Tenant fees ban – financial tips to plug the gap in 2021

16 December 2020 4204 Views

The Tenant Fees Act 2019’s 12-month transition period came to an end on 31 May, prohibiting various payments and charges that have long been associated with rental properties.

Putting aside the various views of industry players regarding this landmark legislative change, what has become clear is that this prohibition has affected the cash flow of lettings agencies and landlords alike. Whilst in the past it might have been that agencies could rely on the limited revenue received from admin fees to pay for office essentials and staff salaries, they must now find new ways to plug that financial gap.

In this article, we take a closer look at how agencies (and the landlords they advise) can bridge the financial gap left by the prohibition on tenancy fees.

What does the law mean for lettings agents?

The Tenant Fees Act 2019 makes it illegal to charge what have been deemed ‘unfair’ additional fees in respect of tenancy agreements. These include admin fees for the signing and verifying of contracts, in addition to a whole range of other previously commonplace charges.

Whilst the provisions and restrictions of the Act are well-trodden ground by this point, what many external commentators have not considered is how this change has impacted on lettings agencies. Under a regime where the majority of administrative fees are now outright banned and at the very least capped, how can agents cover the costs of setting up new tenancies?

Rent increases

The natural expectation of many agents is that the additional fees they have to pass onto landlords will simply result in rising rents – and there’s evidence that this is already happening. In the twelve months leading up to January 2020, national rent rates increased by some 1.5%, and whilst COVID-19 is still causing destabilisation within the industry, this trend seems likely to continue.

Whilst the objective of the Tenant Fees Act was to reduce the costs that tenants face, in a roundabout way it may do nothing of the sort since costs might now simply be recouped through higher rents.

The problem for agencies remains, however, since rates are set at the discretion of landlords and may not help agencies to recover their administrative costs.

Alternative revenue streams

In the event that you cannot rely on increased percentage payments or fees from the landlords on your books, it may be possible to pursue alternative revenue streams – of which the most accessible and reliable are referral agreements. These are arrangements made with third party firms that allow agents to earn extra revenue by referring tenants to various services.

Some of the better-known referral schemes relate to utilities and telecommunications – with providers such as Virgin Media, Spark Energy, and SSE offering cash incentives for each tenant that signs up to their service following a referral.

In addition to referral schemes, lettings agents may also wish to move away from the standard management fee model and instead offer a guaranteed rent scheme. Under these agreements, agents guarantee landlords a fixed sum each month regardless of whether a property is occupied or not. Under such agreements, agents can expect to walk away with up to 30% of the monthly rent price rather than a lower figure under the more traditional model. All it takes is efficient management and perhaps a robust insurance policy.

Financing options

In cases where agencies find themselves facing a cash flow crisis, there are alternatives available. If you’re struggling to cope with adjusting to the new rules, or if the COVID-19 pandemic has hit your tenants especially hard, a personal loan could just help your business to get by.

By using an online credit broker such as Little Loans, you could access between £100 and £10,000 with flexible repayment terms that extend well into the future – giving you the time to recoup the funds and stay afloat.

In many cases, the direct lenders that work with Little Loans will offer a no guarantor loan. This means they won’t even ask a company director to countersign the loan or to act as a guarantor – safeguarding your interests whilst giving your agency a financial boost.

Keep tabs on your business costs

Ultimately, the provisions of the Tenant Fees Act require lettings agencies to tread a fine line. With the restrictions here to stay, it’s more important than ever for firms to increase their income and reduce their costs.

It might just be that it’s necessary to pass the loss onto landlords by charging a higher rate for Right to Rent checks and other such work – but it’s equally feasible for agencies to consider whether they could change anything operationally to bring costs down.

All in all, these (relatively) new restrictions present a challenge that our industry will surely rise to. It might just take some time to adapt.