Student Landlords/Agents – When do you register a “new” deposit?

Perhaps I should explain a bit more.

For example if I have a 5 person house, the rent is £420 per person per month and the deposit is £450 per person. The tenancy runs from 1st September to 31st July.
A non-refundable reservation fee is £200 but this becomes part of the first months rent assuming the tenant eventually pays the deposit and moves in. If they don't it goes towards the costs of finding a replacement and assigning their part of the tenancy.

Normally in January students are signing contracts for September.

In the situation that I find 5 first year students I would expect them to pay the £450 deposit in January, which I would protect as a deposit with the mydeposits scheme as soon as the money was clear funds in my bank.

If I find 5 second year students I am fully aware that their current landlord has already got a sizeable amount of their money as a deposit and that in the current economic climate another £450 is maybe not possible until that tenancy has ended. In that situation a £200 non refundable reservation fee is often a very welcome suggestion. The £450 deposit would then be due to be paid around the 15th August and the first months rent would be due on 1st September. That rent payment would be £420 minus the £200 they had already paid, so £220.

In the event of the whole existing group staying the mydeposits scheme has clear written rules on un-protecting and re-protecting the deposit when the new tenancy is signed.

It is more tricky when maybe 3 stay and bring in 2 new housemates. Again the non-refundable reservation fee seems to be the preferable option with their deposit due on about 7th August (within 10 days of the existing tenancy ending) and the current deposit being due to be refunded. It is a difficult balance as I certainly wouldn't expect existing tenants to pay a second deposit but I understand that they are unlikely to want to sign a joint tenancy with people who have made no financial input. Those incoming tenants are often in the situation above with insufficient money for a full second deposit in January anyway. If I did get a full deposit from them in January I would have to pay two lots of deposit protection or double protect some of the same money as I can't unprotect the existing deposit as there are still several months left for the 2 tenants who are being replaced.

It's this last situation that I have found really messy over the years and when mydeposits suggested the reservation fee idea I thought it seemed like a workable solution.

I am very careful about calling a reservation fee a reservation fee which will form part of the first rent payment. In no way does it resemble the deposit or become part of the deposit.

Mary

Your last comment end of first paragraph.

You cannot sign away your legal rights. This is why a little old lady can't be conned into signing an AST and giving up her secure tenancy where she has lived for 30 years.

I have seen comment from the OFT personally where they have not liked any reference to any part of an application fee being non refundable, other than where the agent has incurred third party costs, such as referencing.

Same as with Mark's developers and reservation fees so it is with your comment Mary. If you can get away with it, orr no-one objects, that is OK. Otherwise it is as I advised scottish clients for years - if a tenant wants their application fee back, give it to them!!!

"Holding deposits

Your landlord doesn’t have to protect a holding deposit (money you pay to ‘hold’ a property before an agreement is signed). However, once you become a tenant, the holding deposit becomes a deposit, which they must protect."

Source https://www.gov.uk/tenancy-deposit-protection/overview

IO, I agree that a landlord would always need to be able to justify the amount withheld in terms of costs incurred because the tenancy did not go ahead and this is why I would never take a large amount of money (ie the full deposit for first months rent). I would have no problem justifying £50 per tenant in terms of cost of chasing guarantees, taking reference on the guarantor and/or tenant, loss of rent and cost of re-adversting.

In the case of a student tenancy there is a very short time frame in which a landlord can let for the following academic year and if tenants are not found in that time it could mean that the property will remain empty for a year. This is why many landlords do take a large non-fundable retainer. There would be no problem for those landlords to justify holding onto the fee to cover some of their losses. Many landlords began to do this when students reserved several properties and then chose which they would sign for a few weeks later and at that point the landlord is left with a problem letting the property. The other problem with this client group is that they can be impetuous and begin looking for a rented house with a group of people that they have only just met, ie term starts in October and they are looking in December for the following Summer. These groups often fall apart by Easter and the landlord is again left with an empty property, or worse, a property with one or two less students that the property should accommodate. When the students know that they will lose a lot of money they often take responsibility for their early decision and move in.

In the good ol' days students did not begin to look for properties until Easter and there were far less problems - I will not show a property until after Christmas but I take the risk that it may not be let, may landlords cannot afford to take that risk.

Follow me on Twitter@landlordtweets

“Holding deposits

Your landlord doesn’t have to protect a holding deposit (money you pay to ‘hold’ a property before an agreement is signed). However, once you become a tenant, the holding deposit becomes a deposit, which they must protect.”

Source https://www.gov.uk/tenancy-deposit-protection/overview

I am not sure I find this comment very helpful. Whilst I can follow the arguments about deposits being returnable for a split second and then being retained for the new agreement life's too short and I prefer a practical approach. Therefore, I ask myself some questions.

1) What is the law aiming to achieve?

2) Bearing in mind the inadequacies of poorly drafted statute and secondary regulations and the very poor to practically useless advice offered by scheme administrators, am I adhering to the spirit of the law?

3) Are there any new legal precedents that I need to take into account and change my methods?

Until some plonker in a wig decides otherwise, I am fully comfortable that monies taken before an agreement is signed are not held under a tenancy agreement. Leaving aside the point that a tenancy agreement does not have to be in writing, mine do. I make it quite clear to students that the house is not theirs until an agreement is signed. Therefore, as a result of this, I must accept that any "deposit" paid earlier is potentially returnable.

Frankly, I think this applies no matter what you call the prepayment, ie whether it is a "holding deposit" or a "retainer" or "rent in advance". I also accept that reasonable amounts may be retained, though I think this should be made clear before the payment is taken.

However, in my opinion, the above quote clearly assumes that the timescale is quite short and does not address the student timetable. Furthermore, it seems to assume that the holding deposit all part of the deposit held under the tenancy agreement. I would be more comfortable with the following wording:

"Your landlord doesn’t have to protect a holding deposit (money you pay to ‘hold’ a property before an agreement is signed). However, once you enter into a legally binding agreement to rent the accommodation (usually be signing a written agreement) the deposit held under the terms of that agreement must be protected.”

I can quite see Jo's point about students not being able to afford large deposits. Taking the example of a five bed house I have never had a case where I needed a deposit of £2,250 from a group of students. Frankly, I was ever in the situation where a full deposit of this size would be exhausted I think I would have far more on my mind than the deposit. I long ago decided that with the (relatively) low value short-life furnishings and parental guarantors it is far easier to ask all students to pay the same lower flat rate deposit (say £250 or £300). It certainly makes the administration a lot easier when you are dealing with a significant number of properties.

By the way, I was advised by mydeposits one year that where my students took the house for a second year I should get them to move out, complete a checkout and then let them move back in …..

Robert

I agree it isn't a perfect world. But don't go down the path of belief, wishes, preferences, what someone should have drafted and enacted etc.

Whether anyone likes it or not the Law is the Law whether it intended subsequent consequences or not. It is no good talking about practicalities and inconveniences, sensible or not the Law must be adhered to.

Accept no advice from any Scheme unless on its own Schgeme Rules and nothing else - and even then seek a second opinion.

Your comment about verbal tenancies is interesting and has reminded me of another influencing factor in all this, it doesn't even need to be as formal (and useless) as a verbal tenancy. Intent is enough to create a deposit - see definitions for Part 1 of the 88 Act in s45 of 1988 Act this is where the impact on student lets and money of any amount taken ages in advance bites.

“tenancy” includes a sub-tenancy and an agreement for a tenancy or sub-tenancy; and
“tenant” includes a sub-tenant and any person deriving title under the original tenant or sub-tenant.

You could interpret "agreement" as meaning a written agreement already in force but that doesn't make sense or work. Here the word means an agreement to do something i.e. enter into a future tenancy

An interesting discussion. On the subject of landlords using tenants' holding deposits to cover the third party costs of tenant referencing and drawing up of tenancy agreements, would any money that is left over and not returned to the applicant be regarded as 'income' for the services provided by the landlord in arranging the screening and tenancy agreement for the tenant?. Tenant screening and tenancy agreements are for the landlords benefit, not the tenants? How would these landlord services be noted for income declaration purposes? The tenant does not contract the landlord to carry out the screening and there is no compulsory requirement to actually have them done. If the full value of the holding deposit (post screening expenses) is then regarded as the protected deposit, then effectively, the landlord has paid those expenses out of his own funds anyway. As a landlord, I don't think you can bill yourself for your own time spent on running your property business. Paying costs for tenant screening and other small incidental costs would seem to be similar to any other costs businesses have to pay, i.e marketing and advertising with no certainty that anything will come of such campaigns. The risk is all with the landlord when searching for new tenants, and the income raised from rent goes towards covering expenses. If a tenant decides not to rent your property in between paying a holding deposit and the AST start date, then surely that is an indication that your property, or rent is uncompetitively positioned in the market place?

Steve

Check with your accountant and HMRC a self managing Landlord can make a reasonable claim for expenses incidental to renting a property. Similar to expanses you can claim against tax for using an agent, such as their fees

Steve

The basic rule is that any money you take or retain in connection with renting your property is taxable less expenses incurred. If you retain holding deposits or charge an application fee that is income, if you pay for tenant referencing that is an expense. The difference between the two will increase or decrease your taxable profits.

Unless you have a lot of time to waste I would not contact HMRC for advice on this matter. Similarly, unless you have money to burn I would not ask your accountant the question either. (Speaking as FCA CTA)

Robert

Why would an accountant charge for answering a simple question? Far as I am aware £200 can be claimed but am not sure if this is the allowances figure or the actual amount that can be saved i.e. the amount is a £1000 maximum claim.

Funny I always thought Landlords were keen to save money wherever and whenever they could.

Your first sentence starting point is also a good guide for determining whether money paid is a deposit or not.

If any money paid by a tenant at any time is not for a specific service or action to do with the tenancy like referencing or preparing documents, buying an inventory etc, treat it as a deposit until you know it is not.

Too many people start by trying to regard what is a deposit as not being one until they are forced to treat it as one especially, if I may say so and risk opprobrium being heaped on me, agents and landlords dealing with students and taking money well in advance - no matter from how many intended future tenants..

Let's take the points in turn:

"Why would an accountant charge for answering a simple question?"

Because they charge for their services and advice and if asked to a question by a client why should the client assume it is free time?

"Far as I am aware £200 can be claimed but am not sure if this is the allowances figure or the actual amount that can be saved i.e. the amount is a £1000 maximum claim."

With all due respect, this comment is so vague and without context so as to render it useless.

"Funny I always thought Landlords were keen to save money wherever and whenever they could."

Many are. Then they wonder why their houses are left when others are taken.

"Your first sentence starting point is also a good guide for determining whether money paid is a deposit or not."

I think we have covered this now. My position is that payments before a binding contract are holding deposits. You might choose to call if something different if you consider the word "deposit" is opening up a can of worms. However, I doubt semantics will help with the men in wigs. My position on holding deposits is that they are returnable if a contract is not signed, less reasonable amounts to cover direct expenses or time incurred. It helps that my paperwork makes it quite clear that a written contract is required before there is a binding agreement and explians the deductions up front.

"If any money paid by a tenant at any time is not for a specific service or action to do with the tenancy like referencing or preparing documents, buying an inventory etc, treat it as a deposit until you know it is not."

Well yes and no. Using my approach I would treat any balance as a deposit as soon as there is a legally binding AST in force. Until a legal ruling to the contrary (which would not surprise me) I am not convinced that there is any obligation to protect a deposit under the Housing Act until there is a binding agreement under the Housing Act, which in case requires a written and signed agreement. I do make this all very clear in my application documentation.

"Too many people start by trying to regard what is a deposit as not being one until they are forced to treat it as one especially, if I may say so and risk opprobrium being heaped on me, agents and landlords dealing with students and taking money well in advance – no matter from how many intended future tenants."

Probably, in which case that's their problem. My problem is that I have been mildly rebuked for protecting the full deposit within thirty days of the agreement being signed, even if the full amount has not been received. To me (using mydeposits and not seeing any benefit in protecting each instalment of deposit separately) this seems to be the safest approach and nobody has yet been able to convince me otherwise.

My view is that the legislation has been drafted in the context of the traditional "professional"* letting where the time between viewing to moving in is probably, on average, four weeks(?) and just does not envisage the minor complexities of student lettings illustrated in my original three examples.

I am slightly disturbed (to say the least) by the implication in advice given by mydeposits that I can wait until the tenancy start date to protect a genuine part deposit held under a binding agreement signed (say) three months earlier. I did ask for the advice in writing from mydeposits on those three examples telling them I would rely on the replies in the event of any dispute, but they have gone strangely silent.

IO says it isn’t a perfect world and warns against going down a path of belief, wishes, preferences of what someone should have drafted and enacted etc. I couldn't agree more. I take a very safe approach. I make it quite clear that the holding deposit is returnable (less deductions) until an agreement is signed at which stage any balance becomes part of the deposit held under the agreement. Once the agreement is signed, the full deposit is protected within thirty days regardless of whether it is new funds and/or fully paid.

In my opinion there is a strange dichotomy between being required to protect a deposit within thirty days when you may not have received it. The obvious (if more expensive approach) is to protect each part within thirty days of receipt. However, this would be an administrative and financial nightmare. Nobody has yet convinced me that I cannot protect the full amount "up front" and am committing any serious error in doing so.