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
When the tenancy deposit scheme was introduced, we advised members to consider taking rent in advance as an alternative. Communities and Local Government’s “Frequently Asked Questions” indicate that advance payment of rent is outside the statutory tenancy deposit scheme. We have previously issued advice to members to ensure that advance payment of rent is properly described as such and documented. However, it has now come to our attention that the Courts are beginning to carefully scrutinise advance payments of rent and that judges may treat it as a disguised deposit which ought to be dealt with under one of the statutory tenancy deposit schemes. This could mean that you could have to pay three times the amount penalty if you have taken advance rent, and not protected it under one of the statutory schemes should the Court decide to treat it is a deposit. Whilst the RLA still believes that an advance payment of rent is not a tenancy deposit, judges are appearing to regard it as an attempt to avoid the legislation. As a result, if you apply for possession using Section 21 against an assured shorthold tenant, at the least you could have to attend Court to explain the situation and persuade the judge that the money you received genuinely was an advance payment of rent and not a tenancy deposit. If you bring action based on rent arrears you could face a claim by the tenant that the advance payment of rent was not that at all but was a deposit. This could mean that the tenant could then try to counterclaim for the penalty to avoid rent arrears. Either way, you could face delay and anxiety in obtaining possession.
It may well be the case in time that the position is clarified in favour of the landlord. We are however, issuing a strong warning to landlords about the problems which could be encountered by you. Our advice therefore is not to take an advance payment of rent from the tenant because of the potential uncertainty and problems you might face. Another alternative to look at is taking an administration fee. This is a non returnable charge which you take for preparing the tenancy, signing the tenant up and initial administration. You could simply decide not to take a deposit. Alternatively, you can take a tenancy deposit but you must then register it under one of the schemes.
If you have already taken advance payment of rent you should seriously consider whether to protect it as a deposit under one of the Statutory Schemes. If you do decide to take this step you will need to notify the tenant(s) and give the prescribed information as well.
- 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.
- A non returnable fee for administration relating to setting up the tenancy agreement is not caught by the scheme.
When charging a tenancy administration fee, ensure you explain to the tenant precisely what it is for. We have provided a leaflet for this purpose, which can be downloaded Here
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 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.
- 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.
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.
! WARNING !
Landlords who try to avoid complying with the tenancy deposit scheme run the risk of penalties.
- 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.
- 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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