Agent’s Fees, Renewal Commission, and Fairness

One of the areas in which the Renters (Reform) Bill is likely to lead to substantial changes, which are wholly unplanned by the RRB and largely unanticipated by government is in relation to the fees that letting agents charge landlords.

At the moment most agents charge some form of fee (usually a commission calculated as a percentage of the rent) for finding a tenant. There is then often some form of ongoing charge or fee for the tenancy renewal if that tenant stays. This varies widely from area to area in England and Wales and to a large degree depends on the local market conditions. In some areas it simply involves a fixed fee for the drawing up of a new tenancy agreement. In the more active market in London agents will typically charge commission on an ongoing basis for as long as the tenant remains in the property.

The RRB will upset all of this. Tenants will not renew tenancies and will not need new paperwork. Agents therefore will not charge fees for this and will then have to charge for specific work they do such as collecting the rent or managing the property.

However, it is in the area of renewal commission where the biggest upheaval is likely to occur. It remains the case that renewal commissions are somewhat limited by the case of Office of Fair Trading v Foxtons Ltd. This case was based on the Unfair Terms in Consumer Contract Regulations (UTCCR) and essentially held that agents could not continue to charge a renewal commission over the longer term where they were no longer involved in the management of the property. Essentially, this meant that where an agent found a tenant and that tenant stayed without the agent being involved in them doing so then the agent would be limited in charging a commission on that renewal for a fixed period (of about three years) and could not simply keep charging as long as the tenant remained in the property.

While the UTCCR has been replaced by the Consumer Rights Act 2015 nothing much has changed. Until now. The reason everything changes is that renewal commission can only be assessed for fairness because it is an ancillary fee and not the basic price paid for the service being supplied (that being the initial commission for the initial fixed term). The basic fee for a service is excluded from the assessment of fairness by s64 of the CRA. But if the RRB abolishes any form of renewal and so all tenancies are for an indefinite term. This means that if an agent charges by way of a commission calculated as a percentage of rent then the commission will be for the provision of the tenant, there will be no renewal which could lead to some form of separate and ancillary renewal fee so there will be no means of assessing these for fairness. So after the RRB comes into effect there will be no actual limit on this and an agent could in principle charge for as long as the tenant remains in the property.

Landlords will therefore need to be far more careful in reading and understanding the terms they have signed up to and make sure they understand the basis on which fees are being charged and how long that fee could be charged for. Agents will need to look at their terms and revise them as triggers for fees such as renewals and extensions of existing agreements will not exist and so terms of business that use these terms to lead to fees are going to fail.