Option 1: Alternatives to Tenancy Deposit Protection

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It is being suggested that you can protect your property without taking a deposit in the following ways:-

Rent in Advance

• Charge two months rent in advance – the RLA has received advice that this should be effective so long as your tenancy agreement is properly drawn up to make this clear.

Clear dates and amounts payable are required. The agreement must state that payments are made in respect of rent and not by way of security for rent.

Let us assume a six month tenancy. Normally, rent would be due in advance for each month at the beginning of the month so you would collect six instalments in all the first at the beginning of the tenancy (i.e. the start of month one), month two, month three, month four and month five. A table is set out below.

This is the old “traditional” method. If you take a month in advance, however, you adopt the new method in the table taking the first two instalments at the beginning of month one but you do not collect any payment at the beginning of month six, because you have a month in hand.

What you, therefore, have is an extra month in hand for rent up until the beginning of month five which covers you for rent should the tenant default. This must be paid as rent; not as security by way of a deposit for performance of the tenant’s obligations (whether as to payment of rent, damage etc). Therefore, taking extra rent and then returning it when all is well would be a tenancy deposit.

Obviously, if the tenant stays for the duration having paid all further instalments of rent, but leaves damage, there is no deposit to cover this damage. If the landlord wanted to do so he/she would have to sue the tenant in the County Court for the damage.

On the other hand, should the tenant default in payment of the rent then the tenant would not be in arrears straight away since the landlord would already have one month in hand paid in advance. The essential point to make is that he payment is intended as payment of rent when it falls due; not as security by way of a deposit.

	MONTH 1	MONTH 2	MONTH 3	MONTH 4	MONTH 5	MONTH 6
	0 – 1	1 - 2	2 - 3	3 - 4	4 - 5	5 - 6
	INSTALMENT FOR MONTH
	Month	Month	Month	Month	Month	Month
Old Method	1	2	3	4	5	6
	INSTALMENT FOR MONTH
	Month	Month	Month	Month	Month	Month
New Method	1 & 2	3	4	5	6	X - No rent payment

Guarantee

• Use a guarantor who is a home owner and would provide assurance that rent/damage will be paid for before the end of the tenancy – taking a guarantee is outside the tenancy deposit scheme.

You are well advised, however, to satisfy yourself as to the financial status/ability to pay of the guarantor. You should also check with the guarantor’s identity.

You need to make sure that the person who actually signs the guarantee is in fact the guarantor.

This could be done by meeting the guarantor, ensuring the guarantor provides you with a proof of identity, and arranging for a third party to witness the guarantee (you should not witness the guarantee yourself because it is in your favour).

You need to use a properly drawn up Deed of Guarantee.

The guarantor does not need to be a home owner but the advantage of a guarantor who is a home owner is that you may be able to obtain a charge on his house to enforce a court judgment in the event of you having to sue the guarantor to enforce payment.

Guarantees are often used in the case of students where a parent is asked to guarantee the tenancy. For more about guarantees see Documentation.

References / Insurance

• Use professional referencing and rent guarantee insurance – references should be an indication of the tenancy ability but is not unknown for a tenant with a glowing reference to default.

Rent Insurance is an option but someone has to pay the premium. The premium could be recharged to the tenant in this situation. The insurance company will only be able to accept suitable tenants.

Administration Fees

• A non returnable fee for administration relating to setting up the tenancy agreement is not caught by the scheme.

A Good Faith Deposit for the tenant to move in

• If set up correctly, potentially this would not be caught by the Tenancy Deposit Scheme.

A pre contract deposit (i.e. simply paid to hold the property prior to the actual tenancy agreement being entered into) is probably not caught.

A “good faith” deposit paid to ensure the tenant turns up should work so long as the tenant is not legally obliged to move into/live in the property.

As with any tenancy, unless there is a provision in the Agreement, the tenant does not have to actually use the property so long as he pays the rent etc. You could, therefore, omit any obligation in the tenancy terms to live in the property.

Other

Other ways which have been suggested which will not work are:-

• Charge rent and offer cash back to the tenant if the property is left in a good condition with the rent paid in full – RLA legal advice is that this arrangement falls foul of the tenancy deposit scheme. The cash back element would have to be paid into the custodial scheme or protected under the statutory insurance deposit scheme.
• Take a bankers draft/cheque and only cash it if necessary at the end of the tenancy – the bank draft or cheque might end up being out of date. RLA legal advice is that this would also be caught by the tenancy deposit scheme. A cheque/draft would be security in this situation. It would have to be paid into the custodial scheme or the landlord/agent receiving it would have to be within on of statutory insurance tenancy deposit schemes.
• A utility/cleaning deposit – This will not work, particularly if it is labelled as t his. A deposit implies a return of money and is clearly caught by the scheme. It may be that there is an idea that because it is separate from the tenancy it would work.

This is certainly not the case. The legislation is quite clear. If the money is paid as a deposit to secure the tenant’s obligations “under or in connection with” the tenancy then it is caught by the Scheme. The use of the works “in connection with” catches things which are related to the tenancy. Clearly, paying the utility bills is something relating to the tenancy.

• An administration fee but with a rebate. This is clearly caught by the Tenancy Deposit Scheme. However, if a genuine administration fee labelled as such, which is non returnable, is collected this is not caught by the Scheme.

! WARNING !

Landlords who try to avoid complying with the tenancy deposit scheme run the risk of penalties.

1. The landlord/agent could be the subject of a court order and if a court order is made there is an automatic penalty on three times the amount of the deposit.
2. The landlord will not be able to issue a valid Section 21 Notice until the deposit requirements have been complied with. If challenged in assured short hold possession proceedings the court would dismiss the proceedings unless the landlord could show that the tenancy deposit scheme requirements have been complied with by him.

If you subscribe to a Code of Conduct then most Codes of Conduct provide that deposits much not be taken in advance of the tenancy agreement being signed up. You are reminded to check the requirements regarding deposits if you are a member of a code and you should of course comply with these.

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