Banning Letting Fees

The Camel's Back

Either he has been mis-reported or Housing Minister, Phil Twyford, does not understand the workings of the Residential Tenancies Act, (RTA,) under his jurisdiction. In banning Letting Fees, Mr Twyford states that he doesn't, ..."know of any other area of law where two parties can contract for a provision of services but then charge a third party." The Tenancy Tribunal,(TT), which administers the RTA, recognises two parties only, especially in relation to the tenancy agreement, that is, the tenant and the landlord, Under the RTA. If the landlord is not the owner, i.e. a Property Manager,(PM,) then the owner does not exist to the TT and is considered a "third" party. There are many rulings to emphasis this. Therefore there are two agreements, not one, as Mr Twyford suggests. The first is between the tenant and the landlord, providing a service to the tenant in finding them a home. The second agreement is between the owner and the PM dictating how the owner wants the property to be managed and appointing the PM as the now landlord.

This distinction is important in understanding what a Letting Fee is for.

Private landlords,(owners,) can't charge Letting Fees. They don't need to, because they have 100% of the rent to pay for management costs to them, which are minimal, (apart from time, emotional and frustration costs.) Small office/Home office PMs often won't charge either whilst they are building their businesses up to a sustainable number of managements. Neither of the above are required to run a Trust Acct for keeping clear and safe records of where every cent is every day. This is understandable for an owner but the SOHO PMs are often using their own cheque books to house the sometimes hundreds of thousands of dollars in rent, before it is disbursed to owners. This is risky and needs to be addressed. Having said this, property management is more of a social service whilst a PM company is small, very personal but very difficult to justify beyond a meagre wage. If the company is any good it will grow organically. As a business it only starts to make sense at around 250 managements, whereupon it has grown out of its SOHO and requires staff and premises.

If the truth be known, PM companies could easily stay in their SOHOs regardless of their size if they only had to provide the services of management to the owners as per that agreement. All of these services can be done either over the phone, email or at the property. We proved this to ourselves when we had to work from home with 20 people in my lounge during the earthquakes, but for one thing, ... servicing tenants. Tenants need a premises to come to. Owners do not. Therefore there is a clear distinction between the two agreements we operate under. The Letting fee, which Mr Twyford wants to ban, is charged to the tenant because we would not otherwise need a premises to pay for. Larger Professional PM companies require premises and staff to service tenants who come in to find a home, apply for a home, pay for it and to collect keys for it, among other things. For this service in this tenancy agreement , the tenant should pay a fee. The percentage of rent, etc, paid by the owner to manage the property covers only the advertising to find tenants. Having a premises for them to then come to, is not. Indeed, sometimes there is no tenant, yet the management services continue, ( e.g. in a renovation,) further proving there are two distinct agreements at play here. One funded by the owner, the other by the tenant.

In banning Letting Fees, Mr Twyford will cripple larger PM firms, who generally only grow because they provide good service. 11-20% of a large PM company's income comes from Letting Fees. Any good company aims to have better than 25% EBIT,( earnings before loan interest and tax,) so large companies like Barfoot and Thompson in Auckland with around 12,000 managements spread over that whole city will lose the incentive to continue to provide the service on a risky margin of 5%. Without PMs most remote landlords will not be able to continue. Regardless of popular belief, the cost will not be passed on to tenants whose wage packets are tapped out now, leaving the landlord to pay the fee in order to keep their service provider afloat.

This is where Mr Twyford is out of touch with his rental market. Very few landlords are filthy rich as seems to be the presumption. They have been hit with a three year onslaught of increased costs including LVR changes from banks and are being unfairly blamed for everything from asbestos in their properties, lack of insulation provided by previous owners, adequate meth tests proving clarity for habitation, the lack of ventilation and heating provided in the original build, (proposed WOF,) and now another week's rent will be gone to pay for their managers to stay in business. If this Bill is passed, landlords would now lose around 40-50% of their rent annually just to provide the accommodation service to tenants and this is before they can even service their mortgages. Mr Twyford needs to be very careful that this ban on Letting Fees is not the straw that breaks the camel's back and leaves him and you, the taxpayer, having to provide a lot more than 100,000 homes to make up for the landlords that leave and sell to the much appreciative First Home Buyers.