Tenants’ Deposits to be Limited to One Month

The government’s plan to restrict the amount landlords can ask for tenancy deposits to one month of rent will make it much harder for people on low incomes, the benefit dependent, students and people with pets to secure private rented accommodation. It is the latest ill thought out proposal from the government who seem to have failed to assess the consequences for tenants, says David Lawrenson of property consultancy, LettingFocus.com.

Oh dear, I see the Conservative government are at it yet again.

Tenancy Deposits to be Limited to One Month of Rent

You can imagine what happened after the general election.

With a much reduced majority, the Tories will have realised that many of the pieces of legislation that they had hoped to bring in would not now be possible.

So apart from pleading with our friends in Brussels to not punish us too much for leaving the EU, what else would they do with all that spare legislative time they now had on their hands?

I imagine some bright spark said, “I know, let’s hit private landlords again. After all, they have not had to suffer any new taxes for at least six months and no new regulations for at least three. Surely, we could bung another load of regulation their way! It must be about time we hit them again.”

And so, in the Queens Speech there is a proposal to limit tenancy deposits to one month of rent and reservation fees to one week of rent.

So, let’s look at these proposals and why they will hurt tenants.

Tenancy Deposits

Let’s start with tenancy deposits.

A cursory look at Rightmove shows that most landlords currently charge an amount equal to about 5 to 7 weeks of rent as a deposit. That seems to be the norm. And it seems fair enough when you think of the potential damage that a tenant can do to a property or the mess some can leave them in, at the end of a tenancy could easily exceed this.

The bizarre thing is, that as far as we are aware, no one, not even serial moaners, Generation Rent, have raised any issue with the size of tenancy deposits. The Tenancy Deposit Schemes are working well too, (though there remains a hard core of incompetent or rogue landlords who still don’t protect tenancy deposits).

So why bring in such a proposal? What on earth is it designed to fix? What is the problem here anyway?

No one seems to have an issue with size of deposits, which are anyway dictated by competition – if you ask for too high a deposit, you’ll find that your property will simply not let. Tenants will just select a property with lower rent / lower deposits. It’s a competitive market after all.

But, it will also mean that certain groups will be even more excluded from the market for private rented properties, especially those folks who are on low incomes and / those who are benefit dependent.

Why?

Well, many landlords flex the deposit amount to reflect any higher risk they think is associated with a particular tenant type. (And it’s worth considering that landlords making repossessions of properties can easily lose 6 months’ rent due to the painfully slow legal processes).

So, people with no lettings history in the UK, (no past landlord reference), will present a higher risk (and so a higher deposit can counteract this).

People whose incomes are low and the housing benefit dependent will also be at a higher risk of not paying the rent (and so a higher deposit can make up for this a little).

Students are often less good at looking after the  properties they rent (and so a higher deposit can make up for this).

People who have dogs or cats are higher risk too, because of the higher risk of damage to a property by the animal, plus the possible cost of removing any flea infestation. Again, a higher deposit…..you get the picture!

All these groups will find it harder to rent if a cap on deposits of a month of rent becomes law.

Landlords will simply charge them a higher rent or, more likely, not rent to them at all.

So, this proposal will hurt many of the more marginal tenants whose housing options are already limited.

Reservation Fees (Holding Deposits)

The government also proposes a limit on “Reservation Fees” (sometimes called “Holding Deposits”) to just one week of rent.

First, let us just explains what we mean by reservation fees / holding deposits as quite a lot of people seems to get confused over this simple issue.

Here goes……

If I have a place to let to tenants, it can often be quite a long time between them agreeing to rent the property to the date they actually sign the tenancy agreement and move in.

For example, just last week, I completed reference checks on a prospective tenant applicant for one of my properties. So, I made an offer of a tenancy to him. He will not actually move into this particular property nor formally sign a tenancy agreement for another four weeks, two days after the current tenants, who are still living there, have left.

Clearly, I don’t want this new tenant suddenly deciding in four weeks time that he no longer wants the property, after all.

If that were to happen, I would have to restart marketing of the property, which costs money and it would be impossible to find anyone who can move in straight away. First, I would need to find a new applicant who actually wanted to let the property and who passed my reference checks (which take at least 3 days to complete). And they would probably have to give a month of notice where they are living now.

So, assuming I could even re-start marketing the property right away, (yes there are other things going on in my life!), it would probably take five weeks or so to find another tenant. All the time, my property sits empty earning no rent at all.

For this reason, and to ensure any new tenant does not suddenly have a last minute change of mind, I ask them to pay a reservation fee of three weeks’ rent.

Please note, this reservation fee (or holding deposit) is NOT a tenancy deposit, it is just a fee that commits them to taking the property. Think of it like a deposit you’d pay to a furniture maker if you were having a bespoke bit of furniture made up for you.

Three weeks’ rent is, I think, a realistic amount that a tenant will not want to lose and ensures that they won’t have a “sudden change of mind” and leave me saddled with an empty property for five weeks. It would seem fair as it would part-compensate me for having my property empty for at least five weeks.

Set Off

This reservation fee is set off against the first months rent and deposit on the day when they move in and sign the formal tenancy agreement. So, as long as the tenant turns up and pays the first months rent and deposit, they get it refunded.

If I was unable to meet my side of the bargain and was for some reason unable to allow them to move in on the agreed date, the reservation fee would, of course, be returned to them. (The circumstances where this could happen are rare – the house could burn down or be flooded or the tenants in the property now may fail to move out. Rare, but possible).

But limiting this fee to one weeks’ rent is utterly ridiculous.

No one thinks three weeks’ reservation fees are unwarranted, no one is complaining.

So why is the government planning to do it?  Why is it interfering where there is no issue, no problem?

Other Letting Fees Charged to Tenants

Of course, there is a separate but linked proposal to ban letting agents (and possibly landlords) charging any other form of fees to tenants.

This is as a separate matter, which we think could have been dealt with in a much better way, by forcing all letting agents AND all portals like Rightmove and Zoopla to clearly show fees on ALL adverts – which  they do not do at present.

For more on my proposal on this, read this article.

But, hey my approach would be too sensible wouldn’t it? After all, my radical proposal to force all letting agents and portals to display tenant fees clearly on ALL adverts for let property, would be too much like when one buys a can of baked beans in a shop. In as shop, one expects to see the price for that can to be displayed somewhere you can see it, somewhere clearly visible.

Far too radical that idea, obviously!

It’s enough to make you want to get really mad and run through a field of wheat, just like Dear Mrs May!

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2 comments

  • It’s fine decision as tenancy deposit provides security for a landlord against damage or financial loss from unpaid rent.

    • But if a landlord cannot serve a Section 8 notice to even start repossession until after 2 months rent overdue and then it can take four more months before he secures the property again, (this can happen where he needs to appoint bailiffs or sheriffs), then how can your point stand that one month is enough to cover unpaid rent?
      Please explain your thinking.
      Thanks

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