Are you really ready for the Renters Right Act?

The press has been full of stories about how the Renters Rights Act will work. However, I have not yet seen much comment in the press about the financial impact that it could have on letting agents. It is high time to address this issue so what might the consequences be?

Firstly, all tenancies will automatically go periodic so there will be no more renewals and this will make it much harder for agents to charge renewal fees. This will have a huge impact on many letting agents income. Secondly, the bar on no-fault evictions might mean that the average length of a tenancy could increase quite significantly. This will mean a loss of income from re-letting fees. A third factor is that rent increases will only be allowed once a year which could mean that rents rise more slowly. This too will reduce fee income. Fourthly, some landlords will decide that they do not want the cost and hassle of complying with all the new regulations and may decide to sell their rental properties. Finally, there will be a significant additional cost burden for landlords due to the complexity of the dealing with all the new regulations.

At first glance, the situation looks very bleak. However, in the long term I do not believe that The Renters Rights Act will destroy the letting industry. The sector is just too big and too important for this to happen.

The precedent for the threat that letting agents are currently facing is the Tenant Fee Ban that was introduced in 2019.  Agents used to earn a significant amount of income from tenant fees and when the ban was proposed many industry commentators said that it would have a devastating impact on the profitability of letting agents. Time has proved that they were wrong.

What happened in practice was that most agents transferred the cost of references and tenancy documentation from the tenants to the landlord then increased the rent by enough to compensate them.  For example, a set-up fee of £360 that used to be paid by the tenant was passed on to the landlord and the rent was increased by £30 per month to pay for it. Everyone was happy with the outcome. The landlord was no worse off, the agent maintained their fee income, most of the tenants preferred to pay £30 per month rather than a lump sum of £360 up front and the government was able to claim that they had done something.

My prediction is that the same thing will happen with the Renters Rights Act. It is likely that letting fees will be reduced and ongoing management fees will be increased proportionately. Let-only contracts will become unviable and will be replaced by part-managed or rent collection contracts with monthly fees for collecting rents and complying with all the legislation being charged in place of renewal fees.

In the medium term there will be some cash flow issues because a lot of upfront fees will be replaced with monthly fees. However, after 13 months this will have washed through the cash flow and agents will be able to maintain their income and will soon get used to the new regime.

There will also be some benefits. Some amateur landlords will find it so hard to comply with all the new rules that they will be forced to start using an agent. Others will be forced to switch from let-only contracts to more profitable managed and part-managed contracts. Landlords will need more advice to comply with the legislation so it should be possible for agents to earn additional fees for providing additional services.  Short lets might become less common because tenants can take an AST at a lower rent then give notice shortly after moving in. Finally, all the extra cost and hassle of complying with the new legislation will drive rents up which will benefit letting agents who generally charge a fee based on a percentage of the rent.

We might even see less landlords exiting the market because doing so will become so much more difficult. The new rule that a property cannot be let for 12 months if it fails to sell will certainly deter some landlords from selling.

My message therefore is very clear: there is no need to panic. Letting agents have survived previous changes to legislation and with thought and careful planning they will survive the Renters Rights Act.