A case that The Property Ombudsman was asked to review came from landlords about the retention of a £2,500 landlord incentive payment paid by the Borough Council (BC).
Already well documented in the press, rising rents in the private rented sector combined with cuts to housing benefits following the introduction of Universal Credit, have made letting to councils a less attractive proposition for private landlords.
However, as councils face mounting pressure to house a growing number of people, it has become common in some areas, in particular those with higher property prices, for local councils to offer financial incentives to landlords offering rented accommodation to tenants with defined housing needs.
In this case, the landlords instructed the agent on a full management basis. Concerned about the length of time it was taking to find tenants, the agent suggested they considered letting to tenants in receipt of housing benefit, explaining that the BC had a scheme. No mention was made of the £2,500 landlord incentive payment that the BC were offering and no disclosure that the agent would retain such a payment.
The landlords considered that the agent’s actions in retaining this payment and failing to inform them about the payment was contrary to their obligations under the Consumer Protection from Unfair Trading Regulations 2008 (CPRs), which requires agents to be open, honest and transparent.
The agent said that the agreement was between them and the BC and as such say that they are entitled to keep the entire fee of £2,500 they were paid.
In this case, the Ombudsman had regard to the CPRs, specifically Regulation 6, which is concerned with ‘misleading omissions’. This places agents under a duty not to mislead consumers by failing to give them the information they need in order to make an informed decision, where this causes or is likely to cause the average consumer to take a different ‘transactional’ decision.
An agent receiving a considerable sum of money, in addition to the fees they receive from a landlord for managing a property, from a council for a tenancy being granted to a tenant in receipt of housing benefit constitutes material information.
The Terms of Business the landlords entered with the agent stated: “Any commissions, interest or other income earned by us while carrying out our duties as managing agent for the letting and/or management of the property will be retained by us”.
However, the agent was required to specifically disclose the amount of any commissions
they may earn and it is apparent that the agent failed to make the landlords aware that, in
agreeing to accept Tenants under the BC’s scheme, that the agent would receive a payment of £2,500 from the BC. Essentially, this incentive payment formed part of the tenant’s offer to rent the property and as such the agent had a duty to present it to the landlords.
The landlords had been keen to resolve the matter with the agent without the need to refer the matter to TPO. However, within the complaints correspondence, the agent advised the landlords that, as they had told the landlords that tenants would be sourced through this scheme, they had “all the necessary tools to explore any information relating to this as you wished” adding that “the claim of dishonesty will continue to fall upon deaf ears”.
The Council offered the incentive scheme to attract landlords who may be deterred from renting properties to tenants in receipt of housing benefits “because of their inability to pay a deposit and delays/shortfalls in Housing Benefit”. Any payment made under the scheme should therefore be paid to a landlord, who has agreed to offer their property in such circumstances and accept the potential risks associated with such a tenancy (risks which in this case were unfortunately borne out, resulting in the landlords having to take legal action to evict the Tenant), not a letting agent. The wording used in the BC’s marketing material for the scheme includes such statements as “Landlords wanted immediately” and “Landlords urgently required for Council’s Homefinder Scheme.”
The agent was remunerated for their work in sourcing tenants, setting up and managing the
Tenancy by receiving an agreed percentage of the total rent payable for the term stated on the Tenancy Agreement, deducted on a monthly basis.
The Ombudsman did not consider it appropriate that the agent retained a substantial payment clearly intended as an incentive to persuade landlords to rent their properties to tenants in receipt of housing benefit. Furthermore, the agent’s failure to disclose the existence and amount of the incentive payment being offered by the BC and their retention of the same is contrary to their obligations under the CPRs.
The complaint was supported and an award of £2,500 made in full and final settlement of the dispute.
Following this case, TPO sought Primary Authority Assured Advice on this topic. Assured Advice 33, which takes into consideration Consumer Protection from Unfair Trading Regulations 2008 (CPRs) and Business Protection from Misleading Marketing Regulations 2008, was obtained from Warwickshire County Council and is applicable to all TPO member agents. It provides further detail on this question and addresses letting agents’ duties and how their fees may be defined.
In circumstances like this, some letting agents have enquired whether they are entitled to keep that incentive payment as part of their fee. The simple answer is yes, a letting agent may be able to include an incentive payment to the landlord as part of their fee, but only as long as they are very clear and up front with the landlord that that is what they intend to do and the landlord agrees.
As a basic principle, landlords and their agents are of course free to contract as they wish, and this includes the calculation of fees. If a contract is agreed whereby the agent’s fee will include a sum equal to that paid by the council as incentive for taking tenants in receipt of Housing Benefit, then that is permitted.
However, agents must not make “secret profits”. If such a sum is to be charged (or kept), then failure to tell a landlord about this could constitute a misleading action or omission likely to affect their transactional decision and could therefore be an offence under the CPRs.