The practice of charging a tenant a fee for renewing a tenancy is widespread and unless/until tenant fees are banned, the letting agent can charge a tenant a fee for renewing a tenancy. However, there are some pitfalls the letting agent needs to be aware of…
Secret profit
The landlord / letting agent relationship is governed by the law of agency. An agent (in this case a letting agent) has a fiduciary duty towards their principal (in this case a landlord). Therefore, the letting agent is only legally entitled to charge fees which are authorised by the agency/client agreement which the letting agent has with the landlord. If other fees are charged by the letting agent, then this is a secret profit. Under the law of agency this money does not actually belong to the letting agent, but to the landlord who is entitled to claim it back from the letting agent, along with any profit made by the letting agent with the use of the funds.
If for example a letting agent charges a fee of £60 to a tenant for renewing a tenancy but the landlord is unaware of this, then under the law of agency this money belongs to the landlord. The same applies if a letting agent charges an unauthorised commission to tradesmen.
Conflict of interest
The law of agency also provides that the agent must not put himself in a position where he has a conflict of interest. For example, this is discussed in the case of Boardman v. Phipps [1967].
Many letting agents consider that they are acting for both the landlord AND tenant and that this, therefore, entitles them to charge a fee to the tenants as well as to the landlord (indeed letting agents often charge both parties a fee for the same thing).
From contract law, if someone charges a fee (in this case a tenancy renewal fee) they must provide something of value in return (in this case a new tenancy). In taking a fee from a tenant in return for a new tenancy, the letting agent is effectively entering into a contract with the tenant.
However, if the letting agent is truly acting for the tenant this puts them in a position of conflict of interest. For example, it is professional misconduct for a solicitor to act for both parties in purchase of land – which is a comparable transaction.
Much of the work which agents consider that they are entitled to charge tenants for consists of work which they need to do for the landlord as part of their role and should, therefore, be charged to the landlord or (perhaps more properly) included within their commission.
Publicising fees
Under the Consumer Rights Act 2015 a letting agent must publicise their fees in the agent’s premises and on their website.
The Committee for Advertising Practice (CAP) extended the requirement to publicise fees to advertisements in other media through the CAP Code.
The decision for a tenant to view or enter into a tenancy of a property is a transactional decision and likely to be affected by the existence and cost of fees. Therefore, this is material information for tenants searching for a property. Property adverts should indicate clearly what is not included in the quoted prices and should provide enough information to allow the tenant to know (or calculate) what fees apply. Adverts that do not display this information breach the Code and in particular CAP Code (Edition 12) rules 3.1 and 3.3 (Misleading advertising) and 3.19 (Prices).
If the letting agent does not comply with the legal requirements or guidance and cannot show on the balance of probability that the tenant was made aware of the fees before entering into the tenancy, the letting agent cannot reasonably demand the tenant pays a fee for renewing the tenancy.
Reference
Consumer Rights Act 2015 Part 3, Chapter 3
Competition & Markets Authority – Guidance for lettings professionals on consumer protection law
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