Tenancy Deposits to be Limited to 5 Weeks

Tenancy Deposits to be Limited to 5 Weeks

The government has done a U-turn on the decision to cap tenancy deposits at 6 weeks rent. Now, for rents under £50,000 a year, they will be reduced to just 5 weeks rent, when the long delayed Tenant Fees Bill becomes the law, says David Lawrenson of www.LettingFocus.com. (If the annual rent is over a fairly whopping £50,000 per annum, you still can charge a deposit equal to 6 weeks rent. Don’t really see why there should be a difference for “Mayfair type rentals”, but there we are!)

Limiting deposits means landlords have even less to fall back on if the tenant does not pay rent and thus makes it even more essential to conduct thorough reference and affordability checks on tenants when they apply to let property from a landlord.

For tenants, it will also make it even harder for people on benefits and folks with pets to let a property.

David Smith from the Residential Landlords Association noted that,

“In May, the government was saying that a cap of deposits at 6 weeks offered a “balance between affordability benefits and financial risk to landlords, giving them the confidence to let to higher risk tenants”. They said then that a cap of 5 weeks did not offer that protection. So, what exactly, has changed in the interim?”

Richard Lambert of the National Landlords Association (NLA) agreed. He said,

“Does the government really not understand that if landlords don’t think the deposit covers the risk of damage and non-payment of rent, they will become even more wary of who they let to, thus making it harder for people on benefits , with poor credit ratings and /or with pets to secure a place to live.”

I agree. Five weeks for a tenancy deposit looks very small when compared to the potential for lost rent in situations where the tenant has stopped paying rent.

Right now, on Section 8 possession claims, according to the NLA, the average period between claim and possession is 18 weeks, though the Ministry of Justice (in response to a question asked by Kevin Hollinrake MP) put the figure even higher, at 22 weeks.

But let’s go with the lower figure, shall we? These delays nearly always equate to the same time, i.e. to least 18 weeks’ lost rent – because most tenants who are being repossessed will not be paying rent. And as landlords cannot start a claim for non-payment of rent until the tenant is already 2 months in arrears, that means roughly 26 weeks (or half a year) of unpaid rent. Ouch!

The Cost of Possession Claims

In addition, the cost of each claim comes in at just over £350 just in court fees alone, (NLA figures), never mind the time involved in filling in claim forms plus the cost of paying a solicitor for handling the work.

It is for this reason that even when there has actually been a REAL breach of the tenancy, such as failure to pay rent for two months, most landlords opt instead for the so called “no fault” Section 21 route to regain possession.

Indeed, the increased and widespread use of Section 21 is evidence that the normal court processes in Section 8 claims are simply not working. And they are not working because the court processes are too slow, with long delays for hearings.

But Section 21 is no panacea. Though faster than Section 8, (as it does not involve a physical court hearing), it is certainly not all that quick either. And, it cannot be used until a fixed term period in a tenancy has ended and two months’ notice have been given. On top of that, it also requires the landlord to serve a separate court action should he want to try to recover any damages or rent owing.

Possession Claims and the Section 21 Patch Up

So Section 21 is really just a “patch up” for failure of the legal processes around Section 8 breaches of tenancies. (We also know that local councils tell tenants to wait until the bailiffs arrive – making the problem worse).

Lost rents on Section 21 processes are slightly less than on Section 8, at around the four to five months’ mark, so a month or so better than Section 8 and a slightly more certain outcome (providing all paperwork is correct), but still a huge loss of rent and very costly to the landlord.

Cost of Possession Claims

Of course, the likes of Generation Rent and Shelter love to highlight the increasing use of Section 21 as proof that landlords are supposedly “kicking tenants out for no fault”.

But this is nonsense as I have just shown. On top of the four to five months of possibly lost rent there are legal fees, plus likely property damage costs when a tenant no longer wants to pay you. And you have little chance of recovering money owed if the tenant does not have any!

And yet, despites this, the government thinks that setting a maximum deposit level of 5 weeks is fair – and presumably a “reasonable amount” for the huge risks we run and costs resulting from, getting a non-paying tenant.

Clearly, the government must live in a separate universe, and their actions will only serve to drive more landlords out of this business.

Tenancy Deposits – Getting the Right Tenants

I’m pleased to say though that if you know what you are doing, you won’t get a tenant from hell who does not pay the rent.

Get both of my books – see below – and follow my processes for checking tenants out at the outset (or making sure your letting agent is doing this for you) and you won’t get a tenant you’ll ever want to get rid of.

I have not had a non-paying tenant for 20 years, so I know my processes work.

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