Are you ready for the end of tenant fees?

Labour and the Liberal Democrats have been defeated and many of their ill-judged proposals for the housing market such as rent controls and mansion tax have been defeated with them.  However, one of their proposals remains very much alive and could still pose a real threat to the profitability of estate agents.  That proposal is a ban on tenant fees.

Tenant fees are deeply resented by tenants.  At a time when they have to find money for their deposit and pay for the other costs of moving, the burden of several hundred pounds of additional fees can be hard to bear.  Many tenants are also smart enough to realise that agents are making a significant profit from their referencing and admin fees and resent the fact that they are paying for a service that they think should be paid for by the landlord.

The problem has got much worse in recent years because many letting agents have reduced the fees that they charge landlords in an attempt to win more business and made up the difference by increasing tenant fees.  This is both unfair and ethically wrong.

The fees that are charged by residential sales agents are absolutely clear and transparent.  The vendor pays the whole fee and the purchaser pays nothing.  No-one is any doubt as to who the agent represents and their duty is clear – to get the best price for their client.

Last year, a few agents tried to introduce conditional contracts, a system where the purchaser pays the fee instead of the vendor.  There were articles in both the trade and the national press denouncing the practice and questions were even asked in parliament.  Ultimately however, it was market forces that killed off conditional contracts.  Agents delivered leaflets door to door that explained the drawbacks of the purchaser paying the fee in simple terms and within a few months, conditional contracts were gone.

I believe that the same thing is likely to happen to tenant fees.  Politicians, journalists and pressure groups such as Shelter will huff and puff about the unfairness of tenant fees but ultimately it is likely to be market forces than ends them.

The process will start slowly with an independent agent running a “no fees for tenants” campaign or possibly a larger chain running a pilot scheme.  They will design a clever leaflet and train their staff to sell the benefits of the new proposition to landlords.  The arguments could be compelling:

• By charging no fees to tenants, we will attract more tenants, generate more competition for your property and therefore achieve a higher rent.
• Many tenants prefer to pay £50 per calendar month in extra rent rather than £300 extra in tenant fees. By spreading the payments, you will get more rent with less resistance.
• Tenant fees are unethical and unfair. By refusing to charge them, we will improve our relationships with tenants which will benefit everyone.

Once the no-tenant fee trailblazers start to win market share, the other letting agents will be forced to follow suit until one day tenant fees will be gone.

The precedent for this has already been set in Scotland.  Tenancy fees were made illegal in Scotland four years ago and a client in Edinburgh retained me to help them to prepare for the transition.  At the time, they were earning 13% of their total fee income from tenancy fees and this income had to be replaced.  They prepared carefully for the change in the law with new point of sale marketing material and a comprehensive training programme for their valuers.

On the day that the legislation was introduced, they added the tenant fees to the landlord fees and recovered the money for their landlords by increasing their rents.  They measured the results carefully and were able to prove twelve months later that they had successfully transferred the whole burden of tenancy fees to their landlords and that their landlords had more than recovered the cost of the extra fees through increased rents.  Most importantly of all, their income had been completely unaffected.

As with any change in market conditions, the agents who prepare most thoroughly are the ones who win market share at the expense of their competitors so you need to decide now whether you are going to be a leader or a follower, and whichever you decide, you need to start preparing your response.

Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years.