Alternatives to Tenancy Deposits
Alternatives to Tenancy Deposits
Is there an alternative to taking a deposit from tenants asks David Lawrenson, private rented sector and landlord advisor at www.LettingFocus.com.
In this article I will explore if “no deposits” are feasible or sensible.
Alternatives to Taking Tenancy Deposits – The Situation Today
Landlords will soon be unable to take more than a six week deposit. This is just one of the veritable deluge of changes that we have had to put up with in recent years, as the government imposes ever more regulation on landlords.
But six weeks’ as a deposit seems about right to me. It is what I have always charged, though if I have a place with a lot of very nice furnishings and fittings, I have in the past occasionally charged as much as 1.5 months, so just a little over 6 weeks. I guess, I will be stuck with a maximum of six weeks going forward!
I have been a landlord for over thirty years with a moderately sized portfolio but I have only had to make a deduction from a deposit on less than 3% of our lets. And only once was this for more than £200. Usually the deductions are for cleaning and the amount deducted represents typically less than 20% of the whole deposit on any occasion. None of the deductions were disputed by the tenant, who all recognized that some deduction had to be made and that I was being fair and reasonable. My view on tenancy deposits is not to sweat over small things and to try as best I can to give deposits back in full.
Part of the reason my tenants leave our places clean and in good order at the end of the tenancy is that we carefully manage the end of tenancy process. A key aspect of this is that we send tenants a list of things they need to do before the tenancy ends, which includes giving them a cleaning guide highlighting the things that tenants often forget to clean, such as ceiling lamp shades, washing machine powder holders, door frames, (especially the front door outside), dado rails and above kitchen cupboards.
It’s worth noting that many Build To Rent operators often heavily market the fact that they don’t require tenants to put up a deposit. Build To Rent is still a very small part of the private rented sector in the UK, except in the market for student flats, so unless you are in that end of the market, there is not too much to worry about from a competition point of view.
Typical deposits in England and Wales are now a little under £1,000, though in London the figure is around £1,750. Just under £4bn is held by the various deposit protections schemes in the UK.
Many tenants complain that they often have to put up a deposit on a new tenancy before they have got their deposit money back from their previous accommodation.
Deposits should be returned within ten days of a tenancy ending, but disputes can mean that monies for damages/cleaning etc. which are in dispute, are held up for much longer, as resolution can take months. (Note that any non-disputed element of a deposit must still be returned in 10 days. Also, a landlord cannot make a deduction for anything that constitutes fair wear and tear).
Tenancy Deposit Alternatives – the Warranty Approach
There are some schemes around that offer deposit free renting.
These always involve the set-up of some kind of insurance or warranty policy. Most schemes will use a subrogation clause which allows them to legally pursue the third party, in this case, the tenant, to recover any claim for damage against the deposit or in some policies, any unpaid rent.
The firms who run the various schemes say the claims process is quick for landlords.
The advantage for landlords is that they can advertise a property as being “deposit free” – which will be attractive to most tenants.
FCC Paragon has been offering such a product, called Smart Deposit for eleven years. Their warranty covers damages as well as up to two months’ of unpaid rent.
Back in February of 2018, Zoopla launched its Zero Deposit Scheme. To qualify, tenants pay one weeks’ rent. This is non-refundable, however, so it is actually a sunk cost to the tenant. The tenants also pay a £25 admin fee in each subsequent year.
The Zoopla scheme gives the landlord the same amount of cover as a six weeks tenancy deposit. There is no rent cover. Any disputes are sent to the dispute resolution firm, The Dispute Service. If they rule that the landlord is owed the money, they pay out promptly to the landlord and make a recovery from the tenant, using all legal means necessary.
Of course, a downside for the tenant is the non-refundable one weeks’ rent cost plus the (admittedly pesky) ongoing annual admin fee. But this is a real consideration when you think, that most tenants in the private rented sector actually get their deposits back in full anyway, with no deductions. (Newsflash for Generation Rent – Most Tenants Get Deposits Back In Full!) However, the Zoopla scheme does, of course, help tenants’ cash flow. So, clearly there is a trade-off for tenants here.
One other benefit that proponents of these sorts of schemes sometimes make is that tenants will be less likely to damage a property or not pay rent if it is covered by a warranty type scheme because, (the schemes backers say), the tenants will think “that a big company like Zoopla will have more time and resources to pursue a tenant than a landlord acting on their own will”.
I find this argument a bit dubious, because, providing the landlord has had a proper independent and thorough inventory done at the start and end of a tenancy, he will always win a case at one of the tenancy deposit services, providing his claim is valid. As regards losses of rent, claims are very easy to pursue these days, either on one’s own or with help from companies like Paul Shamplina’s Landlord Action.
(Digression: Interestingly, it seems that Rightmove is also considering developing a product to rival Zoopla. I do sometimes wonder why it took the big portals so long to develop products for this market. Perhaps they do not want to further upset the letting agents who place their properties-to-let on their sites?)
Tenancy Deposit Alternatives – The Way Forward and the LettingFocus View
So what do I think of these products?
I have always thought it would be great if there was some scheme or other that – using data collected by third parties on payment of rent etc. – went further than an Experian credit check and which would give us extra and real confidence that a prospective tenant was going to look after our properties and pay the rent on time. This might allow landlords like me to reduce the amount of deposit I charge to tenants.
Until then, I am happy to rely on our own very thorough tenant checks to ensure we don’t end up with a bad tenant. I have only ever had one bad tenant – and that was twenty years ago now, so I must be doing something right. I learnt my lesson then and that experience led to me writing my first book, partly so that other landlords would not also suffer the terrible experience of a tenant from hell.
I have to say, I regard a deposit as just another tool to make sure I am getting tenants in my properties who “have enough about them” that they can afford a deposit.
Sure, I do all the detailed checks one should do (and more!), but I really would never feel comfortable with putting a tenant in one of my properties who could not afford a six week deposit, as this would suggest they are only six weeks away from being broke! What a mad risk that would be to take when I know that the slow court processes around recovery/ eviction for non-payment of rent could easily mean me losing six to eight months’ rent.
(Note: Both of my books for landlords – see links below – describe in detail the kind of checks that we think you or your letting agent should be doing for you).
So, I will keep charging deposits of 6 weeks’ rent for that reason, for now, thanks very much.
Plus, I also rather like the fact that in the insurance based versions of the authorized tenancy deposit schemes, for a one off fee of about £20, one gets to keep the deposit money for the whole duration of the tenancy. We can earn interest on that money to give back to tenants, if we so wish, or use it towards our surplus and to help us keep rents low and stay competitive. That seems a good deal to me!
(Note: the insurance versions of the tenancy deposit schemes are not available in Scotland as a result of diktat of the often landlord-hating Scottish government).
Government Supported Private Rented Sector Access Schemes
In addition to these private initiatives, some local councils, housing associations and other bodies concerned with finding housing for vulnerable people and others on low income, provide “guaranteed bonds” to landlords cover any damages at the end of a tenancy. Only tenants deemed trustworthy tend to be accepted.
Some landlords find this enables them to take on tenants at the bottom end of the housing market, people who perhaps are on benefits or social problems and who have no access to a private guarantor nor any means to raise a deposit.
These schemes have their fans. But I have heard some landlords complain that the schemes can be hard to claim on and slow to process claims.
These type of “social schemes” are often called “Private Rented Sector Access Schemes” and the organisations offering them are sometimes described as “Social or Not For Profit Letting Agencies”. They have been supported by the housing charity, Crisis, who have done some very good research and support work into services like these that are set up to help people with low incomes make a success of the private rented sector and to make them more attractive as a proposition for landlords.
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We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.
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