Tenancy Deposits

Definition of Tenancy Deposits:

A tenancy deposit is defined in the Housing Act 2004 as being any money intended to be held (by the Landlord or otherwise) as security for the performance of any obligations of the Tenant, or the discharge of any liability of the Tenant, arising under or in connection with the tenancy.

The above definition entails that any money taken at the beginning of a tenancy on the understanding that it will be returned to the Tenant at the end of the tenancy is regarded as a tenancy deposit.

There are the following categories of tenancy deposits:

• Holding Deposit:
  Money used to hold the tenancy for a short period until such time as the Tenancy Agreement has been signed.
• Security Deposit:
  Money used to provide the Landlord with security in the form of a reserve fund in the event of damage and/or default on the part of the Tenant.

Holding Deposit:

The holding deposit is paid by the Tenant to ensure that the Landlord commences the administrative proceedings necessary for the Tenant to secure the property in terms of a Tenancy Agreement.

The deposit is used to cover the following expenses should the Tenant be unsuccessful in finalising the Tenancy Agreement with the landlord:

• Cancel further advertising of property;
• Advising prospective Tenants that the property is no longer available;
• Performing reference checks on the Tenant;
• Performing credit checks on the Tenant; and
• Preparing the Tenancy Agreement.

The amount of the deposit should be reflective of the reasonable costs incurred by the Landlord as a result of failure on the part of the Tenant to secure the property and to finalise the Tenancy Agreement, and as a result, the Landlord having to proceed with procuring a new Tenant for the property.

Where the Tenant is successful in securing the property and the Tenancy Agreement is signed, the holding deposit is usually used to off-set payment of the security deposit payable by the Tenant.

Security Deposit:

The security deposit, also known as a damage deposit, is paid by the Tenant as a security measure for the Landlord in cases where the Tenant causes damage or incurs liability for the Landlord. The security deposit will then cover these expenses.

Security deposits are not regulated by statute and therefore the terms and conditions of such deposit should be included in the Tenancy Agreement between the Landlord and the Tenant. Normally the security deposit covers the following:

• Damage to the Landlord's property, fixtures, fittings and furniture;
• Cleaning;
• Rubbish removal;
• Unpaid rent;
• Unpaid accounts where the Landlord may be held liable; and
• Replacement locks and/or keys.

The amount of the deposit varies between 4 weeks rent to 2 months rent. It is usually between 5 and 6 weeks rent and should never be higher than 2 months rent.

Legal Requirements for Security Deposits:

The Housing Act 2004 introduced compulsory measures to protect deposits paid by Tenants for all new Assured Shorthold Tenancies (AST's). As from 6 April 2007, all Landlords taking deposits from Tenants for AST's are required to register with a government authorised tenancy deposit scheme.

For more information on the various tenancy deposit schemes and how they work, see Tenancy Deposit Schemes.

Alternatives to Deposits:

Landlords are not obliged to take deposits from Tenants and they are furthermore not obliged to register with a tenancy deposit scheme where no deposit has been taken. For these Landlords, there are the following alternatives to deposits:

• Guarantors:
  A Guarantor is someone who agrees to indemnify a Tenant's rent payments, as well as any damage that the Tenant may cause. It provides the Landlord with additional protection in that should the Tenant either default on his rent payments and/or fail to pay for any damage caused by him to the Landlord's property, the Landlord may proceed against both the Tenant and the Guarantor for payment to be made. For more information on Guarantors, see Guarantors.
• Insurance:
  There are a number of insurance providers that would insure against non-payment of rent as well as other breaches to the Tenancy Agreement.
• Tenant Reference and Credit Checks:
  Although reference checks and credit checks can confirm the financial stability or otherwise of the Tenant, they cannot prevent a change in the Tenant's circumstances, such as loss of job, etc. Therefore it is advisable that this alternative be used in conjunction with another of the above alternatives.

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