Does landlord or agent keep the holding deposit if a tenant pulls out?

John I think that you are doing the right thing using the potential deposit protection issues to gain the information that you need from this agent - I will be very interested to hear what they have to say.

On the issues of Retainer V Deposits.

The use of the term Holding Deposit is dangerous , as has been pointed out. If monies are taken to retain the property for a prospective tenant, which means that the property is withdrawn from the market, the correct term is Retainer. This money is quite separate from agents fees and must not be used to cover them. The payment of a retainer should be receipted and it must be made clear if this is a "None refundable Retainer to hold the property known as...." The wording makes it clear to the prospective tenant that if he backs out the money is lost. In reality the only money which should actually be withheld is an amount to cover the losses caused by taking the property off the market - the loss to the landlord, since the agent's fees are entirely separate, and the balance should be returned to the tenant who has backed out, if a landlord made a profit through this fee he could be challenged in court and I don't believe that he would win. I know that John has no intention of making a profit and therefore, in my opinion, is being very fair - the agent is not.

I also note on my receipt that this money will be credited towards the first rent payment when it becomes due.

As far as monies taken that ARE taken as a deposit or intended to become a deposit. The law says that the date that the money is taken starts the 30 day clock ticking and this money must be protection.

As an experienced student landlord I take a retainer and deal with it as above - this is a relatively small amount to prove the prospective tenants intentions and prevent them agreeing to take several properties from which they intend to chose at their leisure leaving several landlords without tenants during a short lettings window. I would not dream of taking several thousands as a retainer. On my receipt I note that once the tenancy agreement is signed this money will become part of the first months rent - I never link it to the deposit for obvious reasons.

Once an AST is signed there is a legal contract in place and I take the Deposit which will cover me for losses/damages during the tenancy and I protect it within 30 days. Sometimes students need to wait until their previous landlord returns their deposit before they can pay the full amount and if this happens I will take a payment towards the full amount and protect it. I then put a new deposit protection in place when the balance is paid. I always make certain that my ASTs are witnessed because if they are not the tenants can back out at any time between signing and move in date, once tenants move in this issue is not relevant but, in the case of students there are usually several months delay and potential for them to fall out etc.

Long before deposit protection legislation came about I receipted a Retainer as a None Refundable Retainer except in those days I did use it as part of the deposit when the AST was signed.

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Reply to the comment left by "Industry Observer " at "04/02/2014 - 13:38":

What appeal or stated case are you referring to? In the absence of any such cases, which if and when there are some they may well be challenged in the future and change again, you can only refer to the legislation. And with the help of qualified guidance available from respected sources such as the RLA and the CLG I know which guidance I would refer to if I came across a Court that didn’t understand the legislation.

Sec 213
(7) No person may, in connection with a shorthold tenancy, require a deposit which consists of property other than money.
(8) In subsection (7) “deposit” means a transfer of property intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.

Mark was correct in the first place because a holding deposit does not give a prospective tenant any status as the tenant at that stage. There is nothing to say that he will definitely become the tenant so a holding deposit cannot be a tenancy deposit at the time it is handed over to merely hold the property. It is as it states, a holding deposit, during which time a landlord may want to carryout referencing and credit checks etc. And to clearly set it apart from anything else a holding deposit is normally taken in conjunction with a written agreement and should also state whether the deposit is non-refundable or not. If there is no written agreement (definitely not recommended) it is fair to assume that the deposit would be returned less any expenses incurred by the landlord during the holding period.

Once the applicant is offered the tenancy, if the holding deposit is to form part of the tenancy deposit and/or if a further amount of money is taken as a tenancy deposit then the landlord has to comply with Sec 213(5). The Housing Act doesn’t state how much any deposit may or will be and it doesn’t legislate for holding deposits by definition. As Sec 213(8) clearly points out, unlike the holding deposit a tenancy deposit is specifically money accepted as security for the performance of the tenants obligations, or the discharge of his liabilities that are written into a shorthold tenancy agreement. As soon as the applicant agrees to take on the tenancy and certainly by signing the tenancy agreement then any monies retained as a tenancy deposit have to be dealt with as per the tenancy deposit scheme.

So if somebody does agree to give a holding deposit of £2500 when the monthly rent will be £1500 it is still only a holding deposit and will not be dealt with as a tenancy deposit at that stage. That is the interpretation of the law.

@ Mary

Hi how are you?

I wouldn't mention a retainer/holding deposit as being used for anything else in future that looks dfangerously close to s213(8)(a) as quoyted by DC

@ DC

You must believe who and what you will. But mark this - most of those who say p[oppycock and it isn't a deposit are wishing it thus so that in effect they can hold a significant sum - which I say could well be a deposit especially if the tenant forfeits it for some reason - because they want to.

My opinion is based on nothing other than consulting better legal minds than mine to confirm my thoughts (or not) and then stating them as a neutral. It doesn't matter one jot to me whether these things are deposits or not or indeed whether periodics are new tenancies (which they are as per Superstrike) or whether rent in advance can be a deposit (which it can notwithstanding Johnson v Old) and so on.

My job is to keep clients out of Court not help them when in it, and that is what my advice is based on. By all means rely on RLA, NLA opinion or if you must, CLG or a Scheme, but theirs are only opinions no matter how well respected.

Ask Mary Latham how many people believed and alwats stated that periodics were new tenancies - as I did.

Reply to the comment left by "Industry Observer " at "04/02/2014 - 17:46":

That's a great post IO and as a non-landlord with the brief of keeping landlords out of Court I can totally see how you arrived at that conclusion. One could take this to the extreme though and advise people never to become a landlord too and at least one person I know of has taken your advice on that, i.e. YOU.

For the rest of us, who have taken a commercial risk and decided to become landlords, we must weigh up all the advice and opinions that are out there and make our own commercial decisions on the practicalities associated with running our businesses.

As I have already stated, I do not encounter the issues associated with holding deposits too often as I re-let my properties when they become vacant and I never know when that will be, unlike student landlords. I have had to take a commercial view in respect of re-serving prescribed information when a tenancy goes periodic. The Superstrike case did frighten me for a while but it was a relatively unusual case and the specific circumstances of the case apply to very few tenancies. Future cases will be interesting but regardless of the oucome I'm as confident as I can be that I've covered my back, if only with the PI policies of my professional advisers LOL.
.
.

Hi IO, I am rushed off my feet and have only just found time to catch up with interesting discussions. I hope that you are well?

Superstrike was a wake up call for me. I now pay close attention to people like you, who have always looked at worse case scenario and played safe. Regardless of historic interpretation of the law, Superstike and also Taylor V Spencer has shown me that we cannot be complacent and also that there may be many ways of interpreting a piece of legislation and therefore we must always assume the worse possible.

I don't know a single landlord who wants to be a test case and therefore avoiding legal action is paramount. Here is a scenario that may get some landlords in to trouble.

Following Superstrike many landlords have created AST's which begin with a fixed term and go on to become Contractual Periodics. Some of these landlords also believe, following Johnson V Old, that they can safely take more than a months rent in advance some even take the whole 6 months in advance.

In my opinion, these landlords are taking a Premium, if they take more than 1/6th of the annual rent up front and, because the tenancy will become a Contractual Periodic, they are risking granting the right of assignment and possibly creating a 20 year term.

On the subject of this discussion the safe bet is to call the money taken what it is - A Retainer and to use it for it's intended purpose - to cover losses in the event that the prospective tenant backs out before signing the AST.

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I'm grateful to all who have posted, for the wealth of experience.

Thanks Mark. That's a good idea about reducing the 1st months rent to avoid voids! Will use that idea.

I am still unclear on two points:

First Point:

Mary Latham wrote

“On my receipt I note that once the tenancy agreement is signed this money will become part of the first months rent – I never link it to the deposit for obvious reasons.”

But DC then quotes legislation:
“Sec 213
(7) No person may, in connection with a shorthold tenancy, require a deposit which consists of property other than money.
(8) In subsection (7) “deposit” means a transfer of property intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.”

So even if the holding deposit gets credited to the first months rent, it would still (by my understanding of the wording of this legislation) be considered technically a “deposit”, and Mary's strategy mentioned above would be moot?

Second Point:

Do I understand correctly that even if the terms of a holding deposit are that it will be retained in full should the prospective tenant pull out for personal reasons, that it would not be upheld by a court of law? Can anyone point me to the relevant legislation? I ask so that I might challenge the agent, if that is his argument, as is likely.

Under Consumer Law in its simplest sense you cannot make a deposit wholly non refundable because it is paid as part performance of a contract and in contemplation of specific performance by the other party assuming that any further performance by the deposit payer is also discharged in full.

Imagine a washing machine, you put £200 down on it in John Lewis today you are entitled to expect delivery of the item on payment of the balance.

There has been plenty of comment on non refundable fees by the OFT (whatever those fees are called) and I would not like to be defending an agent or Landlord no matter what wording they put to try and create a position that in effect meant if a tenant dropped out, or failed referencing, or failed to complete for any other reason the money they had paid was entirely forfeit.

Mark's comment on in effect never doing anything (not becoming a Landlord) is rather a cheap shot and frankly unworthy. I could point to a lot of Landlords I've met over the years who now wish they had never botherd. But that is a different story.

DC - what you say is not the interpretation of the Law (unless you are a High Court Judge) it is your interopretation and you are perfectly entitled to it. But I suggest you study the 1988 Act and the definition of a tenancy that includes an intention to enter into a tenancy at a later date.

@ Mark

I don't recall our off line discussion on your manoeuvres in respect of periodics but I do recall saying there was no way to contract against the Superstrike decision, clear as it was. If your cover is your professional advisers telling you to carry on and not reprotect and re-serve PI and they will take the consequences then more fool them but if you are covered that is fine.

Like Mary I too am busy and am now out as all that will happen here is that we will go round in circles with other posters stating their beliefs and preferred personal position. As I said I just state beliefs but have no axe to grind personally either way.

Do what you think is right and just hope that it is

I don't think Superstrike clarified anything re. statutory periodic tenancies. It was very clear from the Housing Act 1988 that they were new tenancies, and indeed the court in the Superstrike case just brushed off the landlord's argument that they were not by quoting the act.
On the other hand the decision clarified the wording of the Housing Act 2004 relating to the "landlord receiving a deposit in relation to an AST" and how to interpret it when a SPT arises.

That being said, I agree with DC re. holding deposits not being tenancy deposits when taken. We've both made essentially the same point.
There can be a tenancy deposit only after (1) a tenancy is agreed, and (2) it is agreed to take a tenancy deposit in relation to that tenancy. Once this happens it can further be agreed to allocate whatever was paid as a holding deposit to the tenancy deposit, and only then IMHO does the deposit protection legislation quick in.

Oh Romain and we were getting on so well!!

Superstrike clarified it because until that case everyone (excpet me and about 3 other people!!) was in denial about it no matter what the 1988 Act said and the fact that about 8 times in s5 it refers to a new tenancy!!

I can only suggest you and DC both read the 88 Act s45(1)

“tenancy” includes a sub-tenancy and an agreement for a tenancy or sub-tenancy;

"Agreement" in this context doesn't mean the physical agreement itself and signing it - it means the intention to do so

My First months rent becomes due on the date that the contract is signed. This is why I am prepared to wait for some or all of the deposit if students need to use their deposit from the last tenancy.

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