Martin & Co report: Scottish Government Decision - No tenant fees.
The Government decision in Scotland has unsettled letting agents and landlords throughout the UK. After a vociferous campaign by Shelter in Scotland, backed by various popular titles, a Government consultation exercise has resulted in a decision to ban letting agents and landlords from charging any tenant fees. Yes, you read that right, any tenant fees.
The fees which were at the heart of this matter include referencing, credit check and inventory fees. Over the weekend the Housing Minister made a statement and the essence of it acknowledged that the Rent (Scotland) Act 1984 is not currently explicit enough about charges to tenants such as reference checks, credit checks and inventory fees. “Premiums” such as charging a fee to tenants in order to grant them a tenancy have always been outlaw but the existing law will now be clarified to make all tenant charges, other than rent and a refundable deposit, illegal. The suggestion is that the Scottish Government will amend the definition of a Premium in the Act and publicise the new definition. The timescale proposed is that the clarification will become law in November 2012. Fortunately there is no suggestion that the new definition will be retrospective as it is unfair for changes to be applied retrospectively as citizens should always be able to rely upon the law as it currently stands and to organise their affairs accordingly. Shelter has been aggressively encouraging tenants to take legal action to recover "over-charged" fees and provides claims advice on its website.
Ian Wilson, Managing Director of Martin & Co commented, “As a business we collect around 7% of total revenue in Scotland from the fees being banned.” He goes on to add, “It’s bad news for letting agents generally in Scotland but if you were being charitable you could say that at least it provides certainty and establishes a flat playing field for all agents. Agents will no longer be able to discount tenant fees in order to pull applications towards them. The agents with the best selection of properties, presented to the highest standard on the most visible websites will attract more than their fair share of the available tenants.”
At Martin & Co, the general view is a balanced one. The belief is that agents work for their client – the landlord. Landlords deserve the best possible tenants for their properties and high quality credit referencing is an essential tool in delivering this. In the bad old days of checking references using bank statements and an employer’s letter, the default rate for rent arrears was around 5%. However, after the introduction of credit scoring, the default rate fell to 2%. Even if Agents will not in the future be able to recover referencing fees from the tenants directly, we don’t want to compromise on the quality of referencing by abandoning the cost of a credit check and allowing dubious tenants into the property.
Landlords should be asked to face an increase in their costs, rather than agents absorbing them in their tight margins. However landlords should in turn recover their additional overheads by pushing rents up. Managing Director of Martin & Co, Ian Wilson added, “We reckon that a 5% across the board rent increase would recover the lost income for landlords, working on the basis that agents pass on 100% of the cost increase they face.”
The effect of the changes will be multiple; marginal agents will go bust and agents in Scotland who are already stressed by complying with Tenancy Deposit Protection legislation which was enforced in the summer, will feel the pinch even more. Landlords will feel pressure on fees from agents, and rents will rise.
Wilson suggests, “The beneficiaries will be tenants who are new to the market or who move home a lot. The losers will be long term renters who are "sitting ducks" for rent increases. It would be a rough justice if the benefits bill rises for the Scottish Parliament due to increasing rents to compensate landlords and their agents for lost cost contributions from tenants.”
There is little point in hunting for a loophole in the new regulations. The Scottish Parliament will make sure that there isn’t one. We are left wondering whether letting agents and landlords south of the border can also be conveniently scapegoated because they are perceived as being commercially successful and attract envy in an age of austerity.