The flawed Call for Evidence over Tenancy Deposits

The Government (or at least the Ministry for Housing Communities and Local Government (MHCLG))  has got it into its head to interfere with tenancy deposits to make it easier for tenants to move house. They have issued a Call for Evidence (CfE), click here, asking for information. Some tenants struggle to find a second deposit whilst their current deposit is held. As I shall explain the Government’s exercise is based on fallacious reasoning.

Although the Tenant Fees Act 2019, which abolished upfront and exit fees and was supposed to save tenants money, has only been in force for a few weeks and has not had time to bed in, the Government is calling for evidence about “passporting” deposits.

For those who can’t find this word in the dictionary, it apparently means transferring some or all of a deposit from the current landlord to the new landlord before the current tenancy has ended. Call me a cynic, but the fact that MHCLG are calling for evidence probably means the decision has already been taken and the consultation is just for show. Someone at MHCLG must have heard the word “passporting” in the context of Brexit and of financial institutions being able to continue to operate in the EU after the UK departs. It is misconceived to apply something vaguely similar to tenancy deposits.

I would urge landlords to complete the CfE and to contact their MPs to protest about the proposed changes. We need to explain that a tenancy deposit is security for obligations under a tenancy. That means it needs to be held until it is clear that there is no further liability under the tenancy or what the liability is. Until the tenancy ends and the tenant returns the keys the landlord cannot quantify a claim. Releasing part of a deposit early means that landlords will, and if they are prudent must, act as if they are only entitled to the part retained.

The CfE cites statistics from the Deposit Protection Service (DPS) “that, on average, tenants receive 77% of their deposit back, and 51% of tenants have their deposit returned in full.” It then commits a serious logical fallacy by arguing that, because most tenants will therefore eventually be entitled to the majority, or all of their original deposit that “some of this amount could be available for passporting to a new tenancy”. THERE IS NO “this amount”. It is an average figure across millions of tenancies. The argument is literally nonsense. Every individual landlord has to look at his own situation. It makes no difference to any particular landlord whether 77%, 51%, 29% or any other percentage of tenants get some or all of their deposits back. The correct question each landlord asks himself is: “Will this deposit be sufficient to meet a potential claim under this particular tenancy?”

Prudent landlords will not release the deposit until vacant possession is given. The discussion about percentages is irrelevant. Because 51% of tenants have their deposits returned in full in no way implies that 51%, or any percentage, of a particular deposit can or should be transferred to the new landlord before the current landlord’s claim has been satisfied.

Only a small percentage (let us say 3% for sake of argument) of borrowers default on their mortgages. Does that mean lenders only need to take 3% of the value (let’s allow 5% to give them a cushion) of the loan as security? The question only has to be posed to show the fallacy.

The CfE goes on to say: “the DPS data also tells us that 20% of tenants lose 50% or more of their deposit. In these circumstances’ landlords would need to be reassured that they will still be protected by their security deposit if their tenant causes damage to their property.” There is a second logical fallacy. Until the dispute about the deposit is resolved THERE ARE NO “these circumstances”. Nobody knows until after the event what the circumstances are. If the deposit is to have any value then, for as long as the tenancy subsists, the landlord needs to know that in all circumstances until any dispute is resolved or a maximum liability agreed, 100% of the deposit is available to protect him.

Logically it is not possible to resolve a dispute about the deposit before it is resolved and landlords should not be required to do a “final” inspection 7-14 days before the tenancy ends and be expected to trust that the tenant will not cause more damage and will actually leave when supposed to.

If you think this is bad, I am afraid it gets worse.

The Government has read the submissions from the RLA and others that the obstacles to serving a Section 21 notice operated to ensure compliance with various regulations such as providing Gas Safety Certificates, EPCs and Prescribed Information Forms. In the foreword to the CfE James Brokenshire the Minister says he is “committed to strengthening the grounds for possession under Section 8 of the Housing Act 1988 to deliver a fair and effective tenancy regime”. He says he wants to consult with landlords, tenants and others in the rental sector on the details of a better system that will work for landlords and tenants.

Sadly, the Minister’s words are belied by para 1.8 of the CfE which says “The Government also intends to carry over (emphasis mine) the existing tenant protections included in the Section 21 eviction process (for example for the requirement for landlords to provide evidence that they have protected the tenant’s deposit before an eviction can be granted by the court) into the new tenancy regime.”

In other words it will be made harder for landlords to recover possession under Section 8 than it is at present. New obstacles to s8 claims will be introduced. That is not working for landlords but against them.

So a tenant might owe four months’ rent and the landlord is using s8 to evict for non-payment of rent. Under Brokenshire’s proposed regime the landlord might be ambushed at court, because he served the Prescribed Information form two days late. The landlord might then be required to return the whole deposit to the tenant and start again with his s8 claim.  No doubt the tenant will “suggest” the landlord also pays three times the deposit as a penalty.

This exercise is destined to be yet another nail in the coffin of the PRS. If landlords are nervous about losing s21 (as the NLA survey demonstrates), think how it will appear if landlords lose the benefit of s8 as well over a technicality.

Share This Article