The problems with letting agent fees

One of the big shocks for the letting agents’ industry last year was the announcement by the chancellor of a ban on letting agent fees paid by tenants. Letting agent fees for tenants have been cause for complaint for a long time. Hapless tenants struggling to find a decent property to rent are often being faced with demands to pay:

• The first month’s rent;

• The deposit;

• A fee to cover the cost of referencing;

• An ‘admin’ fee for the agents, which generally varies between £100 and £700;

• An additional fee for the tenancy agreement;

• The cost of 50 per cent of the inventory clerk’s charge, although this is often charged at the end of the tenancy; and

• Renewal fees, again at the end of the fixed term, often charged as a condition of granting a new tenancy.

This can all amount of several thousand pounds – a lot for tenants to find at a time when they also have the normal expenses associated with moving home. Often these fees come out of the blue. Agents are supposed to display all fees prominently in their offices and online, but this is frequently not done, which means tenants may need to scrabble around to find the money quickly and may end up paying exorbitant charges if they need to borrow.

The wide discrepancy between the fees charged from one agent to another encourages the belief that these agents are ‘greedy’ and makes a total fee ban appear, to those not involved in the industry, the only fair way to deal with things. But let‘s take a look at the fees in more detail.

Charges which are not agents’ fees

Some of the charges that tenants have to pay upfront are not actually fees to letting agents, such as rent in advance (although in fact most of this money will be taken by agents against their commission).

Likewise, the tenancy deposit remains the tenants’ money throughout, and there are strict rules about deductions and the procedures tenants use to challenge charges they consider unfair. Not all agents take a deposit but it is fairly common and is something tenants should expect, although, if they are moving from one rented property to another, they should get their old deposit back if the previous property is left in good condition.

Cost of referencing

All agents should carefully reference tenants. This is an important part of their job, particularly in view of the losses landlords can suffer if a bad tenant is allowed into occupation.

The actual cost of obtaining a credit reference report is usually modest. One-off charges are in the region of £15 to £30, although agents who do credit checks all the time should be able to negotiate a cheaper rate. The sums charged to tenants though are often considerably more than this.

Tenants groups argue that the cost of referencing should be borne by the landlords and agents. Agents, however, point out that this would encourage tenants to make unsuitable applications for properties they cannot afford, causing unnecessary expense. There is some truth in this. It would also be unfair if landlords were allowed to charge for reference fees but letting agents were not.

Agent’s admin fees

This is where we enter into murkier waters. In law, a letting agent’s customer is the landlord. They are normally employed to find, reference, and sign up a tenant using a properly drafted tenancy agreement. For this they receive a commission, which varies from agent to agent but is normally in the region of 10 to 15 per cent of the rent – depending on the work done and whether the agent is employed on a ‘let only’ or full management basis.

This begs the question: if the landlord is the agent‘s customer, why are they charging tenants? Surely the cost of their work should be covered by their commission? Otherwise, what is it for?

Indeed, under agency law (which very few people seem to be aware of or understand), an agent‘s right to charge is dependent on their contract or agreement with their principal (i.e. the landlord). If they make an ‘undisclosed’ charge, this is deemed to be a ‘secret profit’ which the principal can claim back from the agent. Under agency law it belongs to them – not the agent. This is the partly the basis of a class action being brought against London agents Foxtons.

Additional fees include a separate charge for the tenancy agreement. I can’t see any justification for this, particularly as many agents charge both landlord and tenant significant sums, which together are far in excess of a fair charge. I would be surprised if this is not outlawed under the tenant fee regulations in due course.

Meanwhile, the justification for the inventory check in and check out fee is that it is in the interests of both landlord and tenant to have an independent inventory and report, as this is needed when considering deductions from the deposit. If inventory clerks’ fees are just paid by landlords, this will cast doubt on the independence of the report, affecting the weight which tenancy deposit adjudicators will be able to place on it.

Finally, renewal fees have infuriated both landlords and tenants for years (renewal fees for landlords were the subject of the 2010 case on unfair terms brought by the Office of Fair Trading against Foxtons).

It is questionable whether they can be justified as many agents (particularly outside London) do not charge them. It is also arguable that the desire to charge a renewal fee encourages agents to arrange for a new fixed term renewal where this might not be appropriate, as tenancies invariably continue anyway as a periodic tenancy. Renewal fees are in my view strong candidates for an outright ban.

Questions for the future

The topic of fees for tenants is less black and white than many tenants’ organisations would have us believe. I think there is strong justification for tenants being asked to pay the actual cost of referencing and 50 per cent of the inventory report charge.

The agents’ admin fee is a trickier proposition. To deal with it properly I think there would need to be a review of the whole industry in the context of developing proper letting agent regulation. There may be scope for certain qualified agents to be entitled to act for both parties in a way analogous perhaps to acting as ‘stakeholder’ or as an independent arbitrator, taking fees from both. However, this would have to be in the context of a properly regulated industry.

The other solution would be for tenants to be required to employ ‘tenants’ agents’ who would act for them, so both parties would have a representative, in the same way that buyers and sellers of a property have their own solicitors.

It will be interesting to see if any of these ideas surface in the forthcoming government consultation on letting agents’ fees to tenants.

Tessa Shepperson is a lawyer and blogger specialising in landlord and tenant law

@TessaShepperson www.landlordlawblog.co.uk