Letting Agent Fees (Tenants)

Siobhain McDonagh Excerpts

Wednesday 6th September 2017 Westminster Hall

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I beg to move,

That this House has considered the proposed ban on letting agent fees to tenants.

It is a pleasure to serve under your chairmanship once again, Mr Owen. I must first draw the House’s attention to my entry in the Register of Members’ Financial Interests. I worked in the property sector for 30 years prior to joining this House. I started my business in the property sector 25 years ago. It has grown into a national business, which I am still involved in as non-executive chair and a principal shareholder. Like many in this sector, my business and its revenue would, on the face of it, be significantly affected by the proposed changes; nevertheless, for reasons I will outline, I am in favour of the ban on lettings fees, but it needs to come with effective enforcement, and we need to cater for unintended consequences, in particular for those whom we are most trying to help in this House: tenants on low incomes.

Why am I in favour? I have declared my interest in this sector, but think that all Members with any outside interests should leave them in the Members’ cloakroom when they join this House. We should first look to ensure that we represent our constituents’ interests. Of course, our constituents include letting agents, landlords and tenants. For me, in business, as in politics, the consumer has to be put first. The free market is ultimately the best regulator that we can ever have. It creates so much opportunity. It created opportunity for my business 25 years ago; there were no protections, entitlements or privileges for the businesses in our market that we sought to compete against then. The consumer, our landlords and our sellers could simply choose which agent delivered the best service at the best price.

[Siobhain McDonagh (Mitcham and Morden) (Lab)]

May I ask the hon. Gentleman what an unfettered free market, where supply is limited, does for first-time buyers and people on low incomes who have to resort to the private sector?

[Kevin Hollinrake]

The first-time buyer difficulty is huge. We are not debating that today—we are talking about tenants—but as I stated, we need to consider the plight of those on low incomes, and I will do that shortly.

The point is that tenants do not have a choice. This is not a free market for tenants in terms of levying fees on them. Landlords choose agents; tenants choose properties. When a tenant has chosen a property, the agent can charge them whatever they feel is the right fee. It is a completely closed market at that point. Most agents take a very responsible view of that and provide their services at fair rates, but from the research done in the consultation by the Department for Communities and Local Government, we know that there is huge variation in those charges. DCLG suggests that the average tenant fee is £318; the industry says that it is much lower. One thing that we would all agree on is that there is huge variation. DCLG says that tenant fees are between £120 and £747.

I was recently at a roundtable of letting agents discussing this issue. A high-profile London agent said that they charge a £400 tenant fee, which they justified on the basis that they provide viewings for tenants. To me, that is clearly a service they provide for their landlords. Another leading figure in the estate agency industry talked to me about his daughter, who went to college in Manchester. She rented a house with four fellow students, and they were charged £500 each as a tenant fee. That is simply unfair.

Some agents exploit this opportunity. They use it as a way to compete unfairly in the marketplace, which is not good for people who operate a fair system of charges. They use it to lower their charges to landlords, so that they attract more of them, and transfer that cost to the tenant. That cannot be right. Others use it simply to maximise profits. There is a loophole, and I welcome the Government’s action in looking to close it. I think that tenants should welcome that, as well as housing charities and Members across this House.

However, it is right that we consider the potential impacts of this change, and there are impacts and unintended consequences. First, there is the issue of rent increases. All rules and regulations have a price tag. A similar ban was introduced in Scotland in 2012. It was a kind of secondary ban, because a ban was put in place some years earlier that had not been totally effective. Having talked to agents in Scotland, I know that they had to make more efficiencies after the ban. They cut jobs and transferred some of the costs and charges to landlords, which is bound to result in higher rents. In terms of landlords and the private rented sector, the lettings market is an effective free market, and those markets do not lead to excessive profits if there is sufficient competition, which there is. Research by LSL Property Services—a property company that looked at the Scottish situation—said that there was a 4.3% increase in rents in 2013, compared with a nil increase in 2012.

The likelihood is that there will be a rise in rents, and that will disproportionately affect some tenants. Tenants who move more frequently will probably be better off; tenants who stay in properties for longer—usually tenants on lower incomes—would potentially be worse off if the fees go into rents. Overall, in their consultation, the Government recognise that this is a potential, if not desirable, outcome. The housing charity Shelter, which has been campaigning on this matter, also sees it as a potential outcome. On the forum that we held on Money Saving Expert, we asked tenants about that, and they said that the transparency of that is better than the lack of transparency and the closed market regarding tenant fees.

I see in the Gallery a number of people who are involved in the industry. The industry is very concerned about the impact on jobs and businesses. The industry position is that we should have a cap, rather than a ban, on fees. I understand that, and at one point argued for it, but the trouble with a cap is that it is a contrived device. Putting a cap in place potentially allows for a race to the top. It does not afford the opportunities of a free market, which I see as the best regulator. What charges would we allow and where would those be capped? That was one of the issues with the original Scottish scheme that was supposed to ban fees. It created a loophole that allowed other types of charges. The Government’s position is clear, and the reality is that the direction of travel is towards a complete ban.

We must consider businesses, which are hugely important. Their investment in our economy and the jobs and wealth that are created are very welcome, and we should do whatever we can to ensure that we create a fair, level playing field for business. According to Companies House, the number of letting agents in Scotland has increased since 2012, so some of the worries about businesses seeing difficulties are probably overblown. One of the leading lettings-only agents in Scotland has had no office closures since 2012.

As somebody who believes in competition, I see market failure and closed markets as protecting weak companies that do not compete on a level playing field, and that do not really work, in terms of their services and in terms of efficiencies, which businesses are so good at.

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[Kevin Hollinrake]

The hon. Gentleman makes some good points. In the main I support them, though I do not agree with them all. I have made it clear that there is an issue here that we need to deal with.

I have a couple of further points on unintended consequences. It is welcome that holding deposits will remain, and that if a tenant offers false documentation, the letting agent can retain it. I wonder who adjudicates on whether that process is fair; I think it is part of the redress schemes that apply to letting agents. There are also exemptions for tenants’ actions, so that tenants can be charged if they lose keys or break a contract. Again, I believe that that is fair.

The consultation suggests limiting security deposits to one month’s rent. The difficulty with that is that a number of tenants will try to use their security deposit as their last month’s rent. We know that around 50% of tenancies end with condition issues and work required. Limiting the security deposit to only a month’s rent raises the possibility of leaving the landlord out of pocket, because it is very difficult to chase a tenant for a debt once they have left. One month may be too short a limit; we need to look at that.

We really need to consider enforcement. The consultation proposes that local authorities enforce and oversee the regulations, but we know that most local authorities simply do not have the time to do that effectively. We need proper enforcement to ensure that we deliver a level playing field for all companies, in which rogue agents cannot continue to charge while good agents do not. In a recent survey, 45% of local authorities said that they took a “reactive only” approach to regulation in the sector.

The rules will also apply to landlords who let directly to tenants. England is the only part of the UK that does not have a central register of landlords. Who will monitor landlords to ensure that letting agent fees are not simply being transferred to direct charges from landlords? Who will regulate that area? There is a chance that more landlords will self-let after the changes.

There is a simple solution: extending the redress schemes, which have been very effective in raising standards, to landlords, so that tenants who rent directly from landlords have somewhere to press a claim for unfair treatment, rather than going to their local authority. That would be a light-touch way of regulating the sector. It would also have the benefit of improving rental standards, to which the hon. Member for Ealing Central and Acton (Dr Huq) referred. Redress schemes could apply a national rental standard and oversee it to ensure that we raise standards. The Government have been proactive in raising standards, having introduced measures on smoke alarms, carbon monoxide detectors, electrical checks and client money protection.

[Siobhain McDonagh]

Will the hon. Gentleman give way on that point?

[Kevin Hollinrake]

For the final time.

[Siobhain McDonagh]

The hon. Gentleman is very generous in giving way. We can have what laws we like; if local authorities do not have the funds to do works in default if a landlord does not do them, the laws are pointless. In the last year, only 19 of the 33 London boroughs have done any works in default.

[Kevin Hollinrake]

I accept that point; I made it earlier. A far more effective way to regulate this would be to have a redress scheme, backed up by a lead enforcement agency for prosecutions and higher fines. At the moment, the fines are £5,000, which is insufficient. Fines for rogue agents should be up to £30,000, as in the Housing and Planning Act 2016, and we should also allow for the possibility of banning orders for rogue landlords and agents. Again, that would potentially provide a funding stream for local authorities and the lead enforcement agency.

In conclusion, the way forward is to make sure that we deal with unintended consequences and deliver a considered and strategic solution, using a combination of market forces, the best regulator and light-touch regulations, which would lead not only to a level and fair business playing field but—crucially—a fair deal for tenants.

[Siobhain McDonagh (Mitcham and Morden) (Lab)]

Thank you, Mr Owen, for calling me to speak and I also thank the hon. Member for Thirsk and Malton (Kevin Hollinrake) for securing this important debate.

At one stage, the private rented sector was the stop-gap for people before they owned their own home. Now in the UK, one in four families with children privately rent, which is up from one in 10 just 10 years ago. In fact, the total number of households privately renting has increased by more than a third since 2010. The under-supply of new houses, particularly social homes and affordable homes, is forcing those households into the private rented sector and extortionate costs have left them trapped and unable to save for a home of their own.

Let us start with the letting fees. Every month, renters pay more than £13 million in unfair fees. On average, each tenant is expected to pay more than £200, with one in seven being charged more than £500. I have heard of tenancy agreements that are as high as £480 and referencing fees that are up to an eye-watering £550. Fees have risen faster than inflation and it is no wonder that, as a result, more than half of tenants have had financial problems. About 27% of tenants have had to borrow or use a loan to pay fees, while 17% cut down on heating and food to cover costs. Can anyone explain why a referencing could possibly necessitate such an extraordinary expense?

Let us take my constituent David as an example. He rents a small room in what was originally a three-bedroom house. There are now two further bedrooms in the loft and the two reception rooms on the ground floor are also used as bedrooms. There are currently 10 households in that house and David is charged £550 a month for his room. That is not the highest rent in my constituency, but it is still high enough, and he was further charged an astounding £1,250 in letting fees, as well as an additional £50 simply to get a letter that explained how much his deposit was and what he had paid for. How can anyone possibly justify such a disgraceful fee? Such fees are exploitative and the market is completely lacking in transparency, with fees being set and charged by individual agents.

I appreciate that I am coming at this issue very much from a London point of view, but the owner of the property that David lives in is taking in a rent of £3,850 per calendar month for an unregistered house in multiple occupation.

Despite the Consumer Rights Act 2015 making it mandatory for letting agents to publish their fees in full, 12% of them still do not do so. One in five tenants expect to have to pay an average of £80 to renew their tenancy, with letting agents preferring short tenancies, so that they can impose fresh extortionate fees on a new tenant. Since the proposed ban on letting fees, one agent has even introduced an additional fee, named a “legal document charge”, as compensation in the short term before the proposed ban hits. Capping those fees would not limit the number of different charges that a tenant might face and I agree with the hon. Member for Thirsk and Malton that they should be banned once and for all.

However, a ban on letting fees will not solve the country’s housing crisis; it would not even solve the crisis in the private rented sector. Since 2010, the cost of private rents has risen by 22%, making tenants increasingly reliant on support from the state. In fact, the amount of housing benefit going to private tenants has more than doubled in the last 10 years, with a quarter of private renters now claiming it. Similarly, the average cost of a deposit in London is a staggering £1,760.30. A ban on letting fees will not solve those spiralling financial issues.

Renters are lost in our housing crisis. They are unable to afford their own home but are unlikely to qualify for social housing. They face paying rents that on average take 41% of their household income, compared with homeowners, who pay 19% of their income on mortgage payments. How can a private renter ever be expected to afford their own home? Extortionate costs have left almost two-thirds of private renters without savings or investment, them precariously close to homelessness if rents continue to rise. It is no wonder that private renters are now the biggest group being made homeless, with one in three homeless cases involving a tenant at the end of their tenancy.

I hold my advice surgery every Friday and the biggest group of people who come to me because they are threatened with homelessness are mature families with three or four children, and they have lived in their private rented home for 10 or 15 years and never miss their rent. They have done nothing; they come to me because of the fact that their landlords can receive higher rents by renting to people who are not even partially on housing benefit. When my mum and dad came to London, they regularly saw signs in the windows saying, “No blacks, no Irish, no dogs”. Today the equivalent signs say, “No one on housing benefit or universal credit”.

Considering the extraordinary costs, it is unforgiveable that almost a third of private rented homes in England fail basic health and safety standards. In fact, a private landlord is more than twice as likely as a social landlord to be renting out a property containing a serious safety hazard. But tenants are petrified of voicing their concerns, with 820 renters per day in 2014 being threatened with eviction for highlighting poor conditions in their home. Councils have the power to fine failing landlords but are strapped for cash themselves and simply cannot afford to enforce the regulations. Next month, the Government’s register of rogue landlords will become active, but unless tenants can access the register it will be worthless to them.

After hearing these statistics, few will be surprised to hear that the level of home ownership in Britain is at its lowest since 1985. When I became an MP in 1997, homeowners could expect to pay just over three and a half times their annual earnings to buy a house; now, it is over nine times. Newly built houses are out of reach for 83% of working private renting families and the vast majority of those families are simply unable to afford a home of their own.

[Dr Huq]

Does my hon. Friend also agree that this problem is also an outer London problem? It used to be the kind of thing that was associated with inner cities. In my constituency of Ealing Central and Acton, 34.4% of people are in private rented properties, compared with 16% nationally. We have a landlord register, which is a good idea. Does she agree?

[Siobhain McDonagh]

I totally agree with my hon. Friend. We both represent outer London constituencies and we are seeing rents that are completely unimaginable. I was looking for a home for a constituent who had to leave her previous home in shocking circumstances. We spoke to a very good local landlord, who told me that a one-bedroom flat in the street I was born and brought up in and where my 93-year-old mother still lives would cost £1,250 per calendar month. My constituent is a young woman who has a good job as a civil servant—she works very close to where we are now—but there is no prospect of her having access to such a home.

For those who cannot afford private rents, nearly 76,000 households are now in temporary accommodation, while not a single starter home has been built since the Government announced their flagship programme three years ago. Our housing market is broken. The lack of housing supply is at the heart of our housing problems, from homelessness to falling home ownership and soaring house prices.

[Kevin Hollinrake]

The hon. Lady has highlighted serious abuses of the private rented sector, particularly in terms of some of the conditions and charges that she referred to. Does she accept that there is life outside London? The property market in the rest of the country can be completely different to the one she describes. Does she also accept that the vast majority of landlords and agents do a very good job in their provision of the private rented sector and making sure tenants get a fair deal?

[Siobhain McDonagh]

First, I accept the hon. Gentleman’s point about London. Our problem is that London is such an important driver for the country’s entire economy and London is getting bigger. Merton is no longer an outer London borough; it has become inner London because London is becoming Reading or Milton Keynes. The pricing out of the people who do the important jobs that we need to be done from ever having an opportunity to live in our city is an important issue for the whole country.

[Wera Hobhouse (Bath) (LD)]

Does the hon. Lady accept that the issue is not only a London problem? I represent Bath and the problem spreads around the country from London, so it is not just a London problem.

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[Siobhain McDonagh]

I appreciate what the hon. Lady says. I imagine Bath is becoming part of Greater London as well as people make ever further attempts to be able to afford the sort of home in which they want to bring up their children. I accept that most private landlords and letting agents are good people simply doing a job, but that does not solve our housing crisis. Buying to let causes problems for young people in good jobs who simply want the opportunity that many of us had to own a home, and we have to do something about that. The problem is not bad motives on the part of people, but the fact that buy to let has an implication for the wider housing market, our wider economy and our wider society.

A homeless family turning up in Merton today will be placed in temporary accommodation in Birmingham or Burnley, away from their wider family and away from their support and their children’s schools. That cannot be right for anybody. Let us ban letting fees, but let us not believe that that will help us to resolve our housing difficulties.

[Albert Owen (in the Chair)]

I do not want to impose an official time limit, but I will call the Front Benchers at half past. Those who wish to speak have about four minutes.