The recent problems at Purplebricks are a sharp reminder of how easy it is for letting agents to incur enormous fines for technical breaches of compliance rules. According to The Telegraph, Purplebricks could be facing costs of up to £30 million for mistakes made by their Letting Divisions which contributes less than 10% of their total revenue. To put this into perspective, this is 40% of the total current value of their business. Purplebricks’ own calculations suggest that the true cost will be much less than this. They have suggested a figure of up to £9 million but this is still a huge amount of money.
From what we have been told so far, it would appear that Purplebricks may have made two mistakes. The first is that they may have accidentally failed to register some of the deposits paid by their tenants. This is a serious matter. However, it seems that the majority of the potential liability is due because despite registering the deposits, they may have failed to send the correct paperwork to their tenants to prove that they had done this. This would seem to be a less serious offence.
In years gone by, landlords could confiscate their tenants’ deposits with impunity and they very often did so. This was grossly unfair and the legislation to remedy this was necessary. Unfortunately, a small number of unscrupulous agents then started to misuse the deposit money to fund their own lifestyles. Some went bankrupt leaving their landlords to repay the money that they had stolen. This too was unacceptable and legislation was needed to prevent it. However, the need for the legislation that stipulates that “prescribed information” should be sent to tenants at the start of their tenancy is, in my opinion, less crucial. More importantly though, this legislation is now being used to impose huge fines on letting agents even when no money has gone missing.
If the prescribed information is not correctly served within the statutory time limit, the tenant is entitled to compensation of up to three times the deposit amount. It does not matter if just one page of the prescribed information is missing or if it was served just one day late. There is no defence.
Many other agents have falled foul of this legislation. So far this year, we have had to decline instructions to sell more than a dozen businesses because of compliance issues. As a consequence, their businesses are worthless and unsaleable. Worse still, there is absolutely nothing that these business owners can do to correct the situation retrospectively. For example, we were asked to sell a small business turning over about £300,000 per annum from about 300 properties. Due to an IT mistake, their system had sent only the first page of the prescribed information to their tenants rather than the entire document. No-one knew that this had happened until we spotted it and no claims had been made. Nevertheless, the potential fines could have been over £1 million which was twice the value of the business. This seems hugely unfair and surely it was not what was intended when the legislation was enacted.
Unfortunately, this is not the only mistake that can leave an agent liable for a huge fine and leave their business unsaleable. The fine for failing to obtain an NRL1 form for an overseas landlord can be as much as twice the unpaid tax. The fine for forgetting to refund the extra week’s deposit when an old tenancy is renewed is up to three times the total deposit amount. The fine for breaches of HMO regulations can run into tens of thousands of pounds per property. Lettings legislation has become an absolute minefield.
It is quite usual for us to have to ask business owners to spend several weeks or months correcting minor mistakes that they have made with compliance legislation before we can put their businesses onto the market. Even when we are dealing with multi-million-pound businesses run by professional and experienced owners, it is not uncommon to find that compliance issues come up during the due diligence process which need to be dealt with through remedial work or an indemnity. The legislation is getting more complex by the day and there is no sign that this will ever stop.
So, what can letting agents do to protect themselves? Here are my ten recommendations:
1. Make sure that all your staff have regular compliance training.
2. Take steps to ensure that as many of your staff as possible are professionally qualified.
3. Join ARLA so that you have access to regular updates about changes in legislation.
4. Review your compliance procedures and systems in order to make sure that mistakes cannot be made.
5. Review your PI policy to ensure that it covers you against the costs associated with compliance mistakes.
6. Decline to take instructions on any property that you consider to be an above average risk.
7. To stop taking instructions on HMO properties unless you are an expert in this field.
8. To dis-instruct yourself from any of your existing properties that present a higher than usual compliance risk, most particularly HMOs.
9. To review whether you are still prepared to deal with landlords on a let-only basis. The compliance risks here are greater and you can easily end up being liable for a mistake that a landlord has made without your knowledge.
10. To commission a compliance review from a specialist consultancy in order to take a thorough look at all your systems. The cost will be several thousand pounds but this will be much less than paying the fines.
In days gone by, residential sales agents commonly ran a small letting business on the side. Many viewed this as an incubator for future sales instructions rather than a profit centre in its own right. Recent legislation has made it almost impossible to do this and lettings is no longer a place for amateurs. If you operate a business like this, then you will need to appoint a professionally qualified letting manager to run it on your behalf. If you cannot afford to do this, the best solution might be to sell it off to a local competitor who specialises in the lettings market. The alternatives are just too dangerous.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.