When you rent out property, you are always taking a bit of a risk:
- A risk that the tenant may not pay the rent, and
- A risk that they may cause damage to the property
So most landlords take some form of security to protect them from these possibilities. The two main forms of security are taking a deposit and taking a guarantee.
Let’s take a look at them.
Taking a deposit
This is a sum of money taken to hold until the end of the tenancy when it will either be used to pay for repair or unpaid rent or will be returned to the tenant. The things the deposit can be used for are determined by the relevant clause in the tenancy agreement (or occupation contract in Wales).
Since 2007, the holding of deposits has been regulated where the deposit is taken (in England) for an assured shorthold tenancy or (in Wales) for an occupation contract.
Landlords must:
- Not (in England) take more than 5x the weekly rent as a deposit (or 6x if the rent is over £50K)
- Protect the deposit in a government-authorised tenancy deposit scheme, and
- Provide the tenant with prescribed information for example, about the deposit, the landlord and the rules which apply to the scheme chosen by the landlord
If the rules are not complied with:
- The landlord cannot serve a valid section 21 notice, and
- The tenant can go to court and claim a penalty payment of up to 3x the deposit sum (the amount awarded is at the discretion of the Judge).
Deposits are very popular as
- The money is available immediately (or within a modest period of time if a custodial scheme is used where the money is held by the scheme), and they know they are going to get it
- The prospect of losing their deposit incentivises tenants to leave the property in good condition
There is also a free, quick and easy adjudication service which can be used if there are disputes about the amount of money landlords wish to deduct.
The main problems are:
- Tenants leaving without paying their last month’s rent
- Tenants finding it difficult to afford to pay the deposit (it is quite a large sum for people who may be quite hard up), and
- Landlords sometimes find the administration difficult to handle
However, taking a deposit is probably the most popular solution to tenant default with landlords.
Alternative deposit schemes
The problem of unaffordability for tenants is the driver for various alternative schemes.
Under these schemes tenants pay a much smaller amount. However, these schemes differ from traditional deposit schemes in a number of important ways
- The sum paid by the tenant is not a deposit but a fee and so is not recoverable by them, however clean they leave the property
- The scheme is actually a guarantee arrangement where the company will pay the landlord if the tenant leaves owning money, and then chase the tenant to claim this from them
The fact that the scheme is a guarantee rather than a deposit scheme means that landlords need to be very careful about the scheme that they use. Tenancies can last a long time, so you want to be sure that your scheme is still in business when the tenant vacates, and you need to make a claim.
The alternative schemes are quite popular, but some landlords I have spoken to prefer a traditional scheme as the money is more readily available if needed.
Note that if you do offer an alternative scheme, you must also give your tenants the option of paying a traditional deposit if they prefer.
Guarantees
The other protection for landlords is taking a guarantee. This is where someone else, traditionally a relative, will agree to pay the landlord if the tenant falls into arrears or causes damage.
The problem with taking a guarantee instead of a deposit is that (as with the alternative schemes) you have to wait for someone else to pay the money to you – which may take some time.
In some cases, the guarantor may be hard up and not have the money. So, it is really important that you check and reference your guarantors as carefully as your tenants.
There is also the question of how long the guarantee lasts. Many landlords may be unaware that they need to take a new guarantee if the rent increases (and the guarantors may be unwilling to sign up again at that time).
Then, some tenants may not know anyone suitable to be a guarantor. Or suitable guarantors may reside abroad, which would make enforcement difficult if not impossible. In these cases, you may want to look to one of the various guarantee companies such as Housing Hand and Rent Guarantor.
And finally
So, what is the best course of action?
For most landlords, it will be a traditional deposit, with a few opting for the alternative option.
Guarantees have always been taken for student lets and are becoming increasingly popular for other tenants, but normally as well as rather than instead of a traditional deposit.
So, if you are worried about your tenant’s ability to pay – doing both is advisable.
Otherwise, for long-term tenants I would recommend a traditional deposit, as you may forget to get guarantees re-signed or the guarantors may be unwilling to do this.
Note that we have guarantees for members of my Landlord Law service along with guidance and information about deposits.
The post Is it best to use a guarantee or take a deposit? appeared first on The Landlord Law Blog.