Licencing: What's the true cost?

Local authorities proposing Additional or Selective Licencing always seem assume there are no costs to licencing other than the Fees, and that those can be magically absorbed without any detrimental impact.

This blog sets out the fundamental reasons why such assumptions are wrong, and offers suggestions on related points that can be raised by an association on behalf of its members at the public consultation stage.

The full cost in financial terms

Licencing Fees are determined to represent the cost of administering the scheme. That is, primarily the amount of time spent by the local authority officers multiplied by a nominal hourly rate.

Officers will review applications, correspond with applicants, check safety certificates, undertake inspections, write inspection reports, and so forth. But that is not the full cost in terms of all the work involved. For each action by an officer, there is another action undertaken by the landlord or their agent: A completed application form reviewed by an officer will have required time taken by or on behalf of the landlord to complete beforehand; A gas safety certificate checked by a council officer needs to have been copied and transferred to the council first; Every inspection is attended not only by a council officer but also by either the landlord or managing agent.

Where it is an agent undertaking the work, the landlord will be billed for that. Where a landlord undertakes work themselves, that may well at the expense of other activities that would provide earnings.

There is no good reason to assume time of a landlord or agent consumed by licencing activities has any lower financial value than that of the officers.

Thus, it is fair to say that the full cost of licencing any property in financial terms is basically double the licence fees.

The cost in relative terms

There are numerous Selective licencing schemes now with fees for a 5 year licence in excess of £900. Accounting for the landlord/agents time too, a fee at that level implies a full cost of circa £360 per year.

Landlords cannot reduce mortgage or insurance costs. If the market will not stand a corresponding rent increase then this sum can only come out of the budget allocation for “maintenance and improvements”.

£360 per year will be in excess of 20% of the “maintenance and improvements” budget in many cases, and certainly for the smallest properties. Basic maintenance needs to be undertaken in any case, so it will be largely planned “improvements” that will be sacrificed.

Thus, whilst Selective licencing schemes are expected to drive improvements in the most out-dated rented properties in a designated area, schemes with high fees should also be expected to drastically slow down the overall rate of improvement for the majority of licenced properties.

It is not difficult to envisage a scenario where the negative impact of high licence fees on the level of re-investment in lots of properties outweigh the benefits gained for the minority of cases where council intervention is appropriate. That is, a scheme can easily have the effect of lowering the overall standard of housing in the designated area at end of the five year scheme relative to what it would be otherwise.

Thus, the higher the fees, the more likely it is that the imposition of a Selective licencing scheme will be disproportionate.

Additional cost of excessive intervention

It is not uncommon for officers to be over-zealous and specify changes they perceive as improvements for properties in decent condition where intervention is not really warranted. Council leadership will allow it as they do not understand the consequences of that behaviour, and tend to perceive all intervention by officers as only ever positive.

Improvements that landlords plan for are generally those updates understood to be valued, if not by the tenants in situ, then tenants in general. That is, what there are clear demand signals for in the PRS market.

Whenever a council officer requires change that is not strictly required, funds are being diverted from what tenants actually value to things the council deem to be of utility and which lack evidence of their value from the tenant perspective.

Points to raise in public consultations

I recommend calling out your council whenever they quote the fees as being the 'cost'. That is grossly disrespectful of landlords and agents. Be firm that the (financial) 'cost' of the scheme needs to be taken as double the fees to include all time spent by landlords and agents.

The costs will need to be borne and the options are very limited. Either rents must rise or maintenance and improvement budgets will be cut, or a combination of those two things. Any assumptions otherwise are wholly unrealistic.

Local authorities do not understand the resistance to licencing schemes from 'good' landlords. It needs to be spelled out to them that money going to licence fees is money 'good' landlords would far rather spend on improving their properties, and at the end of a 5 year scheme with high costs many properties will have had lower levels of investment than without the scheme, so at a lower standard than otherwise. Selective licencing will be proportionate only if it is 'light-touch' and costs for 'good' landlords are very low.

There always has been and always will be continual improvement of standards in the PRS. Market signals inform landlords what tenants generally value, and landlords respond to stay competitive. Over time, and at a reasonable pace, valued features are incorporated in offerings at lower and lower price points; that's how progress in free markets happens. From the standpoint of private sector providers, council officers are not better judges of what constitutes improvement than those tenants who vote on what is of extra value with their wallets. Landlords accept the market signal for 'safety' is weak and there need to be minimum standards. However, it is important to incorporate checks that the narrow focus of officers does not lead to unwarranted interventions for want of a broader perspective on what tenants genuinely value as improvements in their living conditions.

In designing for 'light-touch', councils can take account of the fact that managing agents accredited with PropertyMark (and other such bodies) diligently check compliance, and many professional self-managing landlords have accreditations too.

About the author

Simon Fletcher has been a landlord since 2006 with properties subject to licencing since 2013. He is the committee member for Licencing with Portsmouth and District Private Landlords Association.