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Holding deposits and the process surrounding them can raise plenty of questions, particularly for first-time landlords. Some of the most common queries include whether they’re needed, how much they should cost, when they need returning and how they differ from tenancy deposits. In this article, we’ve answered all of these questions to fully explain how a holding deposit works.
A holding deposit is a payment made to a landlord or letting agent to reserve a property. The idea behind holding deposits is to make sure that renters are serious about taking on the tenancy. Not all landlords ask for a holding deposit as they can sometimes put tenants off.
As a landlord, you don’t have to protect a holding deposit that you’ve received from future tenants. Once a tenancy has been agreed, this holding deposit can then either be refunded or taken off of the first month’s rent (more on this later).
This holding deposit needs to be fully returned if you take your property off the market or decide to rent it to someone else. However, a tenant changing their mind at the last minute can allow you to keep some or all of the deposit.
A written holding deposit agreement is crucial, as is you and your tenant(s) signing it.
The Tenant Fees Act completely breaks down specific rules so there’s no confusion on your end.
A holding deposit differs from a regular tenancy deposit as it’s required before the person becomes a tenant and before any other agreements have been signed. Standard tenancy deposits are usually paid just before a tenant moves in and can’t be more than 5 weeks rent for properties with an annual rent under £50,000 / 6 weeks rent for properties with an annual rent over £50,000.
Landlords aren’t required to keep holding deposits in a deposit protection scheme, whereas tenancy deposits do need to be protected. Some of the most common government-approved deposit protection schemes include the Deposit Protection Service and MyDeposits.
Once somebody has made an application to rent a property, a holding deposit can be taken at any time before the tenancy has been agreed and documents have been signed. Once a deposit has been received, you need to take the property off the market (as you can’t take multiple holding deposits for the same property).
When taking the holding deposit, you should make your prospective tenants aware of why you’re taking the fee. You should also show them a draft tenancy agreement, verify their identity and run some very basic checks to figure out if they’re capable of paying rent. Additionally, you’ll need to tell the tenants what checks could count against them and the circumstances where they might not get a full holding deposit back.
Tenancy deposit protection laws mean that holding deposits are capped at one week’s rent for the property in question.
You can use this sum to work out a week’s rent:
Monthly rent x 12 ÷ 52 = Maximum holding deposit
Once the holding deposit has been paid, you (or your letting agent) can then carry out checks and look over tenant references. If the tenant passes referencing, the next step is to sign the tenancy agreement and organise a move-in date.
Some of the things landlords and letting agents ask potential tenants to provide during these checks include:
If the tenant fails at this stage and isn’t approved for whatever reason, then the holding fee can come into play. If the prospective tenant fails their reference checks by knowingly providing inaccurate information then you might be entitled to withhold some of the holding deposit (especially if checking has been a costly and time-consuming process).
The tenant may need to review their details, provide other references, provide a guarantor, pay their rent in advance or simply not go ahead with renting the property. The exact terms will have been agreed upon before the holding deposit is paid.
The purpose of a holding deposit is to reimburse landlords for any wasted time or money as a result of actions by a prospective tenant. For example, if a potential tenant knowingly provides inaccurate information and fails reference checks as a result, then the deposit will probably be kept by the landlord. Tenants are also unlikely to get their deposit back when withdrawing from a property agreement at the last minute.
If the decision to not go ahead with the tenancy is down to the landlord then the deposit needs to be returned.
As of June 2019, a holding deposit can’t be more than one week’s rent.
Use this sum to work out a week’s rent:
Monthly rent x 12 ÷ 52 = Maximum holding deposit
Before this, many tenants found they were paying well over £500 for a holding deposit. Landlords and letting agents have to refund tenants if they’ve paid any money over this one week maximum.
You can only keep your tenant’s holding deposit in the following circumstances:
In these situations, you need to write to the prospective tenant within seven days, explaining why you’re keeping the holding deposit. If this isn’t done, then it needs to be fully returned.
If the rental doesn’t go ahead for whatever reason, then it depends on who the cause lies with as to whether the holding deposit will need returning or not.
If a tenant decides to pull out of a tenancy agreement before contracts have been signed then the landlord/letting agent is usually entitled to retain some or all of the deposit. This depends on the terms agreed on in the holding deposit.
If a landlord or letting agent changes their mind about renting to a tenant following checks then the holding deposit needs to be fully returned. One thing landlords aren’t allowed to do is take multiple holding deposits for the same property.
Disputes surrounding holding deposits tend to be dealt with on a case-by-case basis.
If any holding deposit related disputes occur, then tenants can complain through several different channels, including trading standards and the Citizens Advice consumer helpline. Trading standards can help tenants apply for a tribunal to get money back if it hasn’t been returned.
Once a tenant is ready to move in, all you need to do is either directly refund the holding deposit or agree to deduct it from the first month’s rent. If you choose to refund the deposit then this needs to be done within seven days of the tenancy start date.
Once you and your tenant(s) have agreed on how much money they’ll be getting back, this deposit must then be returned within ten days (or within seven days of the tenancy start date).
A holding deposit isn’t classed as a tenant fee. This is because it isn’t charged to the tenant and should always be returned. The job of a holding deposit is to protect landlords and their letting agents from financial loss.
The Tenant Fee Ban means that although tenants can still be asked to put forward a holding deposit, this legally needs to be returned when the tenancy has been agreed.
Resooma is on a mission to add trust and transparency to the lettings market and can help agents and landlords get more qualified leads and better tenants. Request a callback to find out more about listing with Resooma.
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