The ban on tenants’ fees

Running a buy to let business is set to become financially tougher this year.

The principal culprit is a ban on landlords or letting agents charging tenants for agreeing to a new tenancy or renewing an existing one. As the National Landlords’ Association (NLA) reported on the 24^th of January 2019, the Tenants’ Fees Bill has now received Royal Assent and the relevant legislation comes into force on the 1^st of June 2019.

In addition, legislation which comes into effect in April requires letting agents who hold money (by way of deposits or rent) for their client landlords must also hold appropriate insurance to protect the money they hold on behalf of their client – a so-called Client Money Protection (CMP) scheme, as described by the property group Ezytrac.

The reaction

Many landlords – and the lobby groups representing them – have protested that the viability of buying to let has already become a difficult business:

• letting agents still need to be paid by landlords;

• property maintenance costs continue to rise as further legislation is introduced to improve housing standards;

• recent legislative changes over the last few years have eaten in to landlords’ profits.

While landlords may look to cut their running costs – such as shopping around for cheaper landlord insurance for example – it is unlikely they will be able to recoup

some of the forthcoming costs associated for setting up or renewing their tenancies.

There is concern, therefore, that landlords may have no choice but to recover some of their continuing expenses by increasing rents.

The Tenants’ Fees Bill and CMP

From the 1^st of June this year, the tenants’ fees legislation will:

• ban landlords and letting agents from charging fees for setting up or renewing a tenancy;

• limit the amount of any holding deposit to a maximum of one weeks’ rent;

• limit the amount of any deposit to a maximum of five weeks’ rent; and

• prevent the charging of default fees for anything other than the actual cost of replacing keys (or equivalent security devices) and limited penalties for the late payment of rent.

Landlords or agents in breach of these new rules may be fined in the civil courts by up to £5,000 for a first offence and up to £30,000 thereafter. The proceeds from any penalties collected in this way may be used by local councils in their future enforcement of housing regulations – in a bid to further clamp down on so-called “rogue” landlords.

Mandatory Client Money Protection (CMP) schemes effectively represent yet another form of insurance reflected in the cost of running a buy to let business.

CMP is quite simply designed to safeguard monies paid by a tenant to a letting agent but intended for the landlord – principally deposits and rent paid in advance, for example. If the letting agent goes out of business before the cash is handed over to the landlord, any such money may be lost – and the tenant might end up paying rent paid in advance yet again.

It is argued that CMP therefore protects both landlord and tenant against losses incurred if a letting agent goes out of business. But the cost of such additional insurance must be paid by someone – initially the letting agent, who may seek to recover that cost from the fees charged to the landlord, who may in turn seek to recover that additional cost from the tenant by way of an increased rent.