Taking Deposits

There would be two reasons for a landlord to take a deposit, here is an explanation of both instances.

The Security Deposit:

This type of deposit is usually taken by a landlord to cover any damage that may occur in the property. It is usually accepted that it is a month’s rent that’s paid prior to the tenant moving into the property. This type of deposit may also be often referred to as a ‘bond’. It usually amounts to the value of a maximum of two month’s rent.

It has become commonplace to take a security deposit for residential lettings, and as such, this type of deposit is now governed by the deposit protection scheme which forms part of the Housing Act 2004.

From 6 April 2007, all deposits (for rent up to £25,000 per annum) taken by landlords and agents for assured shorthold tenancies (AST) in England and Wales have to be protected by a government authorised tenancy deposit scheme. (ASTs are the usual tenancies made between a private landlord and his/her tenants.)

To avoid disputes going to court, though the schemes won’t prevent you going to court if you want to, each scheme is supported by an alternative dispute resolution (ADR) service, whose aim is to make disputes over the repayment of the deposit faster and cheaper to resolve.

If there is a dispute regarding damage or breach of the tenancy terms then the ADR service will become involved, otherwise the tenant’s deposit will be returned without delay.

The onus of proof will be on the landlord or agent. They will need to provide reliable evidence, usually in the form of an inventory, or a schedule of condition and photographs, to support their claim for deductions from the deposit.

The court route is still open to the parties to resolve a dispute and in cases where the damage claim exceeds the deposit.

The security deposit is intended to be used to cover the cost of:

• Unpaid or non payment of rent

• Any damage i.e. fixtures, furnishings, fittings [to exclude expected wear and tear]

• Exit Cleaning – for items like carpets and cookers

• Removal of rubbish left behind by tenant – applies to interior and exterior [garden, driveway] of property

• Replacement keys or locks if a key is lost or not returned [it’s your responsibility as a landlord to change the locks on your property]

All these items, instances should be clearly stated in the letting agreement – makes sure that the tenant not only reads, but understands everything listed. The agreement should also state that if something is deducted from the security deposit, that the tenant is then required to make up the difference of the deposit to it’s full amount again.

Any unpaid bills, goods or services that the tenant may have listed using the address. These could typically be unpaid utility bills etc, although the tenant is liable for these as it will be their name on the bill.

It’s worthwhile to send a ‘Moving Out’ letter to your tenant when they send you notice of vacation. It’s a good time to remind them of the condition that the property and it’s fittings and appliances should be left in. You can also outline cleaning costs in this communication too for carpets and cooker etc.

The Holding Deposit:

The second type of deposit is what’s known as a ‘holding’ deposit. This is usually taken to take the property off the market prior to the tenant signing the contract.

This tenants commitment associated with this type of deposit will allow you to withdraw any advertising that you may have online or in print for the property.

Also, once you are in receipt of a holding deposit, it will give you the necessary time to check references and carry out credit checks. You should also use this time to prepare the letting agreement.

The ‘holding’ deposit can also be used to safeguard against a tenant changing their mind, causing the proposed tenancy to fall through. You can opt to keep the deposit if this happens, as a form of compensation for any costs incurred and the overall inconvenience. If this is your intention, then you must state this and confirm it in writing to the tenant at the outset – you must also give the tenant a receipt for this; this is known as a ‘holding’ deposit agreement.

Bear in mind that you shouldn’t keep the deposit if your tenant can’t provide suitable references or fails their credit check, as from a legal standpoint, you as the landlord are declining the tenancy contract.

The typically accepted amount for a ‘holding’ deposit is one week’s rent.

Remember:

• You aren’t required by law to take a deposit

• If you plan to take a Security Deposit for an Assures Shorthold Tenancy (AST) you must inform your tenants within 14 days of taking it which scheme you intend to use.

• If you plan to take a deposit, then you must decide which scheme you will use.

• Your choices will be either the Deposit Protection Services ‘Custodial Scheme’ or The National Landlord’s ‘Tenancy Deposits Solutions Scheme’.

• Make certain that you have prepared a comprehensive inventory, in case of a dispute. It will enable you to present clear evidence in court or to the dispute service.

• Once your tenant has signed the tenancy agreement, it is usual for the holding deposit to be taken into account for the security deposit, but if you prefer not to take a security deposit, then you should return the holding deposit to your tenant or credit it against their rent.