In theory, if you vet your tenants carefully, they should take good care of your property – and in the vast majority of cases that’s exactly how it will turn out. However, even conscientious tenants sometimes cause damage that goes beyond reasonable wear and tear, or leave the property needing a bit of a spruce up before you can let it to new tenants.
A deposit protects you against this, along with other issues like non-payment of rent.
Why take a deposit?
Mainly because accidents happen. Your tenants might have a party where someone damages something, or may keep a pet that digs a hole in the carpet. They might knock a hole in the plasterboard when they’re moving furniture around, or leave big smears down the walls by keeping bikes inside. It’s rarely intentional or wantonly careless, but it still needs fixing.
Cleaning can also be a common issue at the end of a tenancy, and again it’s usually not deliberate. Tenants may try to save money on an expensive professional clean by doing it themselves, and often despite their best efforts it won’t be up to scratch. New tenants moving into a property usually expect the place to be squeaky clean, and if you let it slide once, then it can come back to bite you. Even if the new tenants don’t complain at the time, when they come to the end of their tenancy they can just argue that it wasn’t clean when they moved in – and they’ll have the check-in report to back them up.
Finally, there’s the issue of rent arrears. With court processes for unpaid rent being convoluted, time-consuming and expensive, making deposit deductions is a practical way to try and recover some of your losses if the tenant moves out with unpaid rent.
How much money can you hold in a deposit scheme?
Bundled up with the new tenant fees ban, there are also some stiff controls on the amount of money that can be held as a deposit. If the total rent is less than £50,000 a year, then the deposit can be a maximum of five weeks’ rent. For properties with higher rents, the limit is six weeks’ rent.
How are deposit schemes administered?
The days of landlords quietly squirrelling away a tenancy deposit in their own account then finding spurious grounds not to give it back are long gone. Deposits are completely refundable if there aren’t any legitimate deductions to make, and for assured shorthold tenancies (which the vast majority of tenancies are), you’re obliged to protect them using a third-party, government-backed deposit scheme. There are a few to choose from, but the processes and rules are similar.
There are normally two options when it comes to protecting a deposit. ‘Custodial’ schemes are when you pay the deposit into the scheme, and they look after it for the duration of the tenancy (there’s not normally a charge for this). ‘Insured’ schemes are when you keep the full deposit yourself but pay the scheme a fee to insure the money in case you don’t give it back.
Whichever you choose, you need to protect the deposit within 30 days of getting it, and you also have to provide the tenant with a variety of information including full details of which scheme it’s in and how the scheme works. Usually the scheme itself will provide most of this information in the form of a leaflet.
What happens at the end of a tenancy?
When a tenancy ends, the first step will be to compare the check-in and check-out reports and to check that all rent has been paid. If there are deductions to make, you need to work this out promptly.
You can then present any proposed deductions to the tenant. If they agree, you’ve got 10 days to notify the deposit scheme and refund part or all of the money. If the deposit is held in a custodial scheme, they won’t release any of the money unless both parties have agreed the amounts.
If the tenant doesn’t agree, this is where it starts to get tricky. The best option is to try and work it out with the tenants themselves, but if you can’t manage this then deposit protection schemes will offer alternative dispute resolution (ADR). You could also go to court, but ADR is free. If you do go for ADR, both you and the tenant will need to submit written evidence (with photographs if applicable) and the deposit scheme will reach a legally binding decision about how much to award each party.
If there are disagreements over deposit deductions, it’s always worth trying to come to a compromise before you escalate it. However cut-and-dried you think the issue is, an alternative dispute resolution service (or a court) will usually make you meet the tenant part way, so you might as well save yourself the hassle and offer them a compromise of your own choosing rather than being forced into one. It’ll also make you look better if you can demonstrate you’ve tried to be reasonable from the outset.
Why are rent guarantee services worth considering as a back-up?
An increasingly popular back-up to a tenancy deposit is to use a professional guarantee service, such as that offered by Ezylet’s sister company, Rentguarantor.com. The tenant pays a one-off fee to the guarantee service, and in exchange the company agrees to cover any unpaid rent or legitimate damage deductions.
Services like these can be a better fit for a variety of reasons. From the tenant’s perspective, it means they may need less ready cash to rent a property. While deposits are refundable, they tie up huge chunks of money, and the nature of renting means that tenants will often have to pay over a new deposit before the old one is released. Using a rent guarantor is also a way to secure a property for people who don’t do well at the referencing stage of a tenancy application, often through no fault of their own. Prospective tenants who’ve previously lived abroad, for example, can often fail credit checks simply because they don’t have a substantial enough UK financial history, and if they also can’t provide a UK-based guarantor then many landlords won’t take the chance.
From a landlord’s point of view, you can’t force a tenant to use a rent guarantor service, but allowing a prospective tenant to use one means you can take on potentially great tenants without exposing yourself to risk. And there are other good reasons to consider it too. If your tenant stops paying rent, then by the time you’ve worked through eviction processes you could well be owed at least four or five months of arrears. A deposit that’s limited to five weeks’ rent would leave you well out of pocket, where a rent guarantor would have these sorts of amounts covered. You’re also much more comprehensively protected against damages. With Rentguarantor.com, for example, contracts include up to £10,000 of damage cover.
Until the recent rule changes, requesting larger deposits used to help landlords feel more secure about taking on riskier tenants – such as those who scored poorly on referencing checks or tenants with pets. Since this is no longer allowed, rent guarantee services are looking like an increasingly attractive back-up.