Letting agencies are earning thousands of pounds in commission and in some cases flouting the ban on tenant fees by forcing renters to sign up to controversial “zero deposit” schemes.
An Observer investigation has uncovered evidence of pressure-selling tactics by some agencies in England, including cases where people were told they were required to sign up as a condition of securing a tenancy.
Touted as a low-cost option, zero deposit schemes typically involve payment of a fee equivalent to about a week’s rent instead of a standard security deposit, which is normally five weeks’ rent.
But unlike a traditional deposit, the fee is non-refundable, with tenants remaining liable for damages at the end of their tenancy. They can also face extra costs for membership renewals and – unlike with standard deposits – face fees for adjudication in the event of a dispute, leaving them worse off in the long run.
Despite the concerns, renters are routinely being advised to sign up for the schemes by letting agents, who stand to earn commission of up to 30% for each person they refer.
The pressure-selling allegations and concerns about the level of protection the schemes offer have led to warnings of a PPI-style mis-selling scandal from senior industry figures, with one expert accusing letting agents of “preying on” tenants by pushing the schemes.
The Observer spoke to six tenants who had rented properties in different parts of the country, through different agencies, but all say they were not given the choice or were pressured by agents into signing up to zero deposit schemes.
Travis and his partner Hannah, from Bath, said they were forced to enrol in a zero deposit scheme after applying to rent a house in Cornwall, which involved payment of a £225 non-refundable joining fee.
They asked instead to pay a standard deposit – which would be protected in an authorised scheme and is usually fully refundable aside from damages – but were told that was not an option.
“If that is something that will be a deal-breaker for you, the landlord would more than likely look to the next applicant who would be willing to go down the zero deposit route,” the letting agent said in an email.
They had already been searching for months so accepted the terms. “It felt unethical and unfair. We were pushed into a corner,” Travis, 33, a hospitality manager, said. “We thought there must be some kind of kickback but they didn’t mention it.”
Others were told the zero deposit scheme was the landlord’s “preferred” option at the application stage, indicating that tenants agreeing to it would be given priority.
With soaring rents and fierce competition for properties, they felt they had no choice but to accept. Renters were sometimes later asked to tick a box confirming that they had been given a choice, and could not move forward with the tenancy until they had done so.
May, 24, a PhD student renting in London, said that she felt “coerced” into signing up for a zero deposit scheme despite having enough cash for a full deposit. She had been told by email that it was the landlord’s preferred option.
“The implication was that if we didn’t say yes, the agency would choose someone else,” she said. “We had to pay £170 each in non-refundable fees. But after weeks of looking for somewhere to live we didn’t really feel in a position to negotiate.”
The schemes are a valid option that can be offered by letting agents, but requiring tenants to sign up to them is likely to be a breach of the ban on tenant fees, which was introduced in 2019 to tackle profiteering. Breaches carry fines of up to £5,000.
David Votta, president of the Association of Residential Lettings Agents, said that he was still “on the fence” about zero deposit products, which he said provided a benefit by offering a lower upfront payment but could result in tenants being aggressively pursued for costs. “It’s often not the agent trying to pursue them, it’ll be debt recovery, and they will want their money with top interest, fees and charges on top,” he said.
Agents introducing the schemes should give tenants a true choice about signing up, provide accurate information about how they work and declare any commission, he said. But while “good agents” abide by those standards, others do not.
“What we don’t want is a PPI moment,” he added. “The concern would be that there would be people getting sued off the back of it. They could say, you’ve mis-sold this to the tenant: you’ve not provided them with sufficient data to make an informed decision, and you enforced this product on them to earn commission and hit your target.”
The findings have led to calls for a crackdown on agents who flout the rules, with National Trading Standards saying that it was examining concerns about the sale of zero deposit schemes, with a view to taking action.
James Munro, head of the Estate and Letting Agency Team, which is responsible for enforcing the fees ban, said that requiring tenants to pick zero deposit options was “bordering on discrimination” and a likely breach of the ban on tenancy fees. “Often it’s the agent who is the one in the middle really pushing these schemes, and a lot of the time it’s driven by referrals,” he said.
As well as concerns about mis-selling, the growth of the zero deposit industry has led to warnings from the charity Shelter, the campaign group Generation Rent and the renters’ union Acorn that more people could be tempted to enrol due to cost of living pressures. The terms of zero deposit schemes vary greatly by provider. Schemes range from regulated insurance products that cover any damages, to unregulated schemes that can leave renters liable for large sums at the end of their tenancy.
Matthew Upton, director of policy at Citizens Advice, said that while the schemes could seem to be a good option “if you’re struggling to pull cash together”, renters could “end up paying hundreds of pounds in fees with no option to get their money back at the end of their tenancy”.
“It’s so important you know what you’re getting into,” he said.
Judy*, 27, a healthcare assistant from Northampton, picked a zero deposit option because of the lower upfront cost but paid more in the end. After her tenancy ended, in a dispute over a bill for alleged damages, the arbitration process was handled by the zero deposit scheme company, which had a contract with her landlord. It found in the landlord’s favour, and she is now repaying £50 a month towards £550 costs, in addition to the £150 non-refundable fee she paid to join the scheme in the first place. “It looked like a cheaper deal but in the end it didn’t feel fair,” she said.
Zero deposit companies deny that their products offer fewer protections and have distanced themselves from the behaviour of third-party agencies that sell or introduce their products to tenants.
One scheme provider, Flatfair, which charges a “check-in fee” of one week’s rent, and an adjudication fee of £25 in disputes, said that it did not have control over the behaviour of agents, and that allegations of pressure-selling were “concerning”.
“We insist that our deposit alternative is offered as a choice as per existing regulations and provide regular training to support this,” Flatfair said. It added that it offered a transparent resolution process “to ensure all parties get a fair outcome”, and did not believe agencies were motivated by the “limited” commissions they could earn. The company has previously paid up to 30% commission per referral but would not disclose its current rates, which it said were lower than that.
There have been several cases of alleged pressure-selling linked to Flatfair’s products. In a recent memo to staff, one lettings agency warned agents that they could not force tenants to enrol. “We’ve recently had two cases go through where the tenant felt forced to take out a Flatfair membership,” the email, reported by trade publication The Negotiator, said.
Sam Reynolds, chief executive at Zero Deposit, a major scheme that is a regulated insurance product, said that his team conducted regular mystery shops and that cases where agents pressured tenants into signing up were rare.
The company is calling for a code of conduct that makes Financial Conduct Registration mandatory.
The property ombudsman, which considers complaints about agent behaviour, said that it was unable to consider complaints about the zero deposit schemes themselves but that letting agents were obliged to accurately explain how alternative deposit products work and must declare commissions.
It said it was concerned about claims of pressure-selling and was working closely with the National Trading Standards Estate and Lettings Agency Team on enforcement matters. “Where a tenant is forced to enter into a zero deposit arrangement, this may be a breach of the Tenant Fees Act 2019,” a spokesperson said.
Clive Betts, Labour MP and chair of the Levelling Up, Housing and Communities Committee, said: “For some people, these schemes will allow people to get a property that they couldn’t. But the schemes ought to be open and transparent, and people shouldn’t be pressurised into adopting them.
“If there is mis-selling of a product the regulator ought to be clamping down on that straight away.”
*Judy’s name has been changed to protect her identity
