At the moment in the land of lettings, holding deposits are a hot topic! There are two schools of thought the first that holding deposits are a reservation type fee to safeguard landlords against void periods should tenants pull out at the last minute. The second that a holding deposit is a deposit and therefore must be protected by the landlord within an approved tenancy deposit protection scheme.
There appears to be no right or wrong answer. A recent court case in Brighton highlights this issue; a judge ruled that taking a rental payment in advance to secure a property constituted the landlord accepting a deposit which should have been protected. It is a vital point that a tenancy deposit must be protected within a TDPS and the relevant prescribed information provided to the tenant. If this process is not followed the landlord will be unable to gain possession of the property via Section 21 notice. Therefore if, as the judge in this case ruled, a holding deposit is considered the same as a standard deposit it must be protected in the same way. This decision was later reversed by another judge who was of the opinion that an advance rental payment was not a deposit; the ruling went in favour of the landlord as a result of the appeal against the first decision.
Commenting on this case the Residential Landlords Association stated that they were not surprised by the outcome, the RLA take the view point that a deposit in need of protection is money held against the tenants tenancy obligations for the landlords security; Rental payments made in advance are not part of the deposit they are purely advance rental payments and therefore are not in need of protection. Deposit Guard run by the Tenancy Deposit Scheme often referred to as the TDS agrees with this stance; hopefully an upcoming decision from a court of appeal case will soon make this grey area of lettings crystal clear to all landlords and estate agents. With this confusing situation in mind we are seeing a growing number of landlords who are put off charging a holding deposit for fear of potential future repercussions. The unique feature of a holding deposit is that they are non refundable should the prospective tenant change their mind and choose another rental property. The whole point of taking a holding deposit is that the landlord is protected against a costly void period should the tenant pull out at the last minute, or offer on various properties before making a final decision as to which one they want. If as a landlord you do wish to take a holding deposit it is vital that you make it clear to the tenant making the payment that any monies taken will not be refunded if they later choose not to rent the property. Ensure the agreement you use for the holding deposit is very clearly written and explained to the tenant in full verbally before it is signed to help avoid potential issues later down the line.
Written by Sara Borton, Urban Sales and Lettings