The evil way Foxtons ripped off landlords

by John Fitzsimons on 06 March 2010  |  8 comments
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Whether you're a tenant or a landlord, you'll be glad this rip-off has been outlawed.

Landlords have had a very tough couple of years. The troubles of the economy have hit them hard with tenant arrears – of the three quarters of landlords who have faced tenants falling behind on payments, almost half encountered such problems last year.

As a result, some landlords have fallen behind on their own buy-to-let mortgage payments, with little option to remortgage elsewhere with rates so punitive. Just to add to the fun, they also face an escalation in regulation, with the likelihood of a national landlords register.

However, at long last, there is a hint that one appalling scam that has long ripped off landlords may be coming to an end.

The Foxtons affair

Last week, the Office of Fair Trading secured a High Court order against the lettings and estate agent Foxtons, prohibiting it from using certain terms in its letting agreements with landlords, a battle that took the best part of two years. The watchdog had argued that the contracts used by Foxtons were far from clear when it came to some of the commissions and fees they would be charging.

The High Court agreed strongly, suggesting that the terms were so unclear that they effectively represented a trap – a pretty damning indictment.

So what were the terms in question – and what does the ruling mean for landlords across the country?

• Adopt this goal: Become a buy-to-let landlord

The dodgy terms

The Office of Fair Trading challenged three kinds of terms in its case:

1) Renewal commission terms

In Foxtons’ contracts, terms were included which obliged the landlord to pay commission to Foxtons on renewals, continuations and extensions of a tenancy, even if the person renewing the lease is not the tenant Foxtons originally introduced.

2) Third party renewal commission terms

Should a landlord sell a property, and the new landlord opt to allow the existing tenant to remain in the property at the end of the initial lease, the old landlord would still be required to pay Foxtons commission, for as long as the tenant remained at the property. Even though that landlord no longer even owned the property!

3) Sales commission terms

Should the landlord sell the property to the tenant, Foxtons would be due commission from the landlord.

What it means for you

This case is very significant, not just for landlords who use Foxtons, but landlords (and tenants) all across the UK.

The judgement is binding against Foxtons, but it also makes clear that for these commissions to be hidden away in the small print of letting contracts is illegal. As a result, all letting agents are now obligated to make such terms absolutely bold and clear, not just in their contracts, but also in any promotional material and even the sales practices of the agent.

Furthermore, the judgement doesn’t just apply to new contracts, but all existing ones as well. Should your letting agent (Foxtons or otherwise) be chasing you for unpaid renewal commission (and if the term of the contract that they are relying on was not clear) then you do not have to pay it.

However, if you have already forked out on unfair fees in the past, it’s unlikely you will be able to claim them back.

This is a great boost for landlords as they will no longer be faced with surprise bills for services there were unaware they had signed up for, and adds a certain security to tenants – they are unlikely to find their landlords in financial bother due to being whacked with unfair bills.

The fact that Foxtons opted not to appeal the judgement suggests such hidden fees will soon be a thing of the past.

• Follow the hints and tips in this goal: Sell your home

An end to ‘money for nothing’?

The National Landlords Association is understandably delighted with the result, and has called for the outright scrapping of these ‘money for nothing’ fees, arguing that the letting agent performs no service to the landlord throughout a tenancy, so should not be able to charge the landlord should the tenant renew.

The judge in the Foxtons case declined to go that far, but was clear that renewal commission can pose a problem, as it operates adversely against the landlord the more time goes on, as with rents increasing so does the amount the landlord has to pay. At 11%, renewal commission is hardly a small sum either, particularly when it is due without the letting agent actually having to do anything.

But unfortunately, for the moment at least, letting agents will still be able to charge renewal fees - even when they offer little or no help to the landlord in securing those renewals. They simply need to make it absolutely clear to the landlord at the beginning of the tenancy that these charges will be levied.

However, I would not be at all surprised if such charges begin to fade away. The reason they were hidden away in the small print is that they are barely palatable, and making them more transparent is only likely to discourage landlords from using the services of a letting agent.

More: Britain’s greatest property investors | The 12 biggest property blunders

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