Putting down a deposit
A ‘holding deposit’ or ‘reservation deposit’ is different to a ‘Tenancy Deposit’.
Holding deposits (often the equivalent of a week’s rent) are taken so that the agent or landlord can take the property off the market whilst they conduct their reference checks.
Assuming the reference checks are successful, this holding deposit is normally then offset against either the rent or the deposit due for the tenancy. If, however, the references or your application are unsuccessful, you’ll usually lose your deposit.
It’s important when paying a holding deposit that you clarify the exact terms under which you are paying it and what will happen to the money once it has been paid.
We’d recommend clarifying the following points before handing over any money:
- What is the holding deposit for?
- What will happen to the holding deposit if my application is successful?
- What will happen to the holding deposit is my application is unsuccessful?
- How do I get the holding deposit back?
‘Tenancy deposits’ are different. They’re paid to cover the landlord against any damages or unpaid rent at the end of the tenancy. Deposit Protection was introduced in April 2007 as part of the Housing Act 2004 for all AST’s in England and Wales where a deposit is taken (Scotland have their own rules).
Deposit amounts can vary but generally vary from four to six weeks’ worth of rent. Given the sums involved, it’s better to send deposits by bank transfer. If you prefer to pay in cash, make sure that you get a receipt for the payment and that this matches the amount stated in the tenancy agreement and on the deposit protection certificate.
There are two types of scheme that a landlord can use to protect the deposit, which work slightly differently.
- Custodial schemes: The deposit monies are actually held by the deposit scheme for the duration of the tenancy. They’re only released once the tenant has moved out, and after the landlord and tenant have agreed any issues.
- Insurance-based schemes: The deposit monies are held by the landlord or agent in a separate deposit account and then insured by an underlying policy supplied by the scheme. At the end of the tenancy, if the landlord and the tenant can’t agree on the cost of damages, either party can refer a dispute to the deposit scheme. If a dispute is raised, the scheme will require the landlord or the agent to send them the money that is in dispute. They will then securely hold the money and then adjudicate the case to resolve the dispute and the funds can then be distributed. If for any reason the scheme does not hold the money, they can use the underlying insurance policy to make sure the tenant gets any money due back to them from the deposit returned.
The tenancy deposit protection rules only apply to Assured Shorthold Tenancies (this is the most common type of tenancy). For AST’s the landlord or agent is required to:
- Protect the deposit within an approved scheme within 30 days of receiving it.
- Send you a confirmation as to which scheme is being used and all the relevant information about it. This is called the “Prescribed Information”.
Failure to protect your deposit
If the landlord fails to protect the deposit properly, a court can award a penalty of up to three times the value of the deposit to the tenant. The landlord will also not be able to serve notice properly for you to vacate.
Getting your deposit back
The release of funds at the end of the tenancy requires both parties to agree on any deductions. If they aren’t able to do so, the schemes will provide an Alternative Dispute Resolution (ADR) process to arbitrate. If either the landlord or tenant does not agree to the ADR process, they will need to initiate a claim through the courts.
Any interest earned by holding the deposit would be retained by the party holding the funds. It is important to distinguish the money as client money, not trading funds.
Tenancy deposit protection providers
There are three main providers of deposit protection and they each provide both insurance and custodial schemes. More details can be found on their websites.
Deposit Insurance/Replacement Schemes
One of the biggest costs of moving home is having to put down a deposit before you’ve had the previous deposit returned to you. There are now a number of companies and schemes who can help you with this and who will pay the deposit on your behalf.
Not all landlord and agents are signed up to use these types of schemes yet and they aren’t under any obligation to do so.
In many ways, these deposit replacement schemes act like a loan facility covering the value of the deposit. They will also support the process of any deposit claim at the end of the tenancy and have a good understanding of the process. Banks can also loan you deposit funds and it’s worth comparing the costs.
Some newer providers take their deposit and referencing service a step further. Using smart technology, they create a ‘rental passport’ which shows your history in a similar way to a credit score, using data that’s relevant to you.