Harvey's posterous

Commercial Property Update:

More Naughty Estate Agents

January, 13^th 2010

Well, here we are in the midst of a new rumpus about the unregulated practices of estate agents and lettings agents. This time the issue of misappropriated tenants' deposits – which has the potential to expose landlords to personal liability the extent of which in some cases could run in to millions of pounds.

The problem is that the landlord is personally responsible under the law as it stands. This is the case despite circumstances when the estate agent or lettings agent has misappropriated, and disposed of the funds – whether they have spent the money, "lost" it or simply vanished.

Eric Walker is the Managing Director of Bushells – a large agency in London. He claims that the legislation has huge loopholes and is very badly designed because landlords can easily have to carry the can for malpractice that is not their fault.

To stop innocent landlords having to foot the bill, Eric says that all agents who operate in the lettings market should have to work within a regulatory framework. In particular he says a requirement to hold client money separately from "firm" money would be very welcome. In fact a similar requirement is already in place for solicitors.

"The real time-bomb," says Eric, "is where agents hold the money in their own account and register it with a scheme, then for whatever reason they cease to be members of that scheme.

"This leaves the landlord with a huge liability in the event that the tenancy is extended or renewed, as the deposit is legally no longer registered.

Eric thinks new legislation should actually go further with a requirement for lettings agents to submit to regular auditing.

"A clients' account may well be ring-fenced, but there is no way of knowing whether the correct amount of money is in it unless it is independently audited. Simply, the amount which should be held is registered with a scheme but is never reconciled with the actual balance of the account.

"If the Tenancy Deposit Service, for example, added up the deposits that they have registered for an agent and asked for a statement confirming what the balance was, or alternatively an accountant's report, the issue would be exposed.

"But they won't do that, as it would be floodgate city – not to mention the effect it would have on its insurance, and on the compliant agents who will foot the bill when premiums inevitably increase.

"Instead, they bury their heads in the sand."

Mr Walker said this is a big problem in the lettings industry, where the unscrupulous use the Tenancy Deposit schemes in effect as a cash machine when times are tough.

"Many of these agents are using rents and new deposits to pay outgoing tenants and landlords, and are trading insolvently – yet audited accounts required by Companies House do not show liability to landlords."

"This needs to be addressed. I know of four well-known independents who between them have deficits exceeding £1.5m. That's a potential liability to landlords of £6m if you take into account the repayment plus fine for not being registered."

At Harvey McKibbin Solicitors it seems to us that the simplest way to counter this problem – like so many problems with estate agents – is to bring in an official regulatory framework.

There are so few professions that still operate without any need to adhere to a code of professional ethics and it is surely time that time was called on agents in this regard.

Mr Walker agrees.

"Really, the solution is that the ONLY agents who should be able to hold clients' money are those accredited by ARLA, RICS or the Law Society. Otherwise all monies should be held in a custodial scheme. The problem is that no one will enforce this as there will be so many agents who will be found out and this will highlight the flaws in the 2004 Housing Act."

If you agree that Estate Agents should have to be regulated, like lawyers, accountants, banks, doctors, mortgage brokers, financial advisers and so on, please leave a comment or email us your thoughts at info@harveymckibbin.co.uk

If there is enough support we will begin a campaign and contact and co-ordinate industry-leading figures to fight to protect your rights in this murky industry.

So let us know if you feel strongly about this! And thanks for reading!