The Tenant Fees Act came into force on 1 June 2019 after years of rumour, counter rumours and battles with the authorities. While we will take a look at the repercussions in more detail later in this article, in effect the new laws abolish the majority of fees associated with letting a property in the private sector in England. At this moment in time it is difficult to see any positives for private landlords and letting agents and how a reduction in income can have any positive bearing on the quality or cost of accommodation in the private sector.
Legal charges under the Tenant Fees Act
The best way to describe the sweeping changes introduced by the UK government is to assume that all historic fees are now illegal with the exception of:-
- Refundable security deposit (capped at no more than five weeks rent or six weeks if annual rent is more than £50,000)
- Refundable holding deposit of no more than one weeks rent
- Early termination charge (if at the request of the tenant)
- Default fee for late payment
- Cost of replacing a lost key
Some of the more common charges which are now illegal include:-
- Viewing fees
- Credit checks
- Reference checks
- Drawing up tenancy agreements
A recent report suggested that on average, additional charges could add as much as £800 to the upfront cost of renting a private property. However, what about legitimate additional costs?
Letting agents will increase fees for landlords
If letting agents are not able to directly charge tenants as they have done in the past then they will simply increase the management/administration fees payable by private landlords. At the end of the day, whatever the politicians say, there are bona fide charges above and beyond those now allowed under the new legislation. So, how will landlords react?
There seems to be a common misconception buy to let investors and private landlords are working on huge profit margins for their property portfolios. It is fair to say that profit margins were much healthier prior to changes of the last couple of years but landlords have had to take investment risks and utilise their own time/effort to maximise returns. In the event that profit margins are reduced to wafer thin levels this would have a significant impact on the risk/reward ratio and (as we have started to see) a number of private landlords could exit the market.
Passing on costs
It is very easy to get wrapped up in the emotion of these changes to the private rental market. So, let us take a step back and peruse the situation from a distance.
Many landlords have already been fairly vocal in their plans for the future, with many suggesting they will be forced to increase rents. There are costs associated with obtaining references, credit checks and similar activities undertaken by letting agents in the past – somebody has to pay in the future. If letting agents/private landlords are not able to invoice tenants directly then many will simply increase their rental charges to make up the shortfall. As rental income is a bona fide charge under the new legislation this is perfectly legal although it could put some tenants in an even worse situation than before.
Fines for private landlords
The new legislation will see landlords fined up to £5,000 for a first offence and a potentially unlimited fine if they break the rules again within five years. It is starting to look like something of a vendetta against private landlords with the increase in stamp duty on second home purchases, reduction in mortgage interest relief and now the introduction of the Tenant Fees Act. However, many experts are already picking holes in the new legislation with a simple solution to reduced profitability, an increase in rental rates.
Some observers believe that recent changes to the private rental market could be reversed in the event a new Conservative party leader with right-wing tendencies is appointed. We have already heard Boris Johnson, the favourite to take over as Conservative party leader, suggesting new tax breaks for 3 million higher rate taxpayers. Therefore, it would not be beyond the realms of possibility to see a reversal of at least some of the recent changes to the private rental market. Time will tell…………