The British Government is focussing regulatory efforts on estate agents and their chronic and extensive criminal non-compliance with consumer protection regulations. More aggressive regulatory activity is likely to provoke civil claims for conduct dating back as far as 1998. The majority of long-established residential estate agencies in the UK, including Foxtons (FOXT.L), Countrywide (CWD.L) and LSL Property Services (LSL.L), are exposed to the risk of claims which could, in total, far exceed their net assets.
Most estate agents charge opaque additional fees to tenants and landlords; most charge opaque renewal commissions to landlords; and most opaquely quote fees and commissions exclusive of VAT (and without disclosing the applicable rate of VAT which was acceptable until 2008 in some circumstances). They have done so for many years. All three practices are prohibited by the Consumer Protection from Unfair Trading Regulations 2008 (CPUTRs) and, before that, by the Consumer Protection Act 1987 (CPA).
The Office of Fair Trading (OFT) has recently published several reports and guidance documents much of which the industry continues to ignore. If the OFT takes action, and it must to retain a semblance of authority, most estate agents are at risk of criminal prosecution, most are at risk of loss of the large proportions of their revenues that rely on opaque pricing, and most are at risk of negative publicity. Negative publicity would severely damage the goodwill upon which their balance sheets and revenues rely, and provoke thousands of civil claims for amounts improperly charged over the past six years or, as in the case of PPI mis-selling, fifteen.
Foxtons, Countrywide and LSL are all heavily exposed and lack sufficient net assets to cover possible claims, even before depreciating the severely threatened goodwill upon which their balance sheets rely entirely. Separately, profitability is threatened. I estimate, for example, that 360% (sic) of LSL's operating profit before exceptionals (OPbE) is directly put at risk by transparent pricing and that a loss of consumer revenue of just 10% due to loss of goodwill would compound with the effects of transparent pricing to reduce all three companies' OPbE by 112%, 242% and 411% respectively.
Estate agency shares have risen strongly on the basis that the revival of the property market will increase both their transaction volumes and their transaction values whilst their scales of commission and fees, and their costs, the majority of which are fixed, will remain largely unchanged. But none of these companies has disclosed, or provided for, the very serious risks analysed in this report.
The report contains:
The Property Ombudsman is nominally independent but industry members are strongly represented on the Property Ombudsman’s Council and dominate his Board. Inexplicably his 2006 lettings code of practice correctly required fees to be quoted inclusive of VAT “where practicable”, but his 2006 sales code of practice required fees to be quoted as an actual amount plus VAT without any requirement to disclose the applicable rate of VAT, in breach of the requirements of the CPA. It is possible he meant to write “actual amount including VAT”, but, if so, he did not correct it.
Inexplicably, the Property Ombudsman did not amend his codes of practice to comply with the CPUTRs at this time.
The OFT also announced that it had recommended that any such charges which exceeded the cost to the trader should be prohibited generally. The Government acted quickly on the recommendation and introduced the Consumer Rights (Payment Surcharges) Regulations 2012 which came into force only nine months after the recommendation.
The Government is likely to react as quickly to any OFT recommendation relating to estate agency.
The guidance was issued a year ago but, inexplicably, the Property Ombudsman has not amended his codes of practice to comply with it.
The ASA’s decision seems to have been interpreted by estate agents as permission to mislead consumers until Nov 1. In fact the decision has been made to allow estate agents time to update computer systems, but in the meantime, since agents can no longer have any reasonable doubt that the relevant practices are misleading, any that fail to take the simple steps necessary to alert consumers to the possibility of being misled by websites as currently configured seem to be committing fraud and exposing themselves to civil claims for exemplary damages in addition to compensation for mischarging.
The OFT is willing to take disruptive action when necessary.
Foxtons published its listing prospectus, having already placed its shares, and unofficial dealing in its shares began. Although it is required to disclose all material risks to the business, the prospectus made no specific reference to risk explained in this report. The prospectus announced that 14% of the share sale would raise £50m to pay off debt, but that the remaining 86% would be disposals by the major shareholders. Adnams BBPM (BC Partners) sold two thirds of its 75% shareholding; CEO, Michael Brown, sold half his 18% holding. Altogether insiders disposed of 63% of the company’s pre-existing shares. All original major shareholders and directors are now subject to lock-up periods of 180 and 365 days respectively. Unusually, Foxtons did not engage a financial PR firm to engage with the media.
Foxtons’s website won the 2013 New Media Award for the best real estate website so it is reasonable to assume that its content and layout are deliberate, and indicative of the Foxtons’s communication intentions. That it won the award without raising objections from any competitors indicates that its treatment of consumers is considered normal practice in the industry.
I consider below the website's treatment of all types of consumer client, none of which is satisfactory.
Note that Foxtons’s non-optional “tenancy arrangement fee” is not mentioned in the “Schedule of Fees” where it should obviously be, also a criminally misleading omission. It is buried further down the page: £350 + VAT (i.e. £420) for a long tenancy and £175 + VAT (i.e. £210) for a short tenancy.
The following table compares the figures stated in the examples (e.g. £2040 in example 1) with the actual amounts payable by the landlord, showing that the actual amounts payable far exceed the quoted figures:
The following table compares [the percentage commission stated in the examples] with [the ratio of Foxtons’s revenue to the full amount paid by the tenant], assuming that the tenancy ends at the end of the initial term and that Foxtons charges its “tenancy arrangement fee” of £350 + VAT to the landlord and its “administration fee” of £350 + VAT and its “checkout organisation fee” of £125 + VAT to the tenant. The opaque increases are even greater than in the first table.
Another way to look at this is to calculate the level of rent required to generate fees amounting to the figure quoted in each example, i.e. £2040, £1320 and £1040, taking into account all the additional fees and VAT. Instead of £1000 per month, as used in the examples, the answers are, respectively, £433, £208 and £208 per month. Foxtons is currently advertising flats costing between £600 and £110,000 (sic) per month.
The following table compares [the figures quoted in the examples] with [Foxtons’s revenue including all fees and VAT], assuming a more representative tenancy lasting three years (although this is unlikely in the case of example 3 which relates to an initial short term let).
If you find these increases surprising, it is because you find the commissions and fees, as presented, misleading.
The first step towards finding these Terms and Conditions is to click “Rent” on the main menu at the top of most Foxtons webpages.
Until recently the second step was to click on “Fees and terms” in another menu at the bottom right of the “Rent” page or any of the listings page reached from this page (or at the bottom of these pages if the window is too small). Web designers know that users are far more likely to look at items at the top left of a webpage, and that the right hand column is widely ignored by users because they unconsciously associate it with banner advertising, a phenomenon called “right-rail blindness” by research company Neilson Norman Group (NNG). The menu’s location at the bottom of the page means that it is not visible on the vast majority of computer screens before scrolling down, another barrier to discovery. Positioning the link in the middle of a menu of much less important items, some irrelevant to prospective tenants, also serves to hide it.
Very recently, in a nod to the ASA's threat to enforce, Foxtons has added an alternative second step, a link which follows the advertised rent. Para 5.16 of the OFT’s draft Guidance for Lettings Professionals describes a link as unsatisfactory. The link says, vaguely (i.e. misleadingly), "Tenants fees may apply".The rent is in large bold white text. The link is half the font size, much dimmer and not bold.
The third step is to click on one of the links on the next page. Both links are clearly marked as PDF documents. PDF documents are designed for print, not for viewing on a screen. NNG has described them as three times worse than HTML (i.e. a web page designed for screen viewing) as a means of communicating on the Internet, and the use of a PDF instead of HTML is the second of NNG’s Top 10 Mistakes in Web Design. For this reason users are less likely to click on a link to a PDF, particularly if they are using a smartphone, and, if they do click on it, they are less likely to read it properly.
Foxtons’s Terms and Conditions for Tenants is a PDF with two columns, making it particularly unsuitable for display on a screen because the user must scroll down to read the first column, and then up and down again to read the second column. An administrative fee is quoted in the first paragraph but other fees are scattered throughout the document. All of the fees are quoted illegally exclusive of VAT.
It seems reasonable to conclude from this carefully designed, award-winning arrangement of navigation and content that Foxtons is not keen for tenants to discover what it plans to charge them. The arrangement is a series of misleading actions and omissions.
Foxtons charges tenant and landlord at least £840 in total when a long-term tenancy is arranged, and it charges tenants a variety of other fees. Such charges, being inadequately flagged, are often a surprise to landlords and tenants. Paras 5.22 and 6.6 of the OFT’s draft Guidance for Lettings Professionals express scepticism about the legality of an “administration charge” to tenants. Buried in Foxtons’s Terms and Conditions for Tenants is an obligation for tenants to pay £80 + VAT (i.e. £96) if a tenancy is renewed beyond the initial term. Paras 9.11- 9.12 of the OFT’s draft Guidance for Lettings Professionals describe renewal fees charged to tenants as an aggressive business practice, i.e. another criminal offence, and criticise the common practice by agents of arranging new fixed term tenancies instead of allowing tenancies to run on. Also buried in its Terms and Conditions for Tenants is an obligation for tenants to pay £125 + VAT (i.e. £150) for an inspection at the end of the tenancy if organised by Foxtons or another amount if organised by the landlord. Para 9.15 of the OFT’s draft Guidance for Lettings Professionals regards these as contractually unreasonable since the check out inspection is for the benefit of the landlord.
Almost all of Foxtons’s additional charges to tenants are problematic.
However it owns mortgage broker Alexander Hall to which it directs buyers for “expert, free mortgage advice” without disclosing Foxtons’s ownership.
A search of Alexander Hall’s website reveals this advertisement to be misleading because Alexander Hall charges fees. Furthermore whilst competitive mortgage brokers tend either to charge clients a fee or to take a commission from the mortgage provider, Alexander Hall charges £499, or much more in some cases, whilst keeping the commission too, although in some cases it offers an alternative deal. The Fees page is reached only, as far as I can see, from the About Us page, an unlikely place to find it, and not from any of the mortgage listings or details pages. The mortgage details pages are particularly misleading because they refer to arrangement fees, but these are the fees charged by the mortgage lender, not by Alexander Hall, which are charged in addition.
It seems reasonable to conclude that Foxtons's subsidiary, Alexander Hall, is not keen for its client to discover its fees.
If the conclusions of this report are valid, all three companies also face prosecution by regulators for failing to disclose material risks to investors.
Criminal investigations, prosecutions and convictions would all be costly and disruptive.
Foxtons seems particularly vulnerable to negative publicity: it has a single very high profile brand; its very high profit margin relies on some of the highest inadequately disclosed charges in the industry; it is already tarnished having regularly pioneered estate agency malpractices ranging, for example, from the systematic removal of other agents’ lettings boards to the contract terms ruled unfair in the High Court; it has long been the agency that exemplifies the yuppie; it is managed by a lawyer who formerly managed Enron Europe, for whom its flotation has made £100m; and it made £375m for its founder Jon Hunt when he sold it to BC Partners in 2007. It seems the agency most likely to feature in media coverage, and to become the focus for bad publicity and public outrage. Its brand could become worthless. This vulnerability might account for Foxtons's unusual decision not to appoint a financial PR firm to help with its flotation, and to avoid all engagement with the press during its flotation.
Countrywide also regularly attracts media attention because it is the largest estate agency company in the UK. It was targetted by Channel 4's Dispatches yesterday for this reason.
LSL is extremely vulnerable because of its weak balance sheet. 55% depreciation of its intangible assets would make it insolvent.
Some goodwill and intangible assets are likely to be salvageable, but more so in the cases of those companies with a higher proportion or regular business-to-business relationships, i.e. Countrywide and LSL.
If this analysis is correct, and assuming that consumers account for 80% of Foxtons’s revenue, the percentages of revenue involved are around 16% relating to inadequately disclosed VAT (or 14% for claims when VAT was 17.5%, and 12% when it was 15%), 10% relating to inadequately disclosed renewal fees and 6% relating to inadequately disclosed non-optional fees, 28-32% in total. Foxtons is therefore at risk of claims amounting to about 30% of its revenue over six or fifteen years plus statutory interest. Even if limited to six years, liability could exceed £200m, which far exceeds Foxtons's net assets of only £116m.
(N.B. Foxtons's prospectus refers to a provision for claims relating to OFT v Foxtons in 2009 which was partially released because claims did not materialise as expected. The amount of claims that did materialise is not disclosed but that amount can be deducted from any new provision.)
Countrywide and LSL are less exposed as explained above. On the estimated basis that consumers account for 50% of their revenue, Countrywide and LSL are at risk of claims amounting to about 17% of their revenues over six or fifteen years plus statutory interest. Six years of claims could cost Countrywide in excess of £550m against net assets of £457m, and LSL in excess of £250m, more than three times its net assets of only £77m.
If intent to deceive were proven, exemplary damages might also be payable, adding up to 50% to the total. All the calculations exclude legal costs and inadequately disclosed fixed mortgage charges.
Defending such claims would be difficult. If the practices are misleading, as the OFT says they are, and the client has been illegally misled about a charge that he has paid, as the OFT says the average consumer is likely to have been, he has been mischarged, the basis for a claim. The only possible defences seem to be to challenge the OFT’s interpretation of the regulations, which is unlikely to be successful; or to argue that the claimant was either better informed or more diligent than the average consumer, which would be very difficult and costly to prove on a case by case basis.
Savills, also listed, engages in the same practices but it is cushioned because its UK residential estate agency business accounts for only 12.5% of its total revenue. If it survives damage to its goodwill, it could even benefit from the disruption by mopping up the business given up by weakened competitors at the top end of the market and, if it chose to, in the middle or lower markets.
Transparency of any fees which are legitimate will promote price comparison, which will promote price competition, which will drive prices towards cost plus a normal margin. The costs of the work to which estate agents' fixed fees are attributed is generally low and the work is routine. For example, a tenancy agreement can be created free of charge online in a few minutes (e.g. on the British Property Federation website), and some agents charge no additional fees at all. Prospective tenants will tend to avoid agents whose obviously excessive fees are exposed and landlords will tend to avoid agents obviously avoided by tenants.
From information in Foxtons’s prospectus, I estimate that additional non-optional fixed fees account for about 22% of Foxtons’s average annual revenue per new letting (c. £700 of c. £3200 exc. VAT), a large proportion, and about 2.2% of its renewals (c. £70 of c. £3200). On the basis that new lettings accounted for 62.5% of 2012 lettings, and lettings revenue accounted for half of Foxtons’s total revenue, I estimate that these fees accounted for about 8% of Foxtons’s total revenue in 2012 and, since its OPbE margin is 28%, 29% of its OPbE. Transparency and regulatory enforcement puts all of this at risk.
The Scottish Parliament has already prohibited such fees.
These calculations do not take account of improperly disclosed fixed mortgage fees, or Countrywide’s recent acquisition of Lambert Smith Hampton.
With net current liabilities of (£20m) already, LSL is most vulnerable. Countrywide is also very vulnerable to such a reverse.
Estate agents could adjust their charging models to cope with the need for transparency, to deal with price competition, and to make a reasonable profit but they cannot do so smoothly as an industry because the Competition Act forbids them to collude to create new charging conventions. Individual firms might choose unilaterally to disclose their fees transparently but they would seem uncompetitive to careless consumers next to competitors who continued to mislead unless they were to advertise their new policy of compliance with the CPUTRs; but if they did so (and they would probably need to do so indefinitely), they would draw attention to their old policy of non-compliance encouraging thousands of civil claims against themselves and their competitors. Disclosure in company reports could also trigger such claims. Hence widespread criminal malpractice continues, competitors respond to malpractice by copying it, the associated risks remain unreported, and liabilities will accumulate until a collapse is triggered by regulatory intervention, press coverage or a high profile civil claim.
This is the sort of chronic market failure which the OFT is focussing upon since its April announcement. The OFT referred the payday lenders market to the Competition Commission for four reasons, all of which are directly applicable to the estate agency market: practices that make it difficult for consumers to identify or compare the full cost of what they are paying for, undermining competition; barriers to switching between suppliers (tenants cannot switch, and landlords or sellers who switch risk paying commission to two agents); variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not; and practices that take advantage of consumers’ weak bargaining positions (once entangled in a relationship with an agency as a buyer, seller, tenant or landlord it is difficult to extract oneself and risky to complain).
The property market itself is unlikely to be badly disrupted by the failure of multiple estate agents because newer estate agents are not significantly exposed and it is relatively easy to set up a new estate agency, whether on the high street or online only. Affordable generic estate agency software is available by subscription and property portals like Rightmove, paid for by subscription, are now the most important routes for property promotion, except, perhaps, at the very top end of the market. Disruption will favour flexible new or recent entrants with low, or no, exposure to civil claims.
Chronic failure to prosecute criminal conduct endorses it as normal practice and and brings the law into disrepute.
You should complain to the Citizen’s Advice Bureau (CAB) about recent misconduct because, although the CAB is unlikely to be helpful to you directly, it will report your complaint to your local trading standards office, who will report it to the OFT. Regulators respond to the quantity of complaints. Multiple legitimate complaints will provoke the OFT to act more quickly an aggressively in support of complainants, which will encourage agents to take complaints seriously.
You should notify recent misconduct to the agent's ombudsman scheme, if he subscribes to one. Notifications from numerous victims will prompt action, but be wary of making a formal complaint because: the complaint process is likely to be slow; ombudsmen will not be able to cope with a large increase in complaints; and ombudsmen cannot be relied upon to make properly independent and competent decisions. The Property Ombudsman, for example, has a board dominated by estate agents; and he will base his decision on his codes of practice which are inadequate, inaccurate and self-contradictory, e.g. in relation to VAT as explained above. You can challenge an ombudsman's decision in court but, to date, no such challenge has been upheld against the Property Ombudsman.
If you remain in dispute, therefore, you should sue, and you need to do so whilst your agency remains solvent. Most claims will fall within the small claims limit of £10,000, so that you can use the cheap and relatively simple small claims procedure which is accessible online at Money Claim Online. Read the instructions. Take screen images of your agent's website immediately, before he amends it, to demonstrate misleading conduct. You might be able to pool evidence of illegal policies with other victims online. Rely in your claim on the regulations and the OFT's guidance about those regulations.The burden of proof is the balance of probability that you were misled regardless of the agent's intention. Bear in mind that judges appreciate simplicity, clarity, brevity and relevance.
Consult a solicitor if you are unsure about making the claim yourself. The firms that make PPI mis-selling claims on a no win-no fee basis might treat this as a similar area of opportunity.
Most estate agents charge opaque additional fees to tenants and landlords; most charge opaque renewal commissions to landlords; and most opaquely quote fees and commissions exclusive of VAT (and without disclosing the applicable rate of VAT which was acceptable until 2008 in some circumstances). They have done so for many years. All three practices are prohibited by the Consumer Protection from Unfair Trading Regulations 2008 (CPUTRs) and, before that, by the Consumer Protection Act 1987 (CPA).
The Office of Fair Trading (OFT) has recently published several reports and guidance documents much of which the industry continues to ignore. If the OFT takes action, and it must to retain a semblance of authority, most estate agents are at risk of criminal prosecution, most are at risk of loss of the large proportions of their revenues that rely on opaque pricing, and most are at risk of negative publicity. Negative publicity would severely damage the goodwill upon which their balance sheets and revenues rely, and provoke thousands of civil claims for amounts improperly charged over the past six years or, as in the case of PPI mis-selling, fifteen.
Foxtons, Countrywide and LSL are all heavily exposed and lack sufficient net assets to cover possible claims, even before depreciating the severely threatened goodwill upon which their balance sheets rely entirely. Separately, profitability is threatened. I estimate, for example, that 360% (sic) of LSL's operating profit before exceptionals (OPbE) is directly put at risk by transparent pricing and that a loss of consumer revenue of just 10% due to loss of goodwill would compound with the effects of transparent pricing to reduce all three companies' OPbE by 112%, 242% and 411% respectively.
Estate agency shares have risen strongly on the basis that the revival of the property market will increase both their transaction volumes and their transaction values whilst their scales of commission and fees, and their costs, the majority of which are fixed, will remain largely unchanged. But none of these companies has disclosed, or provided for, the very serious risks analysed in this report.
The report contains:
- A timeline showing regulatory developments and recent relevant stock exchange transactions
- A critical look at Foxtons’s award-winning website
- An explanation of the undisclosed risks faced by estate agents
- A description of the estate agency market’s failure
- Some brief and obvious recommendations
1. Timeline
1987
Part III of the Consumer Protection Act 1987 (CPA) required price indications to communicate what the consumer would actually pay, i.e. inclusive of all additional charges and taxes.1989
The Consumer Protection (Code of Practice for Traders on Price Indications) Approval Order 1988 (CPAO) provided guidance on the Consumer Protection Act. Para. 2.2.9 required those charging professional fees: either to quote a fee which included VAT; or to make it clear that in addition to the fee the consumer would have to pay VAT at the appropriate rate (to state, e.g., “fee of 1.5% of purchase price, plus VAT at 17.5%”).1999
The Unfair Terms in Consumer Contracts Regulations 1999 required consumer contracts to be written in plain and intelligible language; and blocked enforcement, by the supplier, of any standard (i.e. non-negotiated, pre-printed) term that created an imbalance of rights and obligations to the detriment of the consumer.2005
The Office of Fair Trading (OFT) published Guidance on Unfair Terms in Tenancy Agreements, replacing previous guidance issued in 2001. It explained that good faith: requires transparency, which is “fundamental to fairness”; and prevents suppliers taking advantage of “consumers’ weaker bargaining position or lack of experience”. Section 5.13 said,Generally, tenants under short term or periodic tenancies expect that rent will cover costs associated with taking on a tenancy other than those whose amount is determined by the tenant (such as heating, phone bills and so on), and council tax. Any term imposing substantial additional costs or charges that are outside the tenant's control needs to be clearly and specifically drawn to their attention at the time the contract is entered into.
2006
Subscription to an ombudsman service became mandatory for sales agents, but not for agents involved solely in lettings. A high proportion of estate agents subscribe to the Property Ombudsman's scheme; the rest subscribe to the Ombudsman Services: Property scheme. Ombudsman are dispute resolution services, not regulators, and their codes of practice have no force in law except to the extent that it is illegal to subscribe to a code of practice whilst ignoring it. In the event of a conflict between a code of practice and law, the law prevails.The Property Ombudsman is nominally independent but industry members are strongly represented on the Property Ombudsman’s Council and dominate his Board. Inexplicably his 2006 lettings code of practice correctly required fees to be quoted inclusive of VAT “where practicable”, but his 2006 sales code of practice required fees to be quoted as an actual amount plus VAT without any requirement to disclose the applicable rate of VAT, in breach of the requirements of the CPA. It is possible he meant to write “actual amount including VAT”, but, if so, he did not correct it.
2008
The Consumer Protection from Unfair Trading Regulations 2008 (CUPTRs) implemented the European Unfair Commercial Practices Directive and replaced Part III of the CPA. It prohibited practices which contravene the requirements of professional diligence (which include honest market practice and good faith) and do, or are likely to, materially distort the economic behaviour of the average consumer. These practices include misleading actions, misleading omissions (which include failing to disclose clearly the price of a service fully inclusive of additional charges and taxes) and aggressive commercial practices. The Department for Business Enterprise and Regulatory Reform published guidance on the regulations.Inexplicably, the Property Ombudsman did not amend his codes of practice to comply with the CPUTRs at this time.
2009
In OFT vs Foxtons in the High Court, Mann J found that Foxtons’s standard landlord’s contract contained renewal terms which breached the Unfair Terms in Consumer Contracts Regulations (UTCCRs). He found them to be unfair because they were non-negotiated terms which were not transparent and their effects, an open-ended commitment to pay commission, were not otherwise flagged to consumer landlords and amounted to a trap. He also observed in para. 99 that Foxtons, in proposing revised renewal terms to the OFT, had continued to disregard the requirement for transparency.2011
The Property Ombudsman introduced revised codes of practice for sales and lettings. Both specifically obliged agents to comply with the CPUTRs but required percentage fees to be expressed as an “amount plus VAT”, in breach of the CPUTRs which require consumer prices to be VAT-inclusive, and required fixed fees to be quoted inclusive of VAT “in contracts”, which is compliant but misleadingly limited because fees must be clearly disclosed prior to contract and prior to any transactional decisions, such as choosing to view a house. Very few estate agents comply with the second requirement, and none that I know of comply with the CPUTRs.Jan 1 2012
The Property Ombudsman published a revised code of practice for lettings to comply with the OFT v Foxtons ruling. Inexplicably, it had taken him two and half years to do so, and he did not take the opportunity to correct his VAT errors.July 5 2012
Having endured a long-running, vitriolic dispute, the OFT announced that it had successfully obliged twelve airlines to disclose credit card charges in their advertised prices which they had previously misleadingly concealed until the end of their lengthy online booking processes.The OFT also announced that it had recommended that any such charges which exceeded the cost to the trader should be prohibited generally. The Government acted quickly on the recommendation and introduced the Consumer Rights (Payment Surcharges) Regulations 2012 which came into force only nine months after the recommendation.
The Government is likely to react as quickly to any OFT recommendation relating to estate agency.
Sep 13 2012
The OFT, prompted by chronic and extensive disregard by estate agents of the CPUTRs published “Guidance on Property Sales”. Its straightforward interpretation of the CPUTRs included a reiteration of the requirement for estate agents to disclose a clear description of all their charges (para. 4.9), inclusive of VAT (para. 5.14), before the consumer makes a transactional decision. A transactional decision includes both pre-contractual decisions such as whether to view a property or to consider an alternative agent’s services (para. 3.4), and post-contractual decisions such as whether to object to a charge. The requirement to include VAT in consumer prices is widely overlooked. The Guidance says,5.14 When offering to sell services to consumers, state your charges and fees inclusive of VAT. It is the OFT’s view that, whether you charge a fixed fee or a percentage of an as yet unknown sale price, stating the fee or percentage inclusive of VAT is more meaningful for consumers. If there are circumstances where this is not possible, at least make it clear upfront that VAT will be charged on top (and identify the relevant rate of VAT). In such cases you should make it as easy as possible for consumers to work out how much they will pay overall.Given the clarity of the first sentence, to ignore the advice is certainly a failure of professional diligence that is likely to mislead the average consumer.s. Very few, if any, agents have acted on the guidance.
The guidance was issued a year ago but, inexplicably, the Property Ombudsman has not amended his codes of practice to comply with it.
Nov 30 2012
In Scotland, the Scottish Parliament banned all tenancy charges apart from rent, a refundable deposit and charges relating to the Green Deal.Feb 14 2013
The OFT published its report, The Lettings Market. It reported extensive problems with the operation of the lettings market, and it signalled that it would produce two guidance documents, advised consumers to assert their rights more forcefully, and advocated a redress scheme. It recorded that 30% of lettings complaints in 2011 related to fees and charges, and 10% to undisclosed fee and charges; and it criticised “drip-pricing” by agents, the strategy of introducing extra charges to consumers gradually through the sales process in order to secure commitment before the disclosing the full cost involved (Paras 2.7-2.9). Drip-pricing is a practice about which it wrote a separate generic report, Advertising of Prices, in 2009.Feb 28 2013
LSL’s 2012 annual report made no specific reference to any of the fairly obvious risks explained in this report, or to LSL’s extensive non-compliance with the OFT’s guidance, or to outstanding complaints made to the Advertising Standards Authority (ASA) about its subsidiary, Your Move.Mar 6 2013
A week after publication of LSL’s annual report, the ASA published its adjudication against LSL’s subsidiary, Your Move, that all non-optional fees must be clearly advertised alongside the rent in advertisements for properties to let, because failing to do so is a misleading omission.Mar 20 2013
Countrywide published its listing prospectus. Although required to disclose all material risks to the business, it made no specific reference to any of the risks explained in this report.Apr 2 2013
The OFT announced that its role had changed and that it would focus more attention on systemic market failures, like those it had addressed in the airline industry in 2012, which would require it to take action against multiple firms in such markets.Jun 27 2013
In the course of a review of the payday lending market, the OFT referred the market to the Competition Commission for four reasons, all of which apply directly to the estate agency market (see Market Failure below).Jul 8 2013
The Communities and Local Government Committee published its report, “The Private Rented Sector”, which said in its summary,“It is time to crack down on the unreasonable and opaque fees charged not only by a few rogues but by many well-known high street agents.”
Jul 30 2013
LSL’s half-yearly report made no specific reference to any of the risks explained in this report.Aug 1 2013
Countrywide’s half-yearly report made no specific reference to any of the risks explained in this report.Aug 14 2013
Apollo reduced its holding in Countrywide from 18% to 11% (of which 1% belongs to Pantheon), and Oaktree reduced its holding in Countrywide from 37% to 28%. Both of these disposals broke the IPO lock-up agreement and in return both firms agreed to a 90 day extension of the lock-up period for their remaining shares.Sep 4-5 2013
Directors of LSL sold 6% of the company’s shares, 40% of their personal holdings.Sep 10 2013
The ASA warned that, from November 1, it will take action against any estate agents failing to comply with its ruling of 6 March 2013. The ASA has little power but it can refer offences to the OFT.The ASA’s decision seems to have been interpreted by estate agents as permission to mislead consumers until Nov 1. In fact the decision has been made to allow estate agents time to update computer systems, but in the meantime, since agents can no longer have any reasonable doubt that the relevant practices are misleading, any that fail to take the simple steps necessary to alert consumers to the possibility of being misled by websites as currently configured seem to be committing fraud and exposing themselves to civil claims for exemplary damages in addition to compensation for mischarging.
Sep 18 2013
The OFT announced that its payday lending market review had already caused 19 of the largest 50 payday lenders to withdraw from the marketplace, and that, of those outside the top 50, three had also withdrawn and another three had had their licenses revoked.The OFT is willing to take disruptive action when necessary.
Sep 20 2013
The original lock-up period for Countrywide’s major shareholders expired.Foxtons published its listing prospectus, having already placed its shares, and unofficial dealing in its shares began. Although it is required to disclose all material risks to the business, the prospectus made no specific reference to risk explained in this report. The prospectus announced that 14% of the share sale would raise £50m to pay off debt, but that the remaining 86% would be disposals by the major shareholders. Adnams BBPM (BC Partners) sold two thirds of its 75% shareholding; CEO, Michael Brown, sold half his 18% holding. Altogether insiders disposed of 63% of the company’s pre-existing shares. All original major shareholders and directors are now subject to lock-up periods of 180 and 365 days respectively. Unusually, Foxtons did not engage a financial PR firm to engage with the media.
Sep 27 2013
Alchemy Partners, newly freed from its lock-up, sold its entire 6% shareholding in Countrywide, having been a major shareholder since 2009. An unidentified institutional investor also sold its 3% interest. The remaining major shareholders are Oaktree Capital Management (28%) and Apollo Management (10%), both subject to extended lock-ups.Oct 1 2013
Eric Pickles, Communities Secretary, announced plans for a Tenants Charter and a compulsory lettings redress scheme as proposed by the OFT in February.Oct 17 2013
The OFT published its draft Guidance for Lettings Professionals. It summarises the current legislation, as described above and gives numerous examples of non-compliance relevant to this report (Paras 4.9 & 4.19). In advises that an “average consumer . . . may pay some attention to documentation, but not necessarily to read or understand small print unless key points are brought to their attention”; that, “You are more likely to comply with the law if you provide a summary of fees and charges in a single tariff.”; that “Advertising that includes any fee information should set out all the mandatory fees that landlords may be asked to pay under the contracts you use”; and, “Because your clients are likely to include consumers as well as businesses, we consider that any charges you advertise should be inclusive of VAT (including charges that are expressed as a percentage of rent for example).”.Nov 1 2013
From this date, the Advertising Standards Authority will take action against any estate agent failing to disclose charges in addition to rent in lettings advertisements. The OFT’s draft Guidance for Lettings Professionals supports the ASA’s position.2. Foxtons’s Award-Winning Website
I use Foxtons as an example because it trades as a single brand making its conduct simpler to analyse than that of Countrwide or LSL, both of which have multiple branded subsidiaries, few of which publish their terms in detail, if at all. Whilst amounts and proportions are different, Countrywide's and LSL's subsidiaries engage in many of the same misleading practices as Foxtons and therefore face many of the same risks.Foxtons’s website won the 2013 New Media Award for the best real estate website so it is reasonable to assume that its content and layout are deliberate, and indicative of the Foxtons’s communication intentions. That it won the award without raising objections from any competitors indicates that its treatment of consumers is considered normal practice in the industry.
I consider below the website's treatment of all types of consumer client, none of which is satisfactory.
Landlords
Non-professional landlords are consumers for the purposes of the CPUTRs. Foxtons publishes a scale of fees to landlords as part of its Terms and Conditions for Landlords (see the 26 Oct 2013 version below). However the link to it is in a menu of less important items at the bottom right of the Landlords page (N.B. by the time you read this Foxton's website may have been amended), the tariff is misleadingly incomplete, and its examples are misleading, as explained in the following sections.VAT-exclusive pricing and opaque landlord’s fees
Note that the fees are quoted exclusive of VAT, a criminally misleading omission, referred to in para 5.36 of the OFT’s draft Guidance for Lettings Professionals. Many traders, particularly small building firms, quote prices exclusive of VAT. The principal and obvious reason for doing so is to understate the price to the consumer by 17% (20% of [100% + 20%] is a sixth or 17%). To stamp out this deliberately misleading practice, consumers should always ignore the illegal "+ VAT" and hold suppliers to the stated figure as a VAT-inclusive price.Note that Foxtons’s non-optional “tenancy arrangement fee” is not mentioned in the “Schedule of Fees” where it should obviously be, also a criminally misleading omission. It is buried further down the page: £350 + VAT (i.e. £420) for a long tenancy and £175 + VAT (i.e. £210) for a short tenancy.
The following table compares the figures stated in the examples (e.g. £2040 in example 1) with the actual amounts payable by the landlord, showing that the actual amounts payable far exceed the quoted figures:
| Example | Cost stated in the example | Tenancy arrangement fee | Total inclusive of fee and VAT @ 20% | Opaque increase to the stated figure |
| 1 | £2040 + VAT | £350 + VAT | £2868 | 41% |
| 2 | £1320 + VAT | £350 + VAT | £2004 | 52% |
| 3 | £1040 + VAT | £350 + VAT | £1458 | 40% |
Undisclosed Counterparty’s fees
Note that the fees charged to the tenant are not mentioned to the landlord (or vice versa). Fees charged by the agent which increase the cost of the tenancy to the tenant without the landlord’s knowledge conflict with the agent’s duty to the landlord, which, put simply, is to extract money from the tenant on the landlord’s behalf in return for a fee. This misleading omission is criticised in Para 4.19 of the OFT’s draft Guidance for Lettings Professionals. Many landlords and tenants are surprised to be asked to pay £350 + VAT when a tenancy is arranged. Many remain unaware, and would be even more surprised to discover, that their counterparties are being asked to pay the same amount.The following table compares [the percentage commission stated in the examples] with [the ratio of Foxtons’s revenue to the full amount paid by the tenant], assuming that the tenancy ends at the end of the initial term and that Foxtons charges its “tenancy arrangement fee” of £350 + VAT to the landlord and its “administration fee” of £350 + VAT and its “checkout organisation fee” of £125 + VAT to the tenant. The opaque increases are even greater than in the first table.
| Example | Commission quoted in the example (A) | Foxtons revenue including VAT/tenant’s payments | Percentage of tenant’s cost actually taken by Foxtons (B) | Opaque increase to the quoted commission (B/A) |
| 1 | 17% | £3438/£12570 | 27% | 59% |
| 2 | 11% | £2574/£12570 | 20% | 82% |
| 3 | 26% | £2028/£4570 | 44% | 69% |
Another way to look at this is to calculate the level of rent required to generate fees amounting to the figure quoted in each example, i.e. £2040, £1320 and £1040, taking into account all the additional fees and VAT. Instead of £1000 per month, as used in the examples, the answers are, respectively, £433, £208 and £208 per month. Foxtons is currently advertising flats costing between £600 and £110,000 (sic) per month.
Renewals
Note that none of the examples include the consequences of the tenancy extending beyond the initial term. Foxtons’s prospectus disclosed that in 2012 70% of current tenancies were renewed. On this basis the average tenancy would last over 3 years. The misleading use of examples covering the initial term only flagrantly ignores the spirit of Mann J’s decision in OFT v Foxtons, and paras 4.22-4.30 of the OFT’s draft Guidance for Lettings Professionals cast serious doubt on the enforceability of many renewal commissions in existing contracts. The Property Ombudsman’s Code of Practice for Lettings, para. 3j, prohibits renewal fees unless they have been actively flagged and the landlord has requested a renewal, or has otherwise specifically agreed to them. It is a CPUTR offence to subscribe to a code of practice without complying with it. The implication is that renewals are often optional. If so, since very little work is involved in a renewal (excluding management renewals), a landlord would only sensibly consent to pay non-management renewal fees if he had been misled.The following table compares [the figures quoted in the examples] with [Foxtons’s revenue including all fees and VAT], assuming a more representative tenancy lasting three years (although this is unlikely in the case of example 3 which relates to an initial short term let).
| Example | Cost quoted in the example | Commission over a three year tenancy plus fees plus VAT | Opaque increase to the quoted figure |
| 1 | £2040 + VAT | £7086 | 247% |
| 2 | £1320 + VAT | £5358 | 306% |
| 3 | £1040 + VAT | £9516 | 815% |
A more representative rent
Note that all the examples involve income to Foxtons which is far less than Foxtons’s average annual income per letting of £3172 + VAT. This is a misleading action because Foxtons’s average prospective landlord’s property commands a rent much larger than in any of the examples. This table compares the examples against a more representative rent of, say, £1500 per month, and a more representative tenancy lasting three years (although this is unlikely in the case of example 3 which relates to an initial short term let). As noted above, Foxtons advertises flats costing as much as £110,000 per month.| Example | Cost quoted in the example | Commission over a three year tenancy plus fees plus VAT if rent were £1500 per month | Opaque increase to the quoted figure |
| 1 | £2040 + VAT | £10038 | 392% |
| 2 | £1320 + VAT | £7446 | 464% |
| 3 | £1040 + VAT | £13884 | 1235% |
If you find these increases surprising, it is because you find the commissions and fees, as presented, misleading.
Tenants
The OFT’s draft Guidance for Lettings Professionals including, for example, Paras 5.26-5.37, makes frequent references to the need for a clear tariff of fees. Foxtons does not publish a tariff of fees for tenants on its website or, as far as I know, anywhere else. It does, however, publish its Terms and Condition for Tenants on its website and its various fees to tenants appear at various points in this report.The first step towards finding these Terms and Conditions is to click “Rent” on the main menu at the top of most Foxtons webpages.
Until recently the second step was to click on “Fees and terms” in another menu at the bottom right of the “Rent” page or any of the listings page reached from this page (or at the bottom of these pages if the window is too small). Web designers know that users are far more likely to look at items at the top left of a webpage, and that the right hand column is widely ignored by users because they unconsciously associate it with banner advertising, a phenomenon called “right-rail blindness” by research company Neilson Norman Group (NNG). The menu’s location at the bottom of the page means that it is not visible on the vast majority of computer screens before scrolling down, another barrier to discovery. Positioning the link in the middle of a menu of much less important items, some irrelevant to prospective tenants, also serves to hide it.
Very recently, in a nod to the ASA's threat to enforce, Foxtons has added an alternative second step, a link which follows the advertised rent. Para 5.16 of the OFT’s draft Guidance for Lettings Professionals describes a link as unsatisfactory. The link says, vaguely (i.e. misleadingly), "Tenants fees may apply".The rent is in large bold white text. The link is half the font size, much dimmer and not bold.
The third step is to click on one of the links on the next page. Both links are clearly marked as PDF documents. PDF documents are designed for print, not for viewing on a screen. NNG has described them as three times worse than HTML (i.e. a web page designed for screen viewing) as a means of communicating on the Internet, and the use of a PDF instead of HTML is the second of NNG’s Top 10 Mistakes in Web Design. For this reason users are less likely to click on a link to a PDF, particularly if they are using a smartphone, and, if they do click on it, they are less likely to read it properly.
Foxtons’s Terms and Conditions for Tenants is a PDF with two columns, making it particularly unsuitable for display on a screen because the user must scroll down to read the first column, and then up and down again to read the second column. An administrative fee is quoted in the first paragraph but other fees are scattered throughout the document. All of the fees are quoted illegally exclusive of VAT.
It seems reasonable to conclude from this carefully designed, award-winning arrangement of navigation and content that Foxtons is not keen for tenants to discover what it plans to charge them. The arrangement is a series of misleading actions and omissions.
Foxtons charges tenant and landlord at least £840 in total when a long-term tenancy is arranged, and it charges tenants a variety of other fees. Such charges, being inadequately flagged, are often a surprise to landlords and tenants. Paras 5.22 and 6.6 of the OFT’s draft Guidance for Lettings Professionals express scepticism about the legality of an “administration charge” to tenants. Buried in Foxtons’s Terms and Conditions for Tenants is an obligation for tenants to pay £80 + VAT (i.e. £96) if a tenancy is renewed beyond the initial term. Paras 9.11- 9.12 of the OFT’s draft Guidance for Lettings Professionals describe renewal fees charged to tenants as an aggressive business practice, i.e. another criminal offence, and criticise the common practice by agents of arranging new fixed term tenancies instead of allowing tenancies to run on. Also buried in its Terms and Conditions for Tenants is an obligation for tenants to pay £125 + VAT (i.e. £150) for an inspection at the end of the tenancy if organised by Foxtons or another amount if organised by the landlord. Para 9.15 of the OFT’s draft Guidance for Lettings Professionals regards these as contractually unreasonable since the check out inspection is for the benefit of the landlord.
Almost all of Foxtons’s additional charges to tenants are problematic.
Sellers
Although Foxtons’s selling commissions are non-negotiable, it does not publish them on its website or anywhere else. It will not even disclose the commission over the telephone insisting instead that an agent come and view the property first, implying that the nature of the property might affect the level of commission. Given that consenting to an appointment with an agent is a transactional decision, and the commissions are non-negotiable, this practice is a misleading omission as defined by the OFT.Buyers
Foxtons does not appear to charge buyers any hidden fees directly.A search of Alexander Hall’s website reveals this advertisement to be misleading because Alexander Hall charges fees. Furthermore whilst competitive mortgage brokers tend either to charge clients a fee or to take a commission from the mortgage provider, Alexander Hall charges £499, or much more in some cases, whilst keeping the commission too, although in some cases it offers an alternative deal. The Fees page is reached only, as far as I can see, from the About Us page, an unlikely place to find it, and not from any of the mortgage listings or details pages. The mortgage details pages are particularly misleading because they refer to arrangement fees, but these are the fees charged by the mortgage lender, not by Alexander Hall, which are charged in addition.
It seems reasonable to conclude that Foxtons's subsidiary, Alexander Hall, is not keen for its client to discover its fees.
3. Risk Analysis
Criminal prosecution
All the misleading practices described above breach the CPUTRs and those responsible could be sent to prison for up to two years or fined an unlimited amount. If intent to deceive were proven, the Fraud Act would apply increasing the possible prison term to ten years.If the conclusions of this report are valid, all three companies also face prosecution by regulators for failing to disclose material risks to investors.
Criminal investigations, prosecutions and convictions would all be costly and disruptive.
Balance sheet solvency
A company is balance sheet solvent when its assets exceed its liabilities. At 30 June 2013, the balance sheets of the three companies were as follows.
| (£m) | Foxtons | Countrywide | LSL |
| Goodwill and other intangible assets | 118 | 557 | 140 |
| Other non-current assets | 22 | 57 | 31 |
| Net current assets | 14 | 7 | (20) |
| Non-current liabilities | (86) | (166) | (73) |
| Net assets | 68 | 457 | 77 |
Negative publicity
Publicity generated by regulatory or criminal investigations or multiple civil claims would damage the brands, i.e. the goodwill, of the companies involved. Note the reliance of the companies' balance sheets on goodwill and other intangible assets. Stripped of these, the companies have net liabilities of (£1m), (£17m) and (£78m) respectively. It is a criminal offence in the UK to trade whilst insolvent.Foxtons seems particularly vulnerable to negative publicity: it has a single very high profile brand; its very high profit margin relies on some of the highest inadequately disclosed charges in the industry; it is already tarnished having regularly pioneered estate agency malpractices ranging, for example, from the systematic removal of other agents’ lettings boards to the contract terms ruled unfair in the High Court; it has long been the agency that exemplifies the yuppie; it is managed by a lawyer who formerly managed Enron Europe, for whom its flotation has made £100m; and it made £375m for its founder Jon Hunt when he sold it to BC Partners in 2007. It seems the agency most likely to feature in media coverage, and to become the focus for bad publicity and public outrage. Its brand could become worthless. This vulnerability might account for Foxtons's unusual decision not to appoint a financial PR firm to help with its flotation, and to avoid all engagement with the press during its flotation.
Countrywide also regularly attracts media attention because it is the largest estate agency company in the UK. It was targetted by Channel 4's Dispatches yesterday for this reason.
LSL is extremely vulnerable because of its weak balance sheet. 55% depreciation of its intangible assets would make it insolvent.
Some goodwill and intangible assets are likely to be salvageable, but more so in the cases of those companies with a higher proportion or regular business-to-business relationships, i.e. Countrywide and LSL.
Thousands of civil claims
Negative publicity is likely to trigger civil claims to recover illegally made charges. The Limitation Act, as enacted, allows valid claims to be brought after up to six years, but, on the basis that the charges were improperly disclosed, and that the industry has concealed their illegality by collectively presenting them as “normal”, the Latent Damage Act might apply, as it has to PPI mis-selling, allowing claims to brought after up to fifteen years.If this analysis is correct, and assuming that consumers account for 80% of Foxtons’s revenue, the percentages of revenue involved are around 16% relating to inadequately disclosed VAT (or 14% for claims when VAT was 17.5%, and 12% when it was 15%), 10% relating to inadequately disclosed renewal fees and 6% relating to inadequately disclosed non-optional fees, 28-32% in total. Foxtons is therefore at risk of claims amounting to about 30% of its revenue over six or fifteen years plus statutory interest. Even if limited to six years, liability could exceed £200m, which far exceeds Foxtons's net assets of only £116m.
(N.B. Foxtons's prospectus refers to a provision for claims relating to OFT v Foxtons in 2009 which was partially released because claims did not materialise as expected. The amount of claims that did materialise is not disclosed but that amount can be deducted from any new provision.)
Countrywide and LSL are less exposed as explained above. On the estimated basis that consumers account for 50% of their revenue, Countrywide and LSL are at risk of claims amounting to about 17% of their revenues over six or fifteen years plus statutory interest. Six years of claims could cost Countrywide in excess of £550m against net assets of £457m, and LSL in excess of £250m, more than three times its net assets of only £77m.
If intent to deceive were proven, exemplary damages might also be payable, adding up to 50% to the total. All the calculations exclude legal costs and inadequately disclosed fixed mortgage charges.
Defending such claims would be difficult. If the practices are misleading, as the OFT says they are, and the client has been illegally misled about a charge that he has paid, as the OFT says the average consumer is likely to have been, he has been mischarged, the basis for a claim. The only possible defences seem to be to challenge the OFT’s interpretation of the regulations, which is unlikely to be successful; or to argue that the claimant was either better informed or more diligent than the average consumer, which would be very difficult and costly to prove on a case by case basis.
Savills, also listed, engages in the same practices but it is cushioned because its UK residential estate agency business accounts for only 12.5% of its total revenue. If it survives damage to its goodwill, it could even benefit from the disruption by mopping up the business given up by weakened competitors at the top end of the market and, if it chose to, in the middle or lower markets.
The combined threat to balance sheet solvency
Loss of goodwill and other intangibles assets will weaken the companies' balance sheets. Meanwhile potential civil claims, fines and associated costs far exceed each of the companies’ net assets, in LSL's case by a factor of three.Cash flow solvency
A company is cash flow solvent when it is able to pay its bills. Two important measures of this are net current assets and operating profit margin.
| (£m) | Foxtons | Countrywide | LSL |
| Net current assets | 14 | 7 | (20) |
| Turnover | 125 | 518 | 238 |
| Operating profit before exceptionals (OPbE) | 35 | 44 | 12 |
| OPbE margin | 28% | 8.5% | 5% |
Opaque non-optional fixed charges
The CPUTRs require estate agents to disclose their non-optional charges openly, and the ASA has warned them to do so in advertising by November 1st. I understand that property aggregation portals like RightMove propose to deal with the ASA’s adjudication as Foxtons has, by including a link on every lettings advertisement to an explanation of all charges, but as noted already, para 5.2 of the OFT’s draft Guidance for Lettings Professionals addresses this point and Para 5.16 describes a link as unsatisfactory. The regulations require charges to be clear, not just a bit clearer than they are now.Transparency of any fees which are legitimate will promote price comparison, which will promote price competition, which will drive prices towards cost plus a normal margin. The costs of the work to which estate agents' fixed fees are attributed is generally low and the work is routine. For example, a tenancy agreement can be created free of charge online in a few minutes (e.g. on the British Property Federation website), and some agents charge no additional fees at all. Prospective tenants will tend to avoid agents whose obviously excessive fees are exposed and landlords will tend to avoid agents obviously avoided by tenants.
From information in Foxtons’s prospectus, I estimate that additional non-optional fixed fees account for about 22% of Foxtons’s average annual revenue per new letting (c. £700 of c. £3200 exc. VAT), a large proportion, and about 2.2% of its renewals (c. £70 of c. £3200). On the basis that new lettings accounted for 62.5% of 2012 lettings, and lettings revenue accounted for half of Foxtons’s total revenue, I estimate that these fees accounted for about 8% of Foxtons’s total revenue in 2012 and, since its OPbE margin is 28%, 29% of its OPbE. Transparency and regulatory enforcement puts all of this at risk.
The Scottish Parliament has already prohibited such fees.
Opaque renewal commissions
Estate agents are required to be transparent about their renewal fees and, following OFT v Foxtons, the Property Ombudsman’s Code of Practice for Lettings, para. 3j, prohibits renewal fees, whether fixed amounts or commission-based, unless either they have been actively flagged and the landlord has requested a renewal, or the landlord has otherwise specifically agreed to them. Foxtons, as demonstrated in the example above, does not flag them sufficiently. Nor do most of its competitors. If my analysis of the example is correct, and my analysis seems much the same as the OFT’s in its Guidance for Lettings Professionals, Foxtons’s existing consumer landlord clients who do not take its management service can stop paying their renewal fees today. Foxtons charges a 6% premium for management on top of its initial commission, and, for the purpose of this analysis, I assume that 6% is a reasonably competitive management commission. I estimate that about 40% of Foxtons’s renewal fees relate to managed properties; and I estimate that about a third of this management revenue reasonably relates to management. Non-management renewals involve little more than automated rent collection, which, if competitively priced, might command 2% commission at most. Renewal fees in total account for about 16% of Foxtons’s revenue. I estimate that transparency would threaten about three quarters of this revenue, i.e. 12% of total revenue, which accounts for about 43% of Foxton’s OPbE.VAT-exclusive pricing
Estate agents are required to quote prices inclusive of VAT. Prior to the CPUTRs in 2008, it was compliant with the CPA to quote professional fees exclusive of VAT provided that the applicable rate of VAT was also disclosed. Foxtons routinely uses an illegal VAT-exclusive pricing format. So do most of its competitors and very few quote the applicable rate of VAT. For example, Foxtons illegally quotes its non-negotiable sole agency sales commission as 2.5% + VAT. The law requires it to quote it as 3.0%. It is obvious that a 20% increase in nominal prices will provoke more resistance to price from prospective clients. VAT accounts for 20% of Foxtons’s reported revenue (which is reported exclusive of VAT). A proportion of this, say half, 8.5% of Foxtons’s reported revenue (once adjusted for the VAT that would not be payable on the lost revenue), is at risk. That accounts for 30% of Foxtons’s OPbE.Profit threatened by transparent pricing
Altogether, and adjusted to avoid double-counting, the analysis above puts 27% of Foxtons’s revenue at risk, accounting for 96% of its OPbE. The positions of Countrywide and LSL are more complex to analyse because their activities are more complex, the publish less information about their charges, and their financial reports give insufficient information. Both seem to charge lower average additional fees than Foxtons, perhaps 65% lower, reducing their exposure to opaque additional fixed fee problems. Both have lower exposure to rentals, perhaps 65% lower, reducing their exposure both to opaque additional fixed fee problems and to renewal fee problems. Both offer more business-to-business services than Foxtons reducing their vulnerability to transparent disclosure of VAT by, say, 30%. On this basis, only c. 18% of their revenue is at risk, but they have much lower OPbE margins, 8.5% and 5% respectively, so 212% of Countrywide’s adjusted OPbE is threatened, and 360% of LSL’s.These calculations do not take account of improperly disclosed fixed mortgage fees, or Countrywide’s recent acquisition of Lambert Smith Hampton.
Profit threatened by loss of goodwill
Estate agents's costs are largely fixed so their OPbEis highly geared to revenue. Hence the rapid rise in their share prices in response to the recovering housing market. However revenue is dependent on goodwill and goodwill is severely threatened by the exposure of chronic regulatory non-compliance. Assuming that costs are 80% fixed, each 10% loss of consumer revenue (assumed above to be 80% of Foxtons's total revenue and 50% of Countrywide's and LSL's) would cut Foxtons's OPbE by 23%, Countrywide's by 47%, and LSL's by 80%.The combined threat to cash flow solvency
Compounding (rather than adding) a 10% loss of consumer revenue due to loss of goodwill with the losses forecast above caused by transparent pricing, Foxton's OPbE would drop by 112%, Countrywide's by 242%, and LSL's by 411%, meaning operating losses before exceptionals of (£4m), (£62m), and (£37m).With net current liabilities of (£20m) already, LSL is most vulnerable. Countrywide is also very vulnerable to such a reverse.
4. Market Failure
Estate agents provide a service which has value and there is nothing intrinsically wrong with any of the charges, even open-ended lettings commissions, if properly disclosed, so it is unhelpful to try to assess the individual charges for fairness or reasonableness. The problems have only arisen because clients have been misled about the charges by most agents. Opacity has interfered with efficient competition.Estate agents could adjust their charging models to cope with the need for transparency, to deal with price competition, and to make a reasonable profit but they cannot do so smoothly as an industry because the Competition Act forbids them to collude to create new charging conventions. Individual firms might choose unilaterally to disclose their fees transparently but they would seem uncompetitive to careless consumers next to competitors who continued to mislead unless they were to advertise their new policy of compliance with the CPUTRs; but if they did so (and they would probably need to do so indefinitely), they would draw attention to their old policy of non-compliance encouraging thousands of civil claims against themselves and their competitors. Disclosure in company reports could also trigger such claims. Hence widespread criminal malpractice continues, competitors respond to malpractice by copying it, the associated risks remain unreported, and liabilities will accumulate until a collapse is triggered by regulatory intervention, press coverage or a high profile civil claim.
This is the sort of chronic market failure which the OFT is focussing upon since its April announcement. The OFT referred the payday lenders market to the Competition Commission for four reasons, all of which are directly applicable to the estate agency market: practices that make it difficult for consumers to identify or compare the full cost of what they are paying for, undermining competition; barriers to switching between suppliers (tenants cannot switch, and landlords or sellers who switch risk paying commission to two agents); variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not; and practices that take advantage of consumers’ weak bargaining positions (once entangled in a relationship with an agency as a buyer, seller, tenant or landlord it is difficult to extract oneself and risky to complain).
The property market itself is unlikely to be badly disrupted by the failure of multiple estate agents because newer estate agents are not significantly exposed and it is relatively easy to set up a new estate agency, whether on the high street or online only. Affordable generic estate agency software is available by subscription and property portals like Rightmove, paid for by subscription, are now the most important routes for property promotion, except, perhaps, at the very top end of the market. Disruption will favour flexible new or recent entrants with low, or no, exposure to civil claims.
5. Recommendations
For regulators
As a regulator you must prosecute obviously criminal activity, and encourage victims to take civil action because without the real threat of serious, damaging consequences, agents will continue to ignore regulations however much guidance you publish. Guidance might even be counter-productive suggesting wrongly both that regulations are confusing and that offences are being committed unintentionally.Chronic failure to prosecute criminal conduct endorses it as normal practice and and brings the law into disrepute.
For consumers
As a consumer you should exert your rights. Refuse to pay fees that have been misleadingly presented to you and, and make a clear, straightforward demand for a refund of misleadingly presented fees that you have paid over the past fifteen years.You should complain to the Citizen’s Advice Bureau (CAB) about recent misconduct because, although the CAB is unlikely to be helpful to you directly, it will report your complaint to your local trading standards office, who will report it to the OFT. Regulators respond to the quantity of complaints. Multiple legitimate complaints will provoke the OFT to act more quickly an aggressively in support of complainants, which will encourage agents to take complaints seriously.
You should notify recent misconduct to the agent's ombudsman scheme, if he subscribes to one. Notifications from numerous victims will prompt action, but be wary of making a formal complaint because: the complaint process is likely to be slow; ombudsmen will not be able to cope with a large increase in complaints; and ombudsmen cannot be relied upon to make properly independent and competent decisions. The Property Ombudsman, for example, has a board dominated by estate agents; and he will base his decision on his codes of practice which are inadequate, inaccurate and self-contradictory, e.g. in relation to VAT as explained above. You can challenge an ombudsman's decision in court but, to date, no such challenge has been upheld against the Property Ombudsman.
If you remain in dispute, therefore, you should sue, and you need to do so whilst your agency remains solvent. Most claims will fall within the small claims limit of £10,000, so that you can use the cheap and relatively simple small claims procedure which is accessible online at Money Claim Online. Read the instructions. Take screen images of your agent's website immediately, before he amends it, to demonstrate misleading conduct. You might be able to pool evidence of illegal policies with other victims online. Rely in your claim on the regulations and the OFT's guidance about those regulations.The burden of proof is the balance of probability that you were misled regardless of the agent's intention. Bear in mind that judges appreciate simplicity, clarity, brevity and relevance.
Consult a solicitor if you are unsure about making the claim yourself. The firms that make PPI mis-selling claims on a no win-no fee basis might treat this as a similar area of opportunity.
really interesting article
ReplyDeleteMight be useful to point out the distinction in law between Estate Agents (who can be banned from trading) and Letting Agents (who cannot).
ReplyDeleteAnonymous is correct. An estate agent is an gent dealing with saleable interests in land, which broadly means freeholds or long fixed term leases, but not an agent dealing only with letting agreements. The Estate Agents Act and the Consumer, Estate Agents and Redress Act empower the OFT to issue warning orders and/or to ban estate agents whether individuals or companies, for acts of dishonesty. Since all three companies' conduct seems to be deliberately misleading it is not clear why the OFT has not issued warning orders already.
ReplyDeleteA class action against Foxtons is the best way to proceed.
ReplyDeleteMight also be useful to mention BIS Pricing Practices Guide which mirrors the property ombudsman's code when considering VAT on percentage based fees in in relation to CPUTRs. As you have quoted, the OFTs previous sales agent guidance on CPUTRs on this issue allows VAT to be stated separately, yet it's draft letting guidance now contradicts that. Is it a bit unfair to take a pop at the ombudsman's code given that the regulators (i.e. gov departments) appear not to agree with each other and even themselves? Mind you, Foxtons renewal fees....! P.S. When was the first time the OFT or Trading Standards took action against a property agent under the CPUTRs? I would guess when it became clear that the Property Misdescription Act would be repealed? About spring/summer 2012?
ReplyDeleteAnonymous makes an interesting observation. The BIS Pricing Practice Guide says what he describes. The BIS guidance is wrong because the only circumstances in which the CPUTRs (and the Unfair Commercial Practices Directive which it implements) allow a "plus VAT at 20%" format is when the nature of the product makes it impossible to use a VAT-inclusive format. There is nothing about the nature of a percentage commission that prevents it being quoted inclusive of VAT. "2.5% plus VAT at 20%" is more clearly expressed as 3%. Even though the BIS guidance is wrong, very few agents can claim to follow it because very few mention the applicable rate of VAT, as the guidance requires them to do.
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