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Tenancy Deposits- Confusion and Clarity


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Tenancy Deposits- Confusion and Clarity

There has been a sudden burst of confused information, partly fuelled by commentators, about tenancy deposits. A lot of this is in response to the concern over the Localism Act and the changes

it introduces to the tenancy deposit protection regime. The current area of worry though is about holding deposits and rent in advance.

A tenancy deposit is defined in section 212 of the Housing Act 2004 as follows: "tenancy deposit", in relation to a shorthold tenancy, means any money intended to be held (by the

landlord or otherwise) as security for

(a) the performance of any obligations of the tenant, or

(B) the discharge of any liability of his, arising under or in connection with the tenancy.

This definition will not be altered in any way by the Localism Act. The Court of Appeal has actually had cause to consider this issues in the case of UK Housing Alliance (North West) Ltd v Francis

In that case it was held that when considering the definition of a tenancy deposit it is necessary to read the Act as a whole and, when one does so, one sees a pervading reference tomoney "paid" by the tenant to the landlord, "received" by the landlord and "repayable" by the landlord to the tenant.

So what is the issue for a landlord or lettings agent? There are two things that cause concern. The first is the taking of a so-called "holding deposit" or "holding fee" prior to entering into a tenancy which the tenant pays so that the landlord will take the property of the market. Despite the use of the dreaded "D-word" this is not a tenancy deposit within the meaning of the Act. The money that is being taken is not being taken as security for an obligation arising as a part of the tenancy. The money is being taken as "earnest money" to show the tenants real interest in the property and as a compensation for the landlord if a tenancy is not, in fact, entered into. This is different from the signing of a binding tenancy agreement in advance where the tenant has entered into a tenancy and paid a tenancy deposit but is not yet able to move into the property. This second scenario is common in student lettings where tenants will sign tenancy agreements in June and pay their tenancy deposit but will not actually take possession until the start of the new university term in September or October. In this case the deposit has been taken as a part of a tenancy which has been entered into even though occupation has yet to begin. This deposit is required to be registered within 14 days of receipt and the prescribed information given on the same time period. After the introduction of the Localism Act changes in April 2012 that 14 days will alter to 30 days.

The second area of concern relates to rent taken in advance. Again there are two sub-scenarios. The first is where a tenancy expresses the rent as a monthly figure but then says that it is payable 6- monthly in advance. This rent money is not a tenancy deposit. The money has been taken in connection with an assured shorthold tenancy but it is not security for an obligation, it is the obligation itself. In addition, looking at the UK Housing Alliance case it is perfectly clear it is not money paid to the landlord with any intention that it be repaid, the landlord will be keeping the money whatever the tenant does. Therefore, reading the legislation as a whole, this is not a deposit and that 6 months rent money in advance is not required to be protected.

Contrast this with the second scenario where a landlord takes two months rent at the start of the tenancy. Half of this money is intended to be the advance rent for the first month while the second half of the payment is intended to be the rent for the last month of the tenancy. The tenant is then expected to pay monthly rent from the start of the second month onwards. Now, the second half of that initial payment may be a deposit and therefore require protecting. This is because it has been taken in connection with and assured shorthold tenancy and is intended as security for the tenant breaching the obligations of the tenancy by not paying the last month's rent. However, even this scenario may not be a deposit as the money is not intended to be repaid ever, as set out in UK Housing Alliance . The landlord is always intending to retain the money against the last month's rent.

Each case must be considered on its facts and blanket judgements on what is and is not a deposit are hard to make.

However, it is vary hard, in the light of the decision in UK Housing Alliance to suggest that money which is not intended to be returned is a deposit.

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Thanks Grampa, good information again.

I used to take 2 months up front and run the rental account as 2 months in advance. I stopped as I could see a scenario where a claim might be made that the 2nd half was a deposit. Not wishing to be spending time and effort in defence I reverted to 1 month up front, with a deposit.

The later paragraphs use "may" or "may not" as expressions so is still ambiguous, but "money which is not intended to be returned" seems clear enough.

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