Tenant Fees - Lessons from Scotland

25th Nov 2016

Following the announcement by the Chancellor that there will be a ban on upfront fees charged by letting agents to tenants in England "as soon as possible", we look at the potential implications of this major change.

Whilst ARLA and other industry bodies fight it out and protest, your average agent is left in a situation where there is only so much they can do to influence the outcome. A bit like other recent surprises in the political arena, your average agent can hope for the best and plan for the worst. Whilst there has already been conjecture about rent rises and other Armageddon-like scenarios caused by this potential change in legislation, there is a fairly recent historical precedent that we can learn from.

A similar ban on agent fees was enacted by the Scottish government in 2012 and Reapit client’s adapted their software back then to a lettings setup that no longer included tenant fees. The inherent flexibility within our software setup makes it possible to adapt to a business’ requirements as they change with legislative and business demands.

Even if the software is not an issue, a change this big inevitably presents business challenges and we asked a couple of our clients about their experiences at the time of the change in Scotland. Aberdein Considine are an 18-office agency who use RPS for sales, lettings and property management and CKD Galbraith have 11 offices.

Adrian Sangster, Leasing Director at Aberdein Considine cited aborted applications as something to watch out for:

“The main impact that we witnessed was an increase in aborted applications by potential tenants.  Previously when applications were made, any fee would be forfeited by the applicant if they pulled out of the deal. After fees were removed, there was little we could do to stop tenants ‘working the system’ by applying on multiple properties before making a final decision.

Bob Cherry, a Partner at CKD Galbraith shared a similar view:

“Because the tenant can reserve a property at no cost and be referenced at the landlord’s expense, they sometimes walk away or find something else before they sign the lease having not incurred any expenditure. The landlord is then picking up abortive reference charges which can be a bit annoying. Best to get the tenant referenced and signed up as quickly as possible.”

In terms of passing costs onto the Landlord, Bob commented:

“Generally before the change we hadn’t been charging tenants for a great deal anyway apart from referencing. Referencing costs are now met by the landlord unless the tenant produces their own bona fide and up to date one. We tend to tie in the reference with a rent guarantee policy so the landlord is getting something worthwhile.”

Adrian’s view was that:

 “Additional costs have tended to be absorbed by the agent, however most agents appear to be passing these back to their landlord clients.”

Adrian has seen Landlords take this extra expenditure into consideration when setting their rentals, however, market conditions have not made this possible everywhere:

“In Aberdeen, where average rents have fallen by 16.7% in the past year, some landlords have decided it no longer makes financial sense to remain in the sector and are seeking to sell and invest elsewhere.”

As has been reported widely in the press, a link between rent rises and the ban in Scotland was somewhat tenuous. Bob said:

“We didn’t find that rents went up as a result, because those are essentially market driven - demand and supply.”

Matt Goddard, Lettings Director for Reapit commented:

“Our clients with an integrated lettings, property management and client accounts solution will undoubtedly require assistance should it be necessary to change processes if this legislation is passed. Fortunately, the software is already well geared to that sort of change and the team here are experienced in helping clients make that kind of transition.”

Until further detail on the actual legislative changes are made clear, there is not a great deal to be done, but RPS clients should be well placed to demonstrate to their clients and tenants that they are able to carry on providing a professional service at the point where change becomes necessary.