Holding or Pre-Contract Deposits:

I thought it would be a good time to review the situation with Holding Deposits as they are in the news currently, about limiting the amount of the deposit a landlord or agent can take when a tenant puts down this payment to “hold” the tenancy, while the usual verification checks are carried out.

I personally, as a landlord, have always found the holding deposit (an initial retainer paid to the landlord or agent to reserve a tenancy) a very useful device to commit the tenant to a letting. But is it legal to withhold this advance deposit you take from a prospective tenant if they back out, if you back out, or if the tenant fails the credit check? How much should the holding deposit be in money terms and also does this deposit fall under the rules for the deposit protection scheme?

In my experience a prospective tenant makes his or her mind up pretty quickly if they are genuinely interested in a letting. Then, to close the sale, so to speak, you need commitment. Asking for an initial payment certainly focuses minds and prevents time wasters making excuses like, I’ll go away and think about it, or I’ll be back (after I’ve looked at several other properties).

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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.

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.

In effect the taking of a holding deposit is a contractual arrangement (a pre-contract or a contract for a contract) which has legal implications. It is very common, and has become custom and practice in the letting industry, that a deposit is taken without any written agreement, and the landlord / agent expects to retain the deposit if the tenant backs out.

This may well work in practice but legally this leaves the landlord or agent 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 Scheme (DPS) 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 paying 6 months in advance for a letting for the following year.

Most holding deposits are taken for one week or so, and with the proposed new rules limiting or “capping” holding deposits this one-week rent amount will become law) and I would suggest one week’s rent is the appropriate amount needed to give time to background-check the tenants, so as there’s 30 days to protect a security deposit, the DPS rules issue does not arise.

A holding deposit agreement (an 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 holding deposit contract also acts as a receipt for any cash payment changing hands and it will state that the holding deposit is to be applied to the security deposit and protected in a DPS scheme once the agreement is signed.

Courts will enforce contracts when the terms are considered reasonable. Landlords often get confused with the fact that you can put any terms you like into a contract (and landlord often do include onerous terms on the tenant) but if the term is not considered reasonable it is simply unenforceable.

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 Sept 2005 (now replaced by the Competition and Markets Authority (CMA) and the Financial Conduct Authority) – http://goo.gl/G9YyQ6

The relevant sections for holding deposits 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 actual financial loss to the injured party.

So, if a tenant backs out the landlord / agent should deduct its costs / losses from any holding deposit taken and refund the difference, if any.

A landlord / agent 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 the property for any unjustifiable reason, the tenant would be entitled to a full refund, and possibly even some compensation for any reasonable costs / losses sustained. The arrangement must always be even handed for the contract to be enforceable.

See also: www.landlordzone.co.uk/information/holding-deposits

Article by Tom Entwistle 

©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.

8 COMMENTS

  1. “making excuses like, I’ll go away think about it, or I’ll be back (after I’ve looked a10t several other properties).”
    I think the tenant is perfectly entitled to make these “excuses”. It means he is not yet sure and has certainly not decided on your property. If you try to force him into a corner when he is not sure then you will be at fault. I only take a holding deposit when the tenant has very clearly indicated that he wants to take the property. I also show him the written agreement/receipt for this before accepting his money

  2. If I only took 1 weeks rent for a holding deposit and the tenant changed their mind I would lose money as it is highly unlikely that I would find a new tenant straight away who wanted to move in on the same date as the original tenant.
    I could potentially lose a weeks rent (£95). I have 7 days to re-activate my online advert past this point it will cost me another £95. The reference check is £33. Council tax for 1 week £20.
    If I take a holding deposit of 1 weeks rent and the tenant changed their mind I could potentially be out of pocket by £148 even after I have kept their holding deposit.
    I usually take a holding deposit of £250 to cover this scenario. I never charge my tenants fees and the holding deposit converts to the security deposit. If the law states we are only allowed to take a holding deposit of 1 weeks rent this would be an amount which my tenants could quite easily afford to lose as they are on quite high salaries. I would have no protection at all.

  3. I have a question…If a landlord denies me an apartment, reason being is that I put false information on my application, which I’m most defiantly positive I didn’t…but even if I might have done so, does that mean the landlord has the right to retain my holding fee?

  4. Andrea,
    A landlord or agent is entitled to withhold a holding deposit if the reason for refusing the tenant is the tenants fault, like changing its mind, though in my opinion putting false information on an application form, and having the landlord go to the trouble and expense of withdrawing the property from the market for a period, and doing the various checks, amounts to the same thing.
    However, a landlord / agent is only entitled to withhold his reasonable losses – so any excess over an above justifiable losses should be returned.
    In any event a holding deposit should no more then one week’s rent.

  5. I am interested in a property and the letting agent are asking for a £275 holding fee, £200 for reference checks plus a slightly higher deposit and one months rent. The letting agent advised that the holding fee is none refundable but I have been reading up on it and for tenants it says that the holding fee should be used towards your reference checks or as part of your deposit. Can anyone advise me which is true.

  6. I’ve paid a holding deposit of 1200 GBP (4 week’s rent) in July for a contract planned to begin on 1st of August and have received written confirmation from my landlord about this. I haven’t signed any contract and the landlord informed me at the end of July that the property would only be available beginning the 1st of September. I initially agreed to this later moving date but afterwards found something which was available at an earlier point so I decided to no longer let the initial property (again, no contract signed until this point in time). Could I get my holding deposit back? Landlord says no as I breached our agreement to rent in September – which actually only took place on WhatsApp :). Please advise.

  7. My flatmates and I paid about 3,200£ for holding deposit, with the agreement is that we can move in on 2 Sep. However, we were informed on 29 Aug that the property is damage and in needs of repairment. We have to find other place to stay for almost a month, and even right now the landlord can’t tell the exact date that we can move in. We try to negotiate to get some discount for renting as a compensation. And the landlord hasn’t agreed yet. If the landlord doesn’t agree to compensate us or we think the compensation is too little to be acceptable, and we want to back out. Can we get our money back? And what can we do if the landlord refuses to return our money? Please help.

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