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ask tom ...
Resident Agony Uncle, Tom Entwistle,
answers readers’ questions.
Tom Entwistle is a founding director and editor of LandlordZONE.co.uk
He has been a private investor in residential and commercial property
for over 30 years.
Q
Pre-Contract or Holding
Deposits – I have been told
that it is illegal to withhold
the full advance deposit I took from a
prospective tenant if they back out. Is
this correct?
I have always found the holding deposit
(an initial retainer paid to the landlord
or agent to reserve a property) is a very
useful device to commit the tenant to
your letting.
In my experience a tenant makes up
their mind pretty quickly if they are
genuinely interested, then to close the
sale so to speak, you need commitment.
Asking for an initial cash payment
focuses minds and prevents timewasters making excuses like, ‘I’ll go away
and think about it’ or ‘I’ll be back (after
I’ve looked at several other properties)’.
When demand for properties is high,
tenants know that good properties
let quickly, so it’s usually in their own
interest to retain it if they like it, whilst
the usual checks are carried and a
tenancy agreement is prepared.
This may well work in practice, but
legally this leaves the landlord on
shaky ground as a court would be
unlikely to enforce the arrangement
if it came to a dispute. Like any other
contract, the arrangement should be
in writing and each party should be
aware of the consequences in advance
of not fulfilling their promises.
The holding deposit, if genuinely for
that purpose, is not subject to the
Deposit Protection (DP) rules, though
there is some doubt as to whether
it would be if taken a long time in
advance of the tenancy, for example a
student letting for the following year.
Most holding deposits are taken for
one week or so, and I would suggest
one week’s rent is the appropriate
amount, so as there’s 30 days to
protect a security deposit, the DP
rules issue does not arise.
However, there is often confusion
about the difference between a holding
deposit and a ‘damage’ or security
deposit, and whether it comes under
the rules regarding deposit protection.
Also, it often leads to disputes when
one or other party backs out for
one reason or another and the
whole or part of the holding deposit is
being retained.
A holding deposit agreement
(example here – www.landlordzone.
co.uk/documents) – should be drawn
up and signed by both parties, clearly
setting out the details of the parties,
the property to be let, the date of
the start of the tenancy, any admin
fees to be charged, and under what
circumstances the deposit or part of it
will be retained. This will also act as a
receipt for cash changing hands and it
will state that the holding deposit is to
be applied to the security deposit and
be protected in a DP scheme once the
agreement is signed.
In effect, the taking of a holding deposit
is a contractual arrangement which has
legal implications. It is very common,
and has become custom and practice
in the industry, that a deposit is taken
without any written agreement, and
the landlord / agent expects to retain
the deposit if the tenant backs out.
Courts will enforce contracts when
the terms are considered reasonable.
For guidance on this, landlords
and agents should refer to the
“Guidance on unfair terms in tenancy
agreements” published by the Office
of Fair Trading September 2005 (now
replaced by the Competition and
Markets Authority (CMA) and the
Financial Conduct Authority) – http://
goo.gl/G9YyQ6
The relevant sections state: Sections
3:37 to 3:42: “A 'no refund' term
where the tenant is required to make
a substantial prepayment before a
tenancy agreement is signed, is likely
to be unfair . . . Where cancellation is
the fault of the tenant, the landlord or
agent is entitled to hold back from any
refund of prepayments a reasonable
sum to cover either the net costs or
the net loss of profit resulting directly
from the default . . . Tenants would be
at fault if, for instance, they gave false or
misleading information, but not merely
because the landlord thought their
references were not sufficiently good.”
Put simply, (1) you cannot impose
on the consumer (tenant) a penalty
which is greater than that on the
business (landlord), and (2) any
penalty must represent the financial
loss to the injured party.
So, if a tenant backs out the landlord
/ agent should deduct their costs /
losses from any holding deposit taken
and refund the difference, if any.
A landlord would incur costs if it
removes the property from the market
and advertising, and carries out checks
and paperwork etc., so is entitled to
recover these reasonable losses if the
prospective tenant backs out.
On the other hand, should the
landlord decide not to let for any
unjustifiable reason, the tenant
would be entitled to a full refund and
possibly some compensation for any
reasonable costs / losses sustained.
The arrangement must always be
even-handed for the contract to be
enforceable.
If you have a question for Tom, please email editor@landlordzone.co.uk.
26 Landlord & Buy-to-Let Issue 58 • April 2015