Written evidence submitted by Generation Rent [DTF 055]

Generation Rent represents the UK’s 12 million private renters, and works towards a fair, secure, and decent private rented sector.

Executive Summary

1. Banning tenants’ fees will ensure that the lettings market will be more affordable for tenants, ensuring renters are able to access homes without going into debt, and allowing tenants to move more easily when they need to. It will also make the market more competitive by ensuring the agents’ costs are met by their customers – landlords – rather than by captured tenants who have little consumer power in the present system.

2. There are opportunities to improve the Bill. The cap on security deposits of six weeks’ rent is too high, but if the government is to review deposits it should consider greater reform that gives tenants more control. There remain problems with holding deposits, which ought to be rendered unnecessary by developments in referencing technology. The Bill should add protections for tenants so that letting agents do not abuse the use of holding deposits, and make them refundable where a tenant needs to withdraw before signing a contract.

3. Enforcement requires considerable focus. At local authority level there remains a lack of resources for full, proactive enforcement, and tools should be developed to ensure renters can inform enforcement bodies about illegally-charged fees, without the system being onerous for tenants or only reliant on their reporting.

4. Renters should be liable for greater compensation than simply being returned the illegal fee. One model would be that in practice in Scotland, where tenants are liable to up to three times a fee where they have been illegally charged.

1.The Government's stated objective is to deliver '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.' Do the provisions of the draft Bill enable this objective to be achieved?

Currently letting fees make it more expensive for a tenant to find a new place to live and they discourage tenants from moving out of an unsuitable property. The nature of the rental market means that few tenants have any choice over which agent they use – they will typically apply for the property that best meets their budget and needs, which means that it is easy for an agent to charge more in fees than the cost of the service.

Generation Rent found that the average fees for a two-adult household are £404 but range from £40 to £813.[1] By charging lucrative fees to tenants, letting agents have an incentive to maximise the number of new tenancies they deal with, which can lead to raising the rent as much as possible to encourage churn (as well as maximise commission), or even serving eviction notices on tenants who complain.

By banning all fees, it will become easier for tenants to compare properties as there is only one cost to compare: the rent. Removing barriers to moving home gives the tenant a stronger hand in negotiations, whether that is around rent increases or repairs.

We should therefore see a better service from landlords. A third benefit is that letting agents will rely solely on commission from the landlord and will therefore have an incentive to encourage renters to stay as long as possible.

However, although a ban on fees will support greater fairness, competition, and affordability, the proposals on tenancy security deposits do not. The draft Bill caps these deposits at 6 weeks’ rent, which is not affordable for many renters, and is unnecessarily high.

At Generation Rent, we have often heard that high deposits, as much as fees, have forced people into debt, stopped them from moving or generally caused financial difficulties. In a market where certain institutional landlords are no longer taking deposits,[2] it seems retrograde to cap them at such a high level.

Generation Rent recommends capping them at 4 weeks’ rent, which is clear to tenants and is an amount that easily covers almost all deposit disputes.

The Bill offers an opportunity to rethink deposits more widely and start treating them as the tenants’ own money. Tenants should have the option to allocate money in their own bank account to be frozen as security for the duration of the tenancy. If the landlord wanted to claim the money at the end of the tenancy, the bank would agree to do so once the deposit protection scheme had approved the claim. This would allow the tenant to earn interest on what is their money. Given that this sum of money is locked away as long as the tenant is renting, it ought to attract a higher rate of interest than they might get elsewhere and could therefore encourage additional saving. Two thirds of private renters currently have no savings so this change would see wider economic benefit.

2. Are the draft Bill's provisions necessary, clear and workable?

While the main direction and approach of the Bill’s provisions are workable and clear, key details still need to be addressed to ensure the legislation works as well as possible for tenants.

While they exist, it is right that holding deposits are capped at one week’s rent; but to further make the lettings process more affordable for tenants, the legal framework under which holding deposits are taken needs to change. In its current formation it is one-sided and unfair to tenants.

This is because holding deposits commit tenants to a property (otherwise losing the deposit if they pull out), but do not set similar obligations for the lettings agent.

There is no legal obligation on the agent or landlord to restrict viewings once they have taken a holding deposit, and they could, for example, eventually take on a different tenant despite being in receipt of a holding deposit. The draft Bill entitles the tenant to a refund of the holding deposit if the tenancy does not proceed, but the tenant would want to avoid this eventuality in the first place.

In other markets where tenants’ fees are banned, such as Scotland, they have also outlawed holding deposits, because of their one-sided nature.

To make the system equitable, then, the Bill should either follow the ban that has taken place in Scotland, or tenants should be able to pull out from a home with the security deposit still refundable, while actually securing the home for the tenant if they want it.

If holding deposits are to continue, their use must be policed properly. If letting agents are to be regulated, as the Department for Communities and Local Government is considering, then the new system should record every rented property. This could then allow holding deposits to be registered – at a maximum of one per property at any one time – and avoid abuse.

Some argue that tenants must forfeit holding deposits if they pull out as otherwise they might apply for numerous tenancies, wasting letting agents’ and landlords’ time. There is no evidence that tenants would want (or be able to afford) to frivolously put holding deposits on homes they don’t intend to take or are not sure about. The principle of a holding deposit should respect the fact that tenants might withdraw from properties for legitimate reasons, such as unfavourable tenancy terms, and shouldn’t be financially penalised if they must pull out.It is right that letting agents will be prohibited by the Bill from requiring a tenant to pay a third party for a reference or inventory check. This is one area where the costs involved could be reduced through the use of tenant passports, which are managed by the tenants themselves. There may need to be standards for these so that tenants can be confident that their passport will be accepted by any given agent. As a tenant passport would be presented upon application, there may eventually be no need for holding deposits for most tenants.Another problem with the Bill as drafted is around how local authorities enforce against those agents who are flouting the fees ban. Tenants will be able to claim back illegal fees, with the support of Trading Standards.

Although Trading Standards will have a duty to enforce (where for example another agent complains about a competitor who is charging fees), it is not clear that there is a duty to proactively check compliance.

Given the lack of enforcement resources available at local authority level for recent legislation around fees transparency, mandatory redress, and retaliatory evictions, it seems unlikely under the current funding arrangements that local authorities would have the required resources to fully police the ban.

If tenants had the right to compensation worth, say, three times the value of the fees they paid, then they'd have more of an incentive to pursue the agent themselves through the courts, rather than relying on Trading Standards to do so. This would still require tenants to find upfront costs to pay for court fees, which will deter many renters.

To empower tenants in this area, government should be considering, as part of its wider regulation of letting agents, online tools to ensure they can raise issues of fees in a light-touch and timely manner. These tools could help a large number of tenants challenge the same agent or contact Trading Standards at the click of a button every time they're illegally charged. They should also allow renters to track the progress of action taken.

Tenants in Scotland can be awarded up to three times the illegally charged fee, and are supported in doing so by Shelter’s Reclaim Your Fees website[3]. Government should consider how to facilitate the implementation of a similar tool for England.

Some clarification is required on Schedule 1, Section 1.6 of the Bill. It contains a potential loophole that allows different levels of rent to be charged for different periods. Although there is a prohibition on bundling fees into the first month’s rent, it appears that this schedule allows different rents to be charged over short periods of time, with the tenant’s consent, meaning that the effect might be the same, especially given the difficulty many tenants have in challenging a landlord’s terms when they are desperate for a roof over their head.

3. What are the resource implications for local authorities?

A duty to enforce means that Trading Standards will have to respond to complaints. Local authorities will be able to recoup the costs of enforcement through civil penalties, meaning they should be incentivised to enforce. However, once the legislation comes in, there remains a question of how quickly they can respond to complaints.

The government should therefore also look to tenants themselves as playing a role in policing the ban. They are already eligible for compensation where the landlord has failed to protect the deposit to a sum up to three times the value of the deposit. The same principle should apply to fees.

It remains important for the authorities to have a duty to enforce as letting agents will want to ensure that their local competitors are playing by the rules.

4. What is the likely impact of the legislation on key stakeholders including tenants, letting agents and landlords?

For tenants, no fees to pay will mean that it will be cheaper to move home. This will help those who want to move but can’t afford the upfront costs, and those who don’t want to move but have to. For many such tenants, savings currently do not cover letting fees, so this could help them avoid taking out a payday loan or incurring overdraft charges.

The lower barriers to moving home also increases the risk to the landlord and agent of void periods where no rent is collected. That strengthens the tenant’s hand in negotiations. If a landlord refuses to make repairs or wants to raise the rent, the tenant’s threat to leave will be more credible, making more likely a favourable outcome for the tenant.

Letting agents will have an incentive to encourage longer tenancies to maintain a good relationship with their landlord customers. In practice this will benefit tenants who will experience fewer unwanted moves. However, it should be noted that the ability of agents and landlords to raise the rent and serve a no-fault eviction notice means that the tenant remains fundamentally insecure in their home without further reform of tenancies.

With fewer changes of tenant, letting agents will incur fewer costs that must be passed on to the landlord.

For landlords, covering all the agents’ costs will mean that many will seek out cheaper agents. This will force some agents – especially those charging higher levels of fees – to find efficiencies in their operations.

Given the greater consumer power for tenants, the more negligent landlords will find themselves forced to take better care of their properties.

It is also possible that the legislation could lead to the development of more tenant-led services such as references in the form of tenant passports, providing more choice for tenants. This should hopefully reduce the time involved in agreeing a tenancy and thus the need for a holding deposit.

January 2018