Charging of Premiums in the Private Rented Sector - Analysis of Consultation Responses - Research Findings

Research Findings Charging of Premiums in the Private Rented Sector Analysis of Consultation Responses

Main Themes

• Almost three-quarters of respondents (73%) supported option 1 (which would involve amending and publicising the definition of a premium through a customer focused communications exercise, in order to provide clarity). Two-thirds of all respondents (67%) indicated that it was their preferred option. However, only one letting agent and five local authorities identified it as their preferred option.
• For many, the key argument in favour of option 1 was that it would promote and reinforce their view of the existing law.
• Of those expressing a view, the majority felt that option 1 would have minimal impact on the sector as not all agents currently make such charges as part of their business model. They suggested that any costs incurred as a result of implementing this option would either be passed on to landlords or absorbed. Some argued that the charges currently made by some letting agents were greater than the costs involved and not charging fees would improve perceptions of the sector.
• However, others (in particular, letting agents who responded) suggested that not charging fees could have an adverse effect - either on tenants as a result of increased rents - or on agents if they were to absorb the costs.
• One quarter of respondents (25%) supported option 2 (which would involve developing secondary legislation in order to specify charges that should not be classed as a premium, along with maximum allowable amounts for each charge), with all indicating that it was their preferred option. This was the most popular option among letting agents with around two-thirds of those responding (65%) selecting this option.
• Many letting agents supporting option 2 argued that there are legitimate charges they require to make to tenants in order to deliver an effective and quality service. Some argued that this approach was more transparent than including such costs within rents on an ongoing basis.
• However other respondents, both supporting and opposing option 2, suggested that setting maximum allowable amounts was not an appropriate task for Government and could stifle competition.
• The final option (developing secondary legislation to specify the charges, without a maximum allowable amount) was least favoured, with less than ten per cent of all respondents indicating that they supported it. By far the most significant support for this option came from letting agents.

Background to the Consultation

Letting agents play an important role in the private rented sector (PRS) in Scotland. The industry has been expanding as access to owner occupation becomes more constrained, and property owners become private landlords due to difficulties selling their properties. Letting agents support landlords by managing private rented property and help prospective tenants to access suitable accommodation. It is estimated that there are approximately 500 letting agents operating in Scotland. They are involved with around 150,000 private lettings in Scotland each year, representing half of the annual transactions in the sector^[1].

Although it was intended that existing legislation (Section 82 of the Rent (Scotland) Act 1984 and Section 27 of the Housing (Scotland) Act 1988) should prevent charges being applied to tenants (other than rent and a refundable tenancy deposit), there is evidence that a variety of additional charges are being made to tenants. This seems to result from a lack clarity regarding the definition of a premium.

Section 32 of the Private Rented Housing (Scotland) Act 2011 will change the law on premiums in the private rented sector. Firstly it amends the definition of a premium so it is clear that a premium: is any fine, sum or pecuniary consideration other than rent and a refundable deposit (equivalent to no more than two months rent); and includes any service or administration fee or charge.

Secondly, Section 32 includes a new section 89A into the 1984 Act which provides Ministers the power to outline in secondary legislation charges that will be allowed in connection with the grant, renewal or continuance of a protected tenancy.

The Response

There were a total of 424 responses to the consultation, including two petitions. These included 300 responses which were submitted as a result of a publicity exercise by Shelter, of which 201 were identical responses. In addition, ten identical responses came from the Edinburgh Private Tenants Action Group (EPTAG), five identical responses from private individuals and two identical responses from letting agents. For analytical purposes, we therefore considered 210 responses.

Nearly two-thirds of responses came from private individuals and nearly one fifth from letting agents (although some letting agents described themselves as private individuals). Less than 10% of the estimated 500 letting agents in Scotland chose to respond. However, responses were received from two letting agent representative bodies. Other significant respondent groups included professional, representative or trade bodies (7%) and local authorities (4%).

The Views of Consultees

Option 1: A consumer-focused communications exercise

Seventy-three per cent of respondents expressed a preference for this proposal, with 65% naming it as their single preferred option. Most stakeholder groups broadly supported the option, with the exception of letting agents (none of whom put this forward as their single preferred option) and local authorities (whose response was more mixed than other stakeholder groups). Many private individuals chose this option because they felt it would ensure that charges they consider to be unfair would remain illegal. Many felt that the options explored in later questions would legalise what they consider to be poor practice, and this would lead to additional costs to tenants and prospective tenants. There was particular concern about the frequency, level and application of fees relating to cleaning, inventories, assignation and credit reference checks. They often suggested that such costs should be passed onto the landlord, rather than the tenant.

Respondents from a wide range of groups (private individuals, local authorities, voluntary organisations and representative bodies) who supported this proposal emphasised the need for greater promotion of the existing law, and work to raise awareness. Private individuals, letting agents, local authorities and others felt that clarification was required in this area – either because the law is unclear or is poorly understood. Many, including a number of private individuals, some local authorities and representative bodies, emphasised the need to enforce the existing legislation alongside (or instead of) raising awareness of the existing law.

A significant number of respondents, including private individuals, some local authorities, representative groups, a few letting agents and others felt that the proposals would have very little or minimal impact on the industry – even if this meant ending existing charges being made. In many cases, respondents said that the costs would simply be passed on to landlords, or absorbed in some other ways into the business model of each letting agency. Private individuals in particular felt strongly that passing the fees on to landlords was a fairer approach, as they are the recipient or beneficiary of most of the services charged for. However, a range of respondents emphasised that such costs would ultimately be passed on to tenants in the form of rents.

Those who disagreed with the option had different reasons. Some letting agents challenged the view that many charges come under the definition of a 'premium', suggesting that the 1984 Act never intended to prevent the types of reasonable charges now being made to tenants. A number of letting agents and a local authority emphasised that any policy or practice which reduced the application of charges which have become accepted within the industry would likely lead to increased charges to landlords. These would be passed on to tenants in rent levels. They suggested that this would have a negative impact on the private rental market at a time when it will be increasingly relied upon. Others felt that while communication is important this option alone would be insufficient to address the lack of clarity, and that this measure is simply unnecessary and would therefore be a waste of public funds.

Letting agents were also most likely to consider the impact of the proposal as being significant, if agents came under pressure to stop charging what many consider to be reasonable administrative fees as a result of option one. They suggested two main potential negative impacts. Firstly, that particular checks will not be made with prospective tenants. This could lead to delays in securing tenancies, and other issues. Secondly, that administrative tasks continue to be made, but that charges are passed to landlords. Some warned that this could put significant pressure on landlords at a difficult time, and may even lead to their businesses folding and (as one respondent suggested) tenants being made homeless.

Option 2: Secondary legislation which specifies categories of sums which are permitted to be charged for providing services to a tenant with maximum allowable amounts for each charge.

Seventy-four per cent of respondents, across stakeholder groups, opposed this proposal, with only 24% naming it as their single preferred option. The proposal did, however, receive endorsement among letting agents, with 65% of this group expressing agreement.

Many of those that supported the proposal argued that there are legitimate charges that are required for an effective and quality service and that these need to be permitted. In particular, several letting agents stated that pre-tenancy administration charges are a legitimate fee. There was support for the measure from letting agents, local authorities and some private individuals on the grounds that it would bring greater clarity and openness. Some consultees felt that this option should be backed up with guidance and widescale publicity. However, some letting agents opposed maximum fees, with a significant proportion of letting agents and one representative body arguing that the residential letting industry should be able to set appropriate charges without the involvement of government and that the level of charges should be driven by the market.

Several private individuals argued that the application of premiums in the PRS should remain illegal and felt that secondary legislation would legitimise fees which they consider to be unfair. Some argued that tenants cover letting agency costs through their rents and others felt that it is the responsibility of the landlord to meet these costs. Others argued that introducing secondary legislation would confuse the position that is currently clear in law.

Option 3: Secondary legislation which specifies categories of sums which are permitted to be charged for providing services to a tenant without maximum allowable amounts for each charge.

The vast majority (91%) of respondents opposed this proposal. Eighteen respondents (9%) in total selected it as their single preferred option, 13 of whom were letting agents.

The arguments put forward were similar to those at Option 2. Several letting agents said that they supported identifying permissible charges since it would increase clarity and stop unscrupulous letting agents charging for unfair or excessive fees. Respondents felt that setting a maximum would be impractical due to legitimate variation in costs in the market (with, for example, the price of insurance varying significantly), the impact of inflation over time, and the fact that in exceptional circumstances costs will be higher.

Some letting agents gave more comprehensive lists of the charges to tenants that should be permitted. These included: Reference fees – covering credit and reference checking; Inventory fee – shared by both parties; Agency administration fee – e.g. for support during property search; Early exit fee – for unexpected costs due to earlier vacation of property (e.g. re-advertising etc); Late payment fees – as a deterrent and to cover costs; and Lease assignation fees – for substitution of a tenant within a lease period.

Many of the respondents that opposed this proposal did not give a detailed explanation for their view. Of those that did, the most common argument was that there needs to be established maximum fees to deter unscrupulous companies from overcharging.

Other respondents (from across the stakeholder categories) repeated the view that premiums should remain illegal and not be permitted through secondary legislation.

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