach outlined in the question, the reason given by roughly one third was that they did not believe the approach was sufficiently strong (for example, they did not believe that holding deposits should be permitted).

More than one third of agents who commented, as well as industry groups and redress schemes, argued that credit/reference checks should be met (or partially met) by the tenant, echoing the point made by landlords responding to question 2.

It was suggested that, unlike other fees, reference checks are carried out for the benefit of both the tenant and the landlord.

A key reason given by landlords that disagreed with the proposal was that reference checks should be (at least partially) paid for by tenants. A concern raised by many landlords was that they may have to pay for multiple reference checks before finding a suitable tenant. A number of responses also identified reference checks as a fee that should be chargeable to tenants in order to prevent landlords/agents from cherry picking those tenants that are more likely to pass the reference checks.

More than a quarter of agents stated that other administrative fees should be chargeable. Approximately 15% of comments from agents proposed that fees be capped instead of an outright ban.

Q3. Government response

Banning or Capping

The Government recognises the opposition from letting agents to the proposal to ban all letting fees except the rent, a security deposit, a holding deposit and tenant default fees. It is noted that many letting agents and landlords acknowledge that fees charged to tenants are currently not at a level that is justifiable and agree that intervention is necessary.

The Government believes that only a ban, not a cap, on letting fees charged to tenants would achieve the desired outcome of delivering a fairer, more competitive, more affordable and more transparent lettings market where tenants have greater clarity and control over what they will pay and where the landlord is the primary customer of the letting agent.

Banning fees to tenants will help to improve competition in the lettings sector because the stronger market position of landlords allows them to negotiate the letting fees charged.

A ban on fees will be clearer and easier to understand than a series of caps on certain types of fees, which may be complex to understand and risk transparency. This will help to ensure that tenants are only committing to a property that they know that they can afford.

Reference checks

The Government does not agree that reference fees should be exempted from the ban on fees. It is the landlord, either directly or through an agent, who contracts the services of a referencing agency to provide assurance that the tenant is capable of meeting the terms of the tenancy. The tenant is not in a position to decide this and the consultation responses reveal that a wide variety of charges are currently levied for such services. The landlord is better placed to negotiate and pay these fees. The Government does not therefore propose to exempt reference check fees from the ban on tenant fees.

To address the concern that agents and landlords could be unfairly penalised if a tenant withdraws from a property despite reference checks having been undertaken, we are proposing that refundable holding deposits would be exempt from the ban. This would also act as a deterrent to tenants from registering in multiple or unsuitable properties.

The Government’s proposal

The Government intends to bring forward legislation to:

1. Ban landlords and their agents from charging private sector tenants and licensees fees as a condition of, or of making arrangements for, the grant, renewal or continuance of a tenancy, with the exception of:

1. Rent;
2. A capped refundable security deposit;
3. A capped refundable holding deposit; and
4. Default fees (where the tenant is at fault, for example replacing a lost key).

2. Ban landlords and their agents from requiring tenants and licensees in the private rented sector, as a condition of granting, renewing or continuing a tenancy or license, to secure and pay for services from any third party or to make a loan.

Q7. Agents may occasionally provide bespoke, non-standard services to tenants at the top end of the market, for example, when arranging a property for someone currently living aboard who is relocating to the UK. Do you think there are premium parts of the market where a different approach to handling letting fees may be warranted?

Q7. Consultation findings

Supporting comments from landlords and letting agents indicated no strong views as to why certain parts of the market should be exempted from the fee ban.

Nearly two-fifths of tenants who commented expressed concern about an exemption for services at the top end of the market opening up loopholes.

A point made by respondents from all groups was that any additional services can be negotiated separately from the tenancy agreement. Industry groups also stressed that charges for services such as relocation are not fees related to the letting of a specific property, and that such services can, and should, be treated separately.

Q7. Government response

The Government is keen to ensure that a ban on letting fees paid by tenants can be clearly understood by all. As such, the Government proposes that the tenant fee ban will apply to all parts of the market.

Additional high-end rental services and third party services procured by tenants would be outside the intended scope of the ban as long as they are not a condition of making arrangements for, the grant, renewal or continuance of a tenancy.

Q8. What do you think will be the main impacts of the ban on letting fees paid by tenants? Please include any unintended consequences that you believe may arise.

Q8. Consultation findings

In general, tenants believed that the impact of the ban would be positive resulting in better affordability and flexibility for tenants as well as improved transparency and competition in the sector. Conversely, the majority of agents and landlords believed the impact would be negative owing to increased financial pressures on agents and landlords, which could result in redundancies, agents going out of business and decreasing standards of service.

The most common response from all groups was that agent fees would be charged to landlords who in turn would increase their rents. One of the key points made by tenants was that higher rent would be preferable to the current upfront fees, as their overall living costs would be more affordable and transparent.

A number of responses, particularly from tenants, pointed out that banning fees may improve the image of the letting industry, and thus relationships between tenants and agents, by removing some of the concerns that tenants currently have over the costs charged for services provided. 

Approximately 20% of landlords and agents said that the fee ban would lead to a reduction in supply of rented homes as landlords leave the market. A number of letting agents and landlords also raised concern over the number of recent changes to the sector.

More than one in ten agents expressed concern that landlords would choose to self-manage, rather than using a letting agent; letting agents and landlords thought that this could lead to deterioration in standards across the sector. The DPS in their response found that tenants may be more likely to use a professional agent owing to the ban improving the image of the lettings sector. This point was also made by a number of tenants.

Agents and landlords also pointed out that if reference fees are banned they might be incentivised not to let to potential tenants who seem less likely to pass reference checks. Tenant representative groups reported that discrimination already exists, with landlords requesting higher deposits and fees from tenants seen as high risk.

A number of agents and landlords suggested that a complete ban would lead to an increase in the number of tenants speculating on different properties resulting in potentially costly and unnecessary work being undertaken by landlords and agents.

Q8. Government response

The impact on rents will be kept under review but the Government does not expect letting agents to pass on to landlords the full amount of their current tenant fees since there is evidence that a number of agents are charging excessive fees. Under the ban, all agents will need to be upfront and clear with their landlord fees in order to secure business. As a result, the fees charged should be a fairer and more transparent reflection of the services provided.

The Government believes that tenants will see a net saving. In a case where an agent increases its fees charged to landlords, landlords will subsequently need to set a rent that takes into account their costs whilst still being attractive to prospective tenants. Tenants will be able to compare properties on the advertised rent level and there will be no hidden charges. It is also easier for tenants to manage regular and expected costs rather than high upfront charges.

The Government recognises that some letting agents may have to adjust their business models in order to remain profitable. However, good and innovative letting agents that provide value for money to landlords will be on a stronger footing to compete for landlords’ business, since the opportunity for rogue agents to exploit their position as an intermediary between landlords and tenants will be greatly reduced.

The Government is keen to work with the sector to mitigate as far as possible any negative consequences of the ban. Publishing the Bill in draft prior to implementation will enable greater scrutiny of the proposals to implement the ban and further stakeholder enagement to mitigate any risks.

The proposal to permit refundable holding deposits to be charged under the ban should reduce the risk of agents or landlords being unfairly penalised if a tenant withdraws from a prospective tenancy. The holding deposit would enable a tenant to demonstrate a financial commitment to renting a certain property subject to passing the reference checks. A holding deposit would be refunded to the tenant in instances where the tenancy proceeds or the landlord/agent withdraws from the agreement.

The use of refundable holding deposits should also reduce the risk of landlords or agents choosing not to let to certain tenants that they perceive to be ‘higher risk’ with regards to referencing. The law is clear that agents and landlords must not advertise or let a property in a way that unlawfully discriminates against individuals.

We will continue to ensure that landlords, agents and tenants are aware of their responsibilities in the lettings process through communications and, in particular, by creating a ‘How to Let’ guide and updating the ‘How to Rent’ guide.

Part C – Capping deposits

Q4. Do you think that refundable deposits, payable at the outset of a tenancy, should be capped? If yes please indicate the level of the cap?

Q4. Consultation findings

There was broad support for capping tenancy deposits. Landlords’ preferred cap was 2 months’ rent but there was also support for a cap of 6 weeks’ or one month’s rent.

The National Landlords Association and the Residential Landlords Association both argued against a cap. The latter warned that capping the deposit “will leave landlords with no ability to mitigate the risks associated with higher risk tenant groups”.

Agents’ preferred level of cap was 6 weeks’ rent but there was also support for a cap of one month’s or two months' rent.

Of those tenants that indicated a cap level, around two thirds suggested a cap of one month’s rent or less; Citizens Advice, Shelter and Crisis all recommended a cap of 3 weeks’ rent, while Generation Rent recommended a cap of one month’s rent and highlighted the strain that large up-front deposits can put on people’s finances. Concern was also raised that deposits had crept up in recent years. Data from The Dispute Service shows that in the last 3 years deposits have increased on average by 7.9%.

A further reason offered by tenant representative groups for capping deposits at a lower level was that deposits have become larger than is necessary to provide sufficient security for landlords. Data from Deposit Protection Schemes shows that on average tenants receive back the majority of their deposit value. 

The Property Ombudsman recommended that the cap should be 6 weeks’ rent, so as to dissuade tenants from “choosing to not pay the last month’s rent of a tenancy and avoiding addressing issues relating to their occupancy found during check-out”. This view was also raised by landlords.

Q4. Government response

The Government welcomes the broad support for a cap on tenancy deposits. Taking into consideration the range of views put forward, the Government proposes to introduce legislation to cap the tenancy deposit at six weeks’ rent. This would ease the financial burden that tenants can face at the start of a tenancy, while ensuring a reasonable level of security for landlords.

Q6. Do you think holding deposits, to ensure that a property is taken off the market, should be capped? If yes please indicate the level of the cap.

Q6. Consultation findings

There was a broad consensus for a cap, with 4 out of 5 respondents agreeing that holding deposits should be capped.

Agents were evenly split between those preferring a flat level cap and those preferring a cap based on rent. Larger agents that have a wide range of properties with very different rental values made the case that the holding deposit should be based on rent in order to adequately reflect the financial loss should a proposed tenancy fail to be agreed.

Many large agents disagreed with the proposal to cap holding deposits, but stated that if a cap were to be introduced it should be at the level of 2 weeks’ rent.

A minority of tenants believed that holding deposits should be banned, but most tenants understood the justification for paying a refundable fee to take a property off the market. The most popular response from tenants was that the holding deposit cap should be set at one week’s rent.

Citizens Advice reported that the average level of holding deposit is £250 and recommended that the cap be set “much lower”. Crisis and Shelter both proposed a cap set at 2 days’ rent. Generation Rent stated that one week’s rent is a “typical” holding deposit and that it should be mandatory for agents to fold this fee into the first month’s rent.

Q6. Government response

The Government welcomes the general consensus on capping holding deposits and proposes to bring forward legislation to cap the holding deposit at one week’s rent. This level reflects the likely cost of missed rent should a tenancy agreement fail to be agreed owing to the actions of the tenant.

Part D – Enforcement

Q9. Do you agree that the ban on letting fees should be enforced by Trading Standards?

Q9. Consultation findings

A majority of both landlords and letting agents expressed opposition to Trading Standards enforcing the ban. However, a significant proportion of both agents and landlords stated that they responded ‘no’ because they do not agree with the ban in principle.

No alternative to Trading Standards was proposed; many letting agents acknowledged that there is no realistic alternative. There was unanimous agreement among leading industry bodies that Trading Standards are the logical enforcement body and best placed to enforce the ban.

A key point made by all groups, and in particular letting agents, was concern over the resources available to Trading Standards. The National Association of Letting Agents (NALS) and ARLA Propertymark both argued that Trading Standards are not sufficiently resourced to effectively enforce current regulations and that failure to increase resources would further punish compliant agents while rogue agents would enjoy a competitive advantage.

The Chartered Trading Standards Institute concurred that Trading Standards services are “well placed” to enforce the ban thanks to their local knowledge of landlords and letting agents. It however went on to warn that the absence of additional resource would jeopardise the “consistency” of enforcement across the country.

Q9. Government response

The Government intends that the ban will be enforced by Trading Standards. The Government recognises the concern over the resources available to Trading Standards and proposes to support local authorities in their responsibilities by enabling any monies recovered by Trading Standards through civil penalties to be used for future enforcement of the ban. The Government also proposes to appoint a lead enforcement authority in the lettings sector and require that letting agents are regulated in order to improve standards and ensure compliance with existing legislation. This will support Trading Standards to carry out their enforcement responsibilities.

Q11. Would you support the introduction of a lead enforcement authority for letting agents to develop advice, standards and guidance and to share information?

Q11. Consultation findings

There was strong agreement across all groups for the introduction of a lead enforcement authority.

The Royal Institution of Chartered Surveyors (RICS) made a strong case for a lead enforcement authority, drawing on the example of Powys County Council being the national lead for Trading Standards’ enforcement of Estate Agents, stating that it would lead to more consistent regulatory operation. 

Although agents and landlords expressed concern over bureaucracy and value for money, a significant number believed it would raise standards and consistency across the sector.

Q11. Government response

The Government welcomes the consensus that a lead enforcement authority in the lettings sector would be valuable and worthwhile.

As a result, the Government proposes to establish a lead enforcement authority to provide oversight, guidance and support with the enforcement of requirements on letting agents. This includes the ban on letting fees and related provisions, the requirement to be a member of a redress scheme, the transparency requirements of the Consumer Rights Act 2015 as they apply to letting agents in England, and the forthcoming requirements to be a member of a client money protection scheme under the Housing and Planning Act 2016.

It is envisaged that a Lead Enforcement Authority would:

• Provide guidance and advice to enforcement authorities regarding the operation and enforcement of relevant letting agent legislation;
• Disseminate information about letting agent legislation to members of the public, landlords and letting agents;
• Advise the Secretary of State on the working and enforcement of letting agent legislation and related matters (i.e. market developments); and
• Where necessary/expedient, take steps to enforce letting agent legislation.

Q12. Do you think that the penalty for non-compliance with the ban on letting fees for tenants should be:

1. a civil penalty of up to £5,000 in line with the penalty for non-compliance with the requirement to belong to a Government-approved redress scheme or non-compliance with the transparency requirements of the Consumer Rights Act 2015

2. a civil penalty of up to £30,000 in line with the civil penalty for committing a banning order offence

3. a banning order offence under the Housing and Planning Act

4. Other

Q12. Consultation findings

Of those that selected ‘D – Other’, the most common suggestion from tenants was to make it a criminal offence, while landlords and agents suggested that there should be no penalty or a minimal penalty.

The majority of large agents and industry leaders remarked that option A was not a strong enough deterrent for the fee ban to be effective. ARLA Propertymark suggested that £30,000 is “the right level”. The Residential Landlords Association also agreed with option B as well as the “potential to ban offending agents”.

Q12. Government response

The Government proposes to bring forward legislation where an initial breach of the ban on charging letting fees to tenants would be a civil breach with a fine of up to £5,000. The Government proposes that in the event a further breach is committed within 5 years this would be a criminal offence with the provision to issue a civil penalty of up to £30,000 as an alternative to prosecution. The criminal offence would be a banning order offence under section 14 of the Housing and Planning Act 2016.

The Government intends that the ban will be enforced by Trading Standards who would be able to retain the money raised through civil penalties. This would help provide Trading Standards departments with the additional resources they need to ensure that this new regulation is enforced consistently across the country.

The Government also proposes that tenants who have been charged banned fees would be able to recover the fees charged via the County Court. Tenant enforcement of the ban will be encouraged through communication of tenant rights.

Part E – Wider regulation

Q5. How can Government best support the sector to expand or develop new approaches to minimise the financial burden on a tenant at the outset of a tenancy? For example, enabling tenants to pay their deposit in installments over the first few months of the tenancy or using a line of credit approach where an agreed deposit amount is blocked on a tenant’s credit card.

Q5. Consultation findings

There was strong support from tenants for an approach that enables the deposit to be paid in instalments. A large number of tenants also suggested that deposits should be transferred from one property to the next.

Agents and their industry bodies were generally sympathetic to the affordability issues presented by finding a deposit at the outset of a tenancy, and so were supportive of innovative ways to ease the financial burden. The ‘passporting’ of deposits from one tenancy to the next was often seen as the most promising solution. Agents and landlords gave a mixed response to the ‘deposit by instalments’ approach, with many saying it would be unworkable and leave landlords more at risk since tenants would commence the occupation of a property without having paid the full agreed security deposit. Tenants’ ability to pay upfront was seen as an important indicator of their financial responsibility.

Q5. Government response

The Government is aware that many tenants struggle to afford the fees and deposits required at the outset of a tenancy. Proposals to cap the holding deposit and tenancy deposit should help to improve affordability in the private rented sector. The Government does not intend to introduce any additional measures at this stage but is keen to work with the private rented sector to explore more innovative approaches to paying deposits to improve affordability for renters.

Q10. Would you support greater data sharing on rogue agents and landlords across organisations in the letting sector?

Q10. Consultation findings

There was overwhelming support for greater data sharing from all groups responding to the consultation.

Q10. Government response

The Government notes the strong support for greater data sharing across the letting sector and is keen to work with stakeholders to explore what can be achieved.

Q13. Do you think further action is needed to regulate the letting and management agent sector in addition to the ban on letting fees paid by tenants?

Q13. Consultation findings

The response from agents and landlords shows that there is mixed support for wider regulation in the sector. However, there were strong calls from industry groups and professional associations across the sector as well as tenants for greater regulation.

Many landlords and letting agents support the mandatory membership of an accreditation or licensing body, or membership of a professional association; many agents also proposed a training or qualification programme like Rent Smart Wales. The predominant suggestion from tenants was for rent controls or caps.

Q13. Government response

The Government recognises the appetite from the professional associations in the sector for wider regulation of letting agents and welcomes the commitment to improving standards across the lettings sector.

The Government intends to require all letting agents to be regulated in order to practice. This will give tenants and landlords the confidence that their agent is legally compliant and operating to a good standard. We will consult on the detail ahead of bringing forward legislation to require letting agents to register with an appropriate organisation, satisfy minimum training requirements and comply with an industry code of conduct.

The Government does not believe that capping or seeking to control rent is an effective way to improve affordability for tenants. Evidence shows that rent control can restrict investment, leading to fewer properties in the private rented market and higher rent as a result.

The Government is also committed to continuing to work with the sector to promote good practice, to improve standards and to tackle rogue practices through non-legislative routes, including through an updated ‘How to Rent’ guide and a new ‘How to Let’ guide.

Next Steps

Based on the responses to the consulation and wider engagement with stakeholders across the private rented sector, the Government is publishing a draft Tenant Fees Bill to set out the detailed approach for implementing a ban on letting fees paid by tenants. Publishing the Bill in draft will ensure that there is scrutiny of the Government’s proposals by parliamentarians and stakeholders before introducing legislation.

The Department for Communities and Local Government will work with the sector to shape the wider regulatory framework and provide more detail on this in due course.

List of organisational responses

Please note that this is a list of larger national or regional organisations that submitted organisational responses. Submissions from individual branches or directors of companies have not been included here, though they were fully considered as part of the consultation.

As well as the 4,724 responses to the consultation, we received 64 responses that did not directly answer the questions set out in the consultation but provided feedback on the proposal to ban letting fees paid by tenants; these responses were also fully considered.

Annex B: Banning Letting Fees Paid by Tenants - Assessment of Impact

Overview

1. The Government committed in its manifesto to banning letting fees paid by tenants in England and announced at the Queen’s Speech on 21 June 2017 its intention to publish a draft bill. A ban will improve competition in the private rental market and give renters greater clarity and control over what they will pay. The draft Tenant Fees Bill was published on 1 November.

2. Letting agent fees are not always clearly or consistently explained with the result that many tenants are unaware of the true costs of renting a property. The competitive pressure on tenant fees is very weak as agents are chosen by landlords. Letting agents can therefore impose unfair or excessive fees because tenants have a very limited ability to negotiate or opt-out. This restricts movement in the private rented sector and reduces affordability.

3. Government intervention is necessary to address the asymmetry of information between letting agents and tenants, to reflect that the primary customer of an agent is the landlord, to prevent agents from exploiting their position as an intermediary between the tenant and landlord and to increase transparency and affordability in the lettings sector to the benefit of all consumers.

Problem under consideration – an uncompetitive market

4. Letting agents are engaged by private landlords to let and manage rental accommodation on their behalf. Good agents provide a valuable service in ensuring that properties are safe, compliant and professionally managed; they help landlords comply with their legal responsibilities and help tenants to secure safe and good quality homes. The duties of letting agents might include finding tenants, collecting rent, and responding to queries from tenants (for example, in relation to repairs). Landlords pay fees to letting agents for carrying out these duties on their behalf. However, letting agents also charge fees to tenants for a variety of reasons, including seeking references, inventory services and contract negotiations.

5. Renters pay an average of £200-£300 in letting agent fees per tenancy although many pay significantly more than this. The English Housing Survey 2014-15 found that the mean average fee paid by a household in 2014-15 was £223, while the median was £200.[2] By contrast, the National Approved Letting Scheme found that the average fee charged is £172 with costs ranging from £30 to £500 (inclusive of VAT) and Generation Rent found that the average paid by two tenants is £400 with fees ranging from £40 to £780.[3] Shelter found that one in seven renters pay £500 or more in letting fees.[4]

6. Tenant responses to the Government’s 2017 consultation on banning letting fees found that the average (mean) fee charged at the start of a tenancy is £327 per tenant. Responses from agents put the average (mean) fee at the start of a tenancy at £238 per tenant. In addition to this, some agents said they charge a renewal fee (mean average of £70), an inventory fee (mean average of £117) and a check out fee (mean average of £91).[5]

7. There is evidence that letting agent fees paid by tenants have increased significantly in recent years. The English Housing Survey reports that median fees charged by agents increased by 60% between 2009-10 and 2014-15 (14% increase in mean).[6]
8. The wide range in letting agent fees charged, despite the services provided being broadly comparable, suggests that the market is not functioning in accordance with true market forces. This competitive failure has three main elements. Firstly, tenants do not know in advance what they are going to be required to pay, secondly tenants do not have power in the market to negotiate or challenge the fees charged and thirdly the agent charging fees to both landlords and tenants increases the risk of unfair practices in the form of double charging.
9. Transparency requirements were implemented by the Government in the Consumer Rights Act 2015 to require letting agents to publicise a full tariff of their fees to tenants and landlords prominently in their offices and on their website. The aim of the requirements was to better enable tenants and landlords to compare letting agents and to shop around on the basis of their fees and services. However, there is significant variation in the way that agents charge for their services, with some still not clearly displaying their fees. This makes it extremely difficult for both tenants and landlords to understand what services are being charged and to whom and the competitive process is undermined.

10. The Government ran an eight week public consultation seeking views on how to implement the ban on letting fees paid by tenants. This consultation asked tenants and landlords whether they considered letting agent fees to be clearly and transparently displayed. 15% of tenants thought that they were transparent compared with 69% of landlords.[7]The disparity between landlords’ and tenants’ views on the transparency of their respective fees suggests that the fees charged to landlords are clearer and easier to understand.

11. There is also confusion in the sector between landlords and tenants around who is paying for which letting agent service. 43% of landlords who responded to the consultation on banning letting fees said they do not know the fees that their agent charges to tenants.[8]

12. The Office of Fair Trading, in their 2013 market study, found that tenants focus on the headline advertised price (i.e. the rent), and don’t focus on the ‘drip’ prices that come later in the process in the form of letting agent fees. Similarly, empirical studies and theoretical models indicate that mandatory hidden fees cause, even trick, people into buying things they would not otherwise.[9]
13. Where prices are transparent and upfront consumers are able to make rational decisions to reward companies that provide superior produces for the same price or equivalent products more cheaply. 49% of tenants who responded to the Government’s consultation said that they were not aware of letting agent fees at the outset of their interest in a rental property.[10]
14. Even if all agents were fully compliant with the transparency requirements a tenant would still have little to no ability to negotiate or opt-out of letting fees since the decision to appoint a letting agent sits with the landlord.

15. In highly competitive property markets, such as London and other metropolitan areas, renters have to prioritise the location of the property and the affordability of the rent. Competition for acceptable accommodation is such that renters cannot take time to shop around in the hope of finding a similar property with lower letting agents’ fees or let directly by a landlord. In reality, once a tenant has chosen a property, they accept the fees that are charged and have to deal with any ‘hidden’ fees at a later stage.
16. Some agents exploit their role as an intermediary between the tenant and landlord by imposing unfair, excessive or duplicative charges. Similarly, although landlords are motivated to find the agents with the lowest landlord fees, they have little or no incentive to find agents with low fees for tenants. Indeed, agents can, and do, keep their landlord fees down by charging increased fees to tenants.
17. Given that the majority of tenancies are granted for between six and twelve months initially, tenants can expect to pay letting fees regularly either to secure a new tenancy or renew an existing one.[11] These repeated and often significant charges, over which tenants have limited scope to negotiate, can have a real and detrimental impact on individual finances, particularly for those tenants who are more vulnerable. This decreases the ability of individuals to access and move around in the private rented sector and makes it harder for those tenants who are trying to save for a deposit.

18. In the Government’s consultation 69% of tenants said that letting fees had affected their ability to move into a new property.[12] Citizens’ Advice in their 2015 report ‘Still Let Down’ found that 64% of tenants experienced problems paying letting agents’ fees, and 42% had to borrow money.[13] The English Housing Survey 2014-15 also found that about a third (34%) of private renters said that fees would stop them moving into a new home.

Policy objectives and the intended effects

19. Government intervention is necessary to deliver a fairer, more competitive, and more transparent lettings market where tenants have greater clarity and control over what they will pay and where the landlord is the primary customer of the letting agent. Landlords can also off-set fees charged by letting agents against tax liabilities whereas tenants do not have the option to do so.

20. The pre-requisite for effective and competitive markets is for consumers to have the ability to shop around for a supplier that provides the quality of service they are seeking at a price they are willing to pay. Under the ban, landlords will cover the costs of contracting an agent and any on-going management that they choose to procure. This will sharpen and increase letting agents’ incentives to compete for landlords’ business resulting in a more transparent market with lower overall fee levels and a higher quality of service. A ban will also reduce the risk of unfair practices in the form of double charging.

21. With regards to tenants, the policy objective is to improve affordability at the outset of a tenancy and for tenants to see – at a glance – what a given property will cost them in the advertised rent level with no hidden costs. A ban will strengthen the position of the tenant in the lettings market since they will be able to negotiate with a landlord/agent on the basis of the rental price of a property alone. The greater transparency under a ban will ensure that tenants are only committing to a property that they know that they can afford.

22. This, in turn, may reduce incidences of tenants defaulting on rent as well as facilitating better movement into and around the private rented sector. Tenants will have greater power and flexibility to leave poor quality accommodation, which may help to drive up property standards. Moreover, more optimal housing choices and fewer affordability barriers may lead to reduced incidences of homelessness – which imposes significant social costs in the form of disrupted lives and the demand on health and other public services.

Rationale for regulation and policy options

23. Four different options to implement a ban on letting fees paid by tenants have been considered. These are:
1. Promote awareness of the existing transparency requirements under the Consumer Rights Act 2015 and use guidance to encourage agents not to charge tenants fees.
2. Introduce primary legilsation to ban letting agents from charging fees to tenants as a condition of the grant, renewal or continuance of a tenancy but continue to allow third parties and landlords to charge fees to tenants.
3. Introduce primary legislation to ban all letting fees paid by tenants (i.e. those charged by agents, landlords and third parties) with no exemptions.
4. Introduce primary legislation to ban all letting fees paid by tenants as a condition of the grant, renewal or continuance of a tenancy with the exception of tenancy and holding deposits and fees arising because of a default of the tenant (Preferred Option).

24. Option 1 would not achieve the stated policy objective. Even if awareness were increased substantially tenants would retain their weak competitive position in the lettings market due to the fact that it is the landlord who appoints the agent. The landlord/agent would retain an incentive to charge fees and guidance alone would be insufficient to tackle this. Regulation is therefore necessary in order to improve competition and give renters greater clarity and control over what they will pay.

25. Option 2 would mean that landlords were still able to charge letting fees to tenants and that agents could require tenants to pay a third party company fees as a condition of a tenancy. This is likely to lead to tenants paying agent fees through other routes, for example an agent could, as a condition of rental, ask that a tenant completes a reference check with a third party partner for a fee. The policy objective is that tenants are not required to pay any letting fees in order to improve transparency and affordability in the sector (although we do not want to prevent tenants from procuring their own services from third party services). Option 2 would therefore not meet the stated policy objective. It may also lead to some landlords choosing to self-manage their properties in order to profit from charging fees to tenants as well as an unfair situation where some tenants (those letting directly from landlords) could be charged fees but others (those letting through an agent) could not.

26. Option 3 would mean that there would be no deposit to secure the property and therefore no financial commitment from a tenant to a given property. This could lead to tenants speculating on a number of properties, which could result in potentially unnecessary and costly work by agents and landlords. Similarly, requiring the tenant to pay for any default charges that are a direct result of their action means that the landlord or agent is not unfairly penalised by costs that are outside of their control. The Government does not wish to unreasonably increase the risk or financial exposure of individual landlords or agents.

27. Our preferred legislative option is option 4 since this will achieve the stated policy objectives whilst minimising the costs to business.

Overview of the Preferred Option

28. A draft Bill has been prepared on the basis of our preferred option (Option 4). The Bill contains provisions to ban landlords and their agents from requiring tenants and licensees in the private rented sector:
• To make any payments as a condition of granting, renewing or continuing the tenancy with the exception of the rent, a refundable security deposit capped at no more than six week’s rent, a refundable holding deposit capped at no more than one week’s rent and tenant default fees (such as replacing a lost key);
• To secure and pay for services from any third party or to make a loan.

29. The Bill requires local authorities (Trading Standards) to enforce the ban and makes provision for tenants to be able to recover unlawfully charged fees. The Bill creates a civil offence with a fine of £5,000 for an initial breach of the ban and creates a criminal offence where a person has been fined or convicted of the same offence within the last 5 years. Civil penalties of up to £30,000 can be issued as an alternative to prosecution. It is proposed that local authorities will be able to retain the money raised through civil penalties with this money reserved for future local housing enforcement.

30. The Bill will establish a lead enforcement authority to provide oversight, guidance and support with the enforcement of requirements on letting agents. This includes the ban on letting fees and related provisions, the requirement to be a member of a redress scheme under the Enterprise and Regulatory Reform Act 2013, the fees transparency requirements of the Consumer Rights Act 2015 as they apply to letting agents in England, and the requirements to be a member of a client money protection scheme under the Housing and Planning Act 2016.

31. It is proposed that the ban would apply only in relation to tenancy agreements entered into after legislation has come into force.

Impacts and Benefits of the Preferred Option

32. The ban would improve competition in the lettings sector by capitalising on the stronger market position of landlords, recognising that letting agent services are primarily provided on their behalf and that landlords, unlike tenants, are able to negotiate the letting fees charged. Landlords can also off-set fees charged by letting agents against tax liabilities whereas tenants do not have the option to do so.
33. The ban would increase letting agents’ incentives to compete for landlords’ business by providing lower overall fee levels and good quality of service thus making the sector more competitive, more affordable and of a higher standard. This would support good agents, offering high quality and good value services to thrive in the market. Landlords can also off-set fees charged by letting agents against tax liabilities whereas tenants do not have the option to do so.
34. Agents will need to consider their business models in light of a ban on fees paid by tenants. We would not expect the full level of tenant fees that are charged currently by letting agents to be passed on to landlords since there is evidence that a number of agents are charging excessive fees and that some agents are double charging landlords and tenants. Under a ban, all agents would need to be upfront and clear with their landlord fees in order to secure business and therefore the fees charged should be a fairer and more transparent reflection of the services provided than exists in the market at present.

35. A ban is likely to have a negative impact on agents that are unable to adapt to a market where letting fees to tenants are banned. Such agents may currently rely on overcharging or double charging in order to maintain their profits. Or they may simply be unable to offer the quality of service needed to secure the business of landlords. However, it is important to remember that any impact on business in terms of lost profits would equate to a direct saving to tenants and lost profits are likely to represent fees that were not a fair reflection of the service provided in the first place.

36. Under a ban, good and innovative letting agents that provide services that represent value for money to landlords would continue to play an important role in the market and would be on a fairer footing to compete for landlords’ business since the opportunity for rogue agents to exploit their position as intermediary between landlords and tenants would be greatly reduced. For example, it would no longer be possible for agents to compensate an artificially low rate to landlords by increasing their fees to tenants. The result would therefore be a market that is less monopolistic and more competitive.

37. There are a number of third party suppliers to the lettings market, for example companies that provide reference services and inventories. We propose that third party suppliers would not be banned from charging for their services but agents and landlords would not be able to require that a tenant pays a third party any fees as a condition of the tenancy.

38. In the Government’s consultation a number of respondents raised concerns that agents and landlords may increasingly choose to provide reference or inventory services in house, or not provide them at all, in order to minimise costs. This could have a negative impact on third party suppliers in terms of reduced business. However, there will always be a need for references, inventories and other services such as maintenance in the lettings sector. As in any other market, third party suppliers would need to continue to demonstrate the value and quality of their services in order to secure business. This may help to drive innovation and competition in the sector.

39. Further, the proposed approach to implementing the ban would not prevent tenants from choosing voluntarily to procure services from a third party. For example, some tenants may choose to obtain their own reference checks to demonstrate they are financially and legally able to meet the terms of their tenancy and give themselves a competitive edge in the market.

40. Following the proposed change, the responsibility for paying for any third party services would sit with the individual or organisation that contracts the service, which is fairer and reflective of a competitive market. There is no reason why third parties that offer a valuable service to agents, landlords and tenants would not be able to continue to market and sell these services.

41. Like any other supplier, landlords would need to set a rent that takes into account their costs whilst still being attractive to prospective tenants.

42. The draft Bill not only bans agent fees charged to tenants but also those charged directly by landlords. This is to avoid encouraging landlords to self-manage for financial reasons and to avoid agent fees only being charged to those tenants that let directly from landlords. Given this approach there is no reason why agents that are providing a valuable, high quality service to landlords should not continue to be sought after under a ban given the vital role they play in aiding landlords to comply with the legislative requirements and in keeping their properties up to standard.

43. The most common response from tenants, agents and landlords to the consultation question asking what would be the impact of the ban was that rents would rise. More than one third of tenants believed that rents would rise, but one quarter of that group explicitly said that a rise in rents was preferable to upfront fees as it would be more affordable and transparent. A number of responses suggested the ban may even cause rents to decrease slightly due to more competitive market forces.

44. As per the analysis below, we believe that tenants will see a net saving as a result of the ban. However, assuming that rents were to increase, it would become much simpler for tenants to understand and compare rental costs. It would also be easier for tenants to manage these regular and expected costs rather than high upfront and often hidden charges. The monetised costs and benefits are considered in greater detail in the analytical method section below.

45. The proposed changes are also intended to deliver a number of non-monetised benefits. It would mean that tenants would be required to find less money at the outset of a tenancy. This may lead to reduced instances of financial difficulty, thus also minimising the costs incurred by agents and landlords as a result of a tenant falling into arrears, as well as reducing incidences of homelessness. Tenants would also be financially more capable of re-locating and leaving a bad or unsuitable rental and there are wider economical and social benefits arising from this improved mobility.

46. A ban may also help to promote longer term tenancies where these are wanted since there would be no financial incentive for an agent in offering short terms tenancies that need frequent renewal. This would serve to provide tenants with greater security, which would particularly benefit families with children who are increasingly represented in the private rented sector and who often have schooling services disrupted by the need to secure a new rental property.

ANALYSIS OF BENEFITS AND COSTS OF LETTING FEES BAN

Summary

47. Households in the private sector will see an annual benefit of £215m on average over a 10 year appraisal period. This will result in savings of between £18 and £50 per household, with larger savings for households that use letting agents and or that move or renew tenancies frequently. Greater competitive pressure in the lettings market will ensure that landlords and letting agents will be unable to fully pass on the costs to PRS households.

Appraisal period and counterfactual

48. A ban on charging tenants letting fees is expected to come into force from 2019-20 and will continue indefinitely. An appraisal period of 10 years is used as per standard practice for impact assessments.
49. The policy is assessed against a ‘Do Nothing’ – the counterfactual. In this scenario the regulation to ban charging tenants letting fees is not introduced. This counterfactual is used as the baseline for the cost-benefit analysis.

Summary of benefits and cost

Table 1: Categories of benefits analysed.

Table 2: Categories of costs analysed.

50. Table 3 summarises the main quantifiable costs and benefits of the chosen policy option, which have been monetised and discounted in line with HM Treasury’s Green Book[14]. It shows that landlords will incur the greatest costs, followed by letting agents. Letting agents will be deprived of revenue from tenant fees while landlords may see an increase in letting agent fees as well as being deprived of revenue from tenancy fees.

51. The majority of these costs will result in a positive transfer to households in the private rented sector, which will benefit each year by £215m on average over the 10 year period. The average PRS household will benefit by between £18 and £50 annually. The Government will incur enforcement costs.

Table 3: 10 year annual average of net benefit by group

Methodology

52. Costs and benefits are estimated based on assumptions around the number of expected tenancy moves / renewals in the PRS, the number of letting agents and landlords, and the likelihood of a pass-through of fees to landlords and tenants in the form of higher rent. Where there is significant uncertainty around an assumption, upper and lower bound scenarios have been included. The cost benefit analysis is presented in 2015 -16 prices and discounted from the year of implementation in line with the Green Book[15].

Background / Assumptions

53. In 2015-16, there were almost 1.2 million moves to or within the private rented sector. This includes almost 0.8 moves within the PRS; 0.2m new households joining the PRS; 0.05m social renters joining the PRS; and 0.1m owner occupiers joining the PRS.

Figure 1: Household moves (thousands) by tenure, 2015-16

Source: English Housing Survey

54. Given the growth in the PRS over the past 10 years, we assume that there will be 1.4m moves to or within the PRS by the expected time of implementation – 2019-20 based on the PRS growing by 5% per annum.[16] This is based on the historical growth rate of the PRS since 2008-09 and the relative stability of the

ratio of moves to the size of the PRS stock. See table below.

Table 4: Growth in PRS households from 2008-09 to 2015-16

Figure 2: Trends in household tenure, 1980 to 2015-16

Source: English Housing Survey

55. Each move within or to the PRS would impose an administrative burden, such as searching costs and contracts, on the tenant, landlord, and letting agent if involved. Additionally, tenancy renewals will involve a further administrative burden. Landlords and letting agents recoup the costs by charging fees to tenants and / or by imposing higher rent.

56. Not all landlords use letting agents. The CML Private Landlord survey reported that 63% of landlords involve letting agents in letting and / or managing properties, while the report by Capital Economics, commissioned by ARLA Propertymark, estimated that 40% of landlords use letting agents.[17] For our central case, we take the average between both values: 52%.

57. The majority of landlords own only one letting, but the majority of the dwelling stock is owned by landlords with more than one property (CML Private Landlord Survey 2016). Based on the 2010 Private Landlords survey, we estimate that the average landlord owns 2 PRS lettings. However, this is not evenly distributed – with 78% of landlords only owning one letting but only representing 40% of the stock.

Letting agents

58. In our central case, this implies that in 2019-20 over 700,000 households’ moves in the PRS will involve letting agents that charge fees. This may be an under-estimate as it is likely that landlords who use letting agents are more likely to have more than 1 letting, thus capturing a greater proportion of the stock and PRS households.

59. The level of fee charged to tenants varies significantly, but for the purposes of this analysis we employ the mean fee charged to households reported in the EHS in 2014/15 - £223. We uprate this to 2015/16 prices by using the HMT deflator to account for the growth in prices. In the sensitivity analysis, we vary this fee by 25% to account for the range of fees provided by the consultation.

60. For PRS households that do not move, they may be charged renewal fees. The analysis assumes renewal fees are £72 on average, which is the midpoint between DCLG desk research that found that the average renewal fee was £75, following a review of 50 letting agents’ pricing practices, and analysis from Generation Rent that estimated renewal fees average £68.The estimate is corroborated by evidence from the consultation, where the median estimate provided by agents was £60, while tenants estimated £100.

61. By combining the number of PRS households that use letting agents to move and/or renew tenancies with the average cost of each fee, we estimate that letting agents will be potentially deprived of £80m per annum in revenue from the loss of tenancy and renewal fees from tenants. This revenue loss, however, as the analysis below shows, is likely to be offset to some extent by an increase in fees to landlords.

Gross revenue loss to letting agents = (Proportion of landlords that use agents)*{(No. of PRS household moves)* (letting tenant fee) + (No. of PRS renewals)*(renewal fee)}

Landlords

62. It’s likely that letting agents will recoup some of the revenue from tenant fees by passing them on to landlords via higher fees. The consultation responses showed that agents and landlords believe that one of the key impacts of the ban would be higher fees to landlords, with circa 40% of agents and landlords raising this issue. This is supported by research from the National Landlord Association that shows that 79% of landlords believe their fees will increase as a result of a ban. An increase in fees to landlords may have a number of overlapping effects:

a)      Some landlords may increase rents to cover the increase in fees;

b)      Some landlords may pay the increased fees in full without passing it on in higher rents;

c)       Some landlords may stop using their letting agent;

d)      Some landlords may attempt to renegotiate with their letting agent;

e)      Some landlords may search for a more competitive letting agent.

f)        Some landlords may withdraw from the market

63. It is highly likely that at least a proportion of the lost revenue tenant fees will be passed on to landlords. Letting agents play a role in matching households to homes, carrying out checks, drawing up contracts. Landlords will continue to demand and be willing to pay for these activities.

64. However, it is very unlikely that the fees will be passed on to landlords in full due to greater competition between letting agents to hold on to and attract business from landlords. Currently, tenants are unable to exert sufficient competitive pressure on letting agents.  As an example, the consultation found that only 50% of tenants were aware of fees at the outset of interest in a rental property. A ban will align letting agent fees with the party – landlords - that chooses and appraises the agent, thereby increasing the competition faced by letting agents.

Figure 3: Proportion of tenants aware of letting fees at outset of interest in letting

Source: Banning letting fees paid by tenants consultation, DCLG

65. Relatedly, some agents are currently over-charging for services, while some are double charging tenants / landlords. Given the consultation indicated that 43% of landlords don’t know how much their letting agent charges their tenants, it is likely that that letting agents are able to exploit their informational advantage to extract more revenue. Therefore, we expect that extra competition will ensure that only ‘fair costs’ which reflect the economic value of the activities carried out are passed on.

Figure 4: Proportion of landlords aware of how much their agent charges tenants

Source: Banning letting fees paid by tenants consultation, DCLG

66. Under the assumption that c. 75% of the fees charged to tenants are commensurate to the expected resource cost and normal profit, we expect that landlords using letting agents will see their fees rise by an amount equivalent to 75% of what their letting agent was charging their tenant. This is in line with a report from Capital Economics prepared for ARLA Propertymark, which argued that the pass-through rate is likely to be 50-100 per cent.

67. Economic theory suggests that the degree of competition in a sector or an industry determines the capacity of the firm to pass-through cost increases to consumers. For instance, in a market where there is perfect competition, the pass-through rate is expected to be 100%, while in a monopolistic market, the pass-through rate is expected to be 50%[18].

68. The number of firms in a market can be indicative of the level of competition and there are a large number of letting agents in England. In response to the consultation, the Property Ombudsman estimated that there are 17,250 letting agent branches in the UK, while a 2013 report from RICS estimated that that there are 11,560 firms engaged in letting activities. Taking the average from these sources, we estimate that there are c.14, 500 letting agents.  Despite this large number, the differences in their service and the localised nature of each letting agent’s market leads us to believe that the industry is likely to be between a monopoly (50% pass-through) and perfect competition (100% pass-through). This supports the estimate of 75% pass-through from letting agents to landlords.

Net revenue loss to letting agents = (1- pass-through rate to landlords)*(gross revenue loss to letting agents)

69. The regulation will also ban landlords, as well as letting agents, from charging tenant fees. The responses from the consultation indicate that c.50% of self-managing landlords do not charge fees. For those that do charge, these fees tend not to be as high as those charged by letting agents. The majority of landlords said that they charge between £1 and £50 per year. Taking both as lower and upper sensitivities, we use £26 as a central case. This is about a tenth of the average fees charged by letting agents.

Gross cost to landlords = (Net revenue loss to letting agents) + (No. of PRS household moves)*(1 – proportion of landlords that use agents)*(landlord tenant fee)

70. Therefore landlords will see an increase in letting fees and / or will be unable to charge fees to tenants. In both scenarios, landlords may attempt to shift the cost burden to tenants via higher rents. Some will be able to pass the cost through in full, others will be unable to do so, with the majority in between. It is likely, however that the pass-through rate will be lower than letting agents:

1. Landlords - unlike letting agents - offer differentiated products (each home will be unique) so operate in more of a monopolistic market where pass-through is lower.
2. A significant proportion of landlords currently self-manage and do not charge fees. This sector of the market may limit the ability for other landlords to increase rent.
3. There is limited capacity for tenants to absorb extra housing costs. The English Housing Survey shows that households in the PRS pay a significantly higher proportion of income on housing costs than those in other tenures. However, this proportion – 35% - has stayed very stable over the past number of years. See figure 5 below.

Figure 5: Mortgage/rent as a proportion of household income (including housing benefit), by tenure, 2015-16 & 2010/11

Source: English Housing Survey

71. In the absence of firm evidence as to the intentions of landlords and the ability of PRS households to absorb extra rent, we assume that 50% will be passed on. The higher rent will reduce the net costs to landlords. The majority of respondents to the consultation – including letting agents, landlords and tenants – believed that rents would rise as a result of the ban.

Net cost to landlords = (1 – pass-through rate to tenants)*(Gross cost to landlords)

72. It is also likely that some landlords may decide not to use letting agents. According to the consultation, 76% of landlords said that an increase in fees from letting agents would affect their decision to use an agent in the future. A survey carried out by the Deposit Protection Scheme, found that 13% of landlords would stop using agents if fees increased.[19]

73. As landlords spend time undertaking tasks in lieu of their letting agent – we would expect them to increase rents as compensation. However, in the absence of robust evidence as to the extent landlords would choose to self-manage, we have not quantified this effect. A reduction in landlords using agents would decrease the costs to landlords and increase the cost to agents.

Tenants

74. Tenants will save from no longer paying letting agent and landlord fees, with a proportion of the saving offset by higher rents. In the consultation, more than a third of tenants said they expect rents would rise, but a quarter of that group explicitly said that that an increase in rents would be preferable to upfront fees as it would be more affordable and transparent.

75. That said, we expect that the savings in fees will outweigh any increase in rent due to landlords exerting competitive pressures on letting agents and the limited ability for landlords to increase rents in compensation. In aggregate, we expect that the average household in the PRS will save between £18 and £50 annually over the 10 year period.

76. The monetised benefit will be equivalent to the annual net costs to letting agents and landlords, accounting for the higher rent tenants will face.

Net benefit to tenants = (Net cost to landlords) + (net cost to letting agents)

Table 5: Costs and benefits to each group in 2019-20, by scenario

Familiarisation costs

77. Fees make up a significant proportion of revenue for letting agents. The Capital Economics report estimates that 20% of letting agents’ revenue comes from fees. Consultation responses indicated that revenue makes up about 10-40% of revenue, with 20% being the most common response. Therefore, letting agents will need to spend time familiarising with the regulations, adapting their business model and renegotiating contracts with landlords. We estimate that each letting agent branch will need to spend a cumulative amount of 20 hours adjusting to the ban. Due to the uncertainty around the expected familiarisation time, we vary this figure by 50% in the sensitivity analysis.

78. Landlords would also need to spend time adjusting to the ban. We estimate that this will amount to 2 hours. Landlords are less dependent on tenant fees than letting agents but will still need to spent time understanding the implications for their business, and renegotiating contracts with tenants and letting agents. Due to the uncertainty around familiarisation time, we vary this figure by 50% in the sensitivity analysis.

79. In many cases, however, contracts drawn up between letting agents, landlords and tenants to reflect the ban will not be an additional burden as the process would have occurred in the counter-factual. Extra costs will arise only when the ban prompts a renegotiation of an existing contract. It is likely that the vast majority of agents will renegotiate contracts with landlords on a tenancy by tenancy basis. Given that it is proposed that a ban would only apply to new tenancies coming into force after the commencement of the ban, this will reduce the burden of the legislation on agents as it will only apply to contracts they would have needed to renegotiate anyway.

80. To monetise the familiarisation cost, we multiply the number hours of hours needed for familiarisation by the median hourly salary for an estate agent as a proxy for landlords and letting agents taken from the Annual Survey of Hours and Earnings. When uplifted by a factor of 1.3 to allow for non-wage costs, we assume that the hourly cost of a landlord’s and letting agent’s time is £14.3.

Familiarisation costs = (Hourly salary)*(Non-salary cost uplift)*(No. of hours familiarisation hours for landlords and letting agents)

Enforcement costs

81. One trading standard body will be nominated as the lead enforcement body. Their remit will be to support local authorities in enforcing the ban and other relevant letting agent regulation. This is estimated to cost between £200k and £300k per annum based on the running costs of similar bodies set up by other Government departments.

82. Local authorities are already obliged to enforce rules governing transparency of fees, which in some cases is likely to be more burdensome than imposing a ban. The budget for this is £150k per annum. The Government are planning to provide an additional £150k per annum to support enforcement of the ban. Enforcement will be designed to self-funding with local authorities allowed to keep the revenue from penalties imposed. We anticipate that it will cost an additional £100k per annum to fund tribunals related to the enforcement of the ban.

83. The enforcement costs are estimated to total no more than c.£700k per annum.

Small and micro-business assessment

84. We are not proposing to exempt small and micro businesses as it would undermine the policy objectives. The 2010 Private Landlords survey indicates that 74% of all private sector landlords own one property and 95% own between one and four properties.  Although this does not indicate the number of employees each landlord may have, it is highly likely that they would be classified as a small or a micro business. Similarly, for letting agents, the Capital Economics analysis indicates 60% of the market is comprised of small businesses[20].

85. Therefore, exempting these businesses would result in the policy only affecting a small proportion of the private rented sector, which would hinder the policy’s objective of introducing transparency and improving affordability for tenants.  This approach of including small and micro-businesses is consistent with other legislation agents in the Private Rented Sector, for example, Part II of the Housing and Planning Act 2016.

Table 6: Total discounted costs and benefits over the 10 year appraisal period

Central scenario

Upper scenario

Lower scenario

HOUSING AND PLANNING ANALYSIS DIVISION

December 2017