Alternatives to Tenancy Deposit Protection

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

Rent in Advance

Taking advance payments is open to members so long as they clearly spell out when payment is due in the tenancy agreement as well as carefully explaining to tenants what is to happen about rent payments.

However, even though the Court of Appeal decided in Johnson v Old that rent in advance is not a deposit, we found that in practice, paying rent two months in advance at the outset caused a lot of confusion and uncertainty. This gave rise to the potential for tenants to challenge the landlord and claim a penalty. There is also now the risk that if you get it wrong you cannot use Section 21 at all (at least unless the deposit is returned in full). The penalties are now more draconian than when the tenancy deposit legislation was introduced. Our advice to members, therefore, is not to go down this route. If you are considering doing so it would be wise to take a separate deposit as well which you would have to protect under the tenancy deposit legislation in any event, with one of the statutory schemes.

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

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.

Third party schemes such as Zero Deposits

There has been a growth in popularity over the last few years in having tenants pay a non-refundable fee to insure the rent, etc as an alternative to using a deposit. This is an acceptable alternative but landlords need to be careful with their contract wording after the Tenant Fees Act comes into force.

The tenant fee ban prohibits making tenants sign up to third party providers as a condition of the contract unless it is as an alternative to charging a permitted payment. A deposit is a permitted payment so landlords who wish to use zero deposit schemes should ensure their tenancies state that the tenant may either pay a deposit or agree to pay the fee to the nominated zero deposit scheme.

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 this. 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. In any event, from June 1st 2019 landlords and agents are prohibited from charging administrative fees for tenancies.

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 of up to three times the amount of the deposit for each tenancy.
  2. The landlord will not be able to issue a valid Section 21 Notice unless the deposit requirements have been complied with. If challenged in assured shorthold 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 must 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.

If you haven't found the information you are looking for, try our Frequently Asked Questions (FAQ) page by clicking here.

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