Why You Must Take Compliance Seriously
Almost every week we read about another letting agent who has had to pay an enormous fine for a compliance mistake but if my experience is anything to go by a great many letting agents are still making elementary compliance mistakes. So what are the most common problems that I am seeing?
The first is failure to register for AML. Currently most letting agents do not have to register because AML only applies to properties that are rented for £10,000 Euros per calendar month (approximately £8,500). Only a small percentage of agents deal with properties at above this rental level.
The most common mistake however is that agents do not realise that if they arrange the sale of a single property they immediately have to register for AML. All too often a landlord says that they want to sell a property and the letting agent, in an attempt to protect their management commission, arranges the sale of the property to another landlord that they are already dealing with. Instantaneously AML registration becomes compulsory and the fine for not being registered can be huge.
The AML regulations are very complicated and a great many agents get caught out by the rules. My own business is AML regulated and I estimate that we spend about £30,000 p.a. complying with the rules. Despite regulation clearly being mandatory at least two of my new competitors are trading without being AML registered. Do they think that the law doesn’t apply to them or do they just think they won’t be caught? I don’t know how they sleep at night.
A second very common area for mistakes is overseas landlords. If a landlord lived abroad you need to obtain an NRLI form. If you do not have one you can be held responsible for their unpaid tax plus a penalty of up to 100%. The potential lost of this could easily exceed £30,000 for a typical buy-to-let property.This is an easy thing to check and I would advise you to do so straight away.
A third common mistake is missing gas safety certificates or EPC’s. The issue is that unless a property has a valid EPC and gas safety certificate on the day that the tenancy commenced the landlord can never serve a Section 21 notice. This could result in a huge claim from a landlord for damages resulting in their not being able to regain possession of their own property. A lot of these claims date back to the Covid lockdown period when EPC’s and gas safety certificates were very hard to obtain.
A fourth common mistake is missing or late prescribed information. If this is not served correctly within 28 days of the tenancy commencing the fine is 3 X the deposit amount or about £5,000 for a typical buy-to-let property.
We usually spot these issues before we put a business onto the market but I am constantly surprised by how many letting agencies are being run in a wholly incompetent way. One in particular springs to mind. The owner had retired and appointed a manager to run the business on his behalf about 5 years before we became involved. He wanted to sell because the profit level was slipping but the mistakes that we found during the process of getting the business ready for market were truly awful. If the full fine had been imposed for every mistake that they had made the total bill would have exceeded £3 million for a business that we were selling for less than one third of this amount.
Compliance has become far too complex to deal with oneself. If you own a letting business I would urge you to bring in an external compliance consultant to conduct a thorough audit of your systems and procedures as a matter of urgency. The cost will be several thousand pounds but this is far less than the potential fines and repetitional damage from being caught out by HMRC or the local authority.
Adam Walker is a business sales broker and management consultant who has worked in the property sector for 42 years.