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Deposits and rent arrears – a guide to best practice

With many tenants struggling to pay their rent at the moment, some tenants, agents and landlords may be wondering whether the deposit can be used to cover rent arrears. Here, we take a closer look at this question, identifying some of the scenarios which landlords, agents and tenants are likely to be facing currently, and providing guidance on whether the deposit can, or should, be used to cover rent arrears.

What can the deposit be used for?

By law, the deposit belongs to the tenant, no matter where it is being protected, and they are entitled to a full refund, UNLESS the landlord can show, with evidence, that they have a claim. This would be because the tenant has broken the terms of the tenancy agreement in some way, for example, by not paying all their rent.

The circumstances in which all or part of the deposit may be retained by the landlord broadly include:

  • – Outstanding rent
  • – General maintenance, which the tenant was responsible for
  • – Cleaning, if the property has not been returned cleaned to the same standard as when the tenants moved in
  • – Repairs required to the property, as a result of the actions or omissions of the tenant, and which are in excess of what is normal deterioration over the length of the tenancy

Can the deposit be used to pay rent arrears?

The short answer to this question is yes, it can.

Not paying rent is clearly an example of the contract being broken and the landlord losing money which the tenant should have been paying. However, as a rule, it is not best practice to use the deposit to pay rent arrears, before the tenancy ends. If something goes wrong before the tenant moves out, and the deposit has already been used to pay rent arrears, the tenant potentially faces the possibility of court action and the landlord is left unprotected – especially in England, now that the Tenant Fees Act restricts deposits to a max of five weeks’ rent

Shelter advises tenants that landlords should only keep money from their deposit if the tenant has caused them financial loss.  So, for example, money should only be deducted from the deposit if the tenant broke the terms of their tenancy agreement, for example by smoking in the property, AND it caused damage which resulted in a financial loss to the landlord.

Can the deposit be used to pay the last month’s rent?

Many tenancy agreements include a clause which makes it clear to the tenant that this is not an option and they will have to pay their last month’s rent. However, if the landlord and tenant both agree, then this is a possibility.

A landlord has to take a view on their tenant and may decide that a reliable tenant who has paid all their rent on time, is up to date, and has looked after the property well can use the deposit to pay their final month’s rent.

However, once the deposit has been used to pay rent, if there is any damage to the property, even from just moving out, there will be little or nothing left to pay for any work that needs doing.

Best practice, to safeguard both the tenant and the landlord, is to wait until the end of the tenancy to deal with the deposit.

Where a tenancy is likely to be renewed to roll into a statutory periodic tenancy, the deposit should remain intact and protected.

Can I use the deposit at the end of the tenancy, to cover any discounted rent which was applied during a tenancy?

When a tenant is unable to pay the rent, for example due to the impact of coronavirus, landlords are sometimes willing to accept a reduced rent for a period of time. We would always encourage landlords to work together with their tenants to come to an agreement over any outstanding rent and the payment of future rent, for example by agreeing a rent repayment plan. With such agreements, it is important to be clear about whether the arrangement is permanent or for a specified period of time, and whether the amount that the rent has been reduced by will simply increase the rent owing at the end of the tenancy.  

If the discount is a temporary deferral of part of the rent, for example if the tenant has been on a reduced income due to furlough, then it is possible that the balance of unpaid rent could be deducted from the deposit at the end of the tenancy. If, however, the discount is a permanent one, or is in place for a specified period of time, then the landlord has to accept that the rent reduction will not create an outstanding balance.

This scenario illustrates how important it is to keep clear written evidence of agreements, so that it can be referred to, down the line, in the event of a dispute.

If the rent has been reduced permanently, does some of the deposit need to be refunded and if so, could this be used towards paying the rent?

Sometimes a landlord may agree to reduce the rent permanently. For example, if the tenant’s income is reduced due to redundancy and they can no longer afford to live in the property; or if rents decline in an area. In these scenarios, if the tenant is a good, reliable tenant, a permanent rent reduction may actually be a more sensible long term, sustainable option once the cost of reletting and finding a replacement tenant have been taken into account.

Where the rent has been reduced permanently, landlords should consider whether the deposit may need to be partially refunded. The tenant fee ban in England introduced a deposit cap, usually equivalent to five weeks’ rent from the start or renewal of a tenancy. In most cases, where the tenancy is ongoing, a rent reduction will not affect this amount, but if the current tenancy is renewed and the new contract is for the reduced rent amount, a portion will need to be returned to bring the deposit in line with the deposit cap (note that this only applies to England, not Wales). The guidance suggests that the ‘excess’ deposit does not have to be refunded, so this would help landlords when the tenancy ends.

Alternatives to using the deposit to cover rent arrears

There will of course be occasions where the landlord and tenant do agree to using the deposit to cover rent arrears when the tenancy ends, and this works well, but given the potential pitfalls, it’s worth looking at alternatives to using the deposit to cover rent arrears.

Due to the coronavirus pandemic, mydeposits and other organisations from across the housing sector teamed up with the NRLA to support landlords and tenants facing rent arrears as a consequence of COVID-19, offering practical ways in which they can work together to address arrears and sustain tenancies through and beyond the current crisis.

Another option, which has gained considerable momentum recently, is mediation. The Property Redress Scheme, also part of the Hamilton Fraser family, recently fast tracked the planned launch of its mediation service, in response to increased demand following COVID-19. The Property Redress Scheme mediation service is designed for landlords (or their agent) and a tenant to resolve tenancy related issues, including those relating to rent repayments, without the need to go to court.

The pitfalls of using the deposit to cover rent arrears

Since the deposit is usually equal to little more than one month’s rent, it may seem like a good idea to use it to pay the rent, particularly at the end of a tenancy. However, as already mentioned, even at the end of a successful tenancy, things can go wrong, and the landlord then has little or no deposit left for putting these things right.

This leaves landlords, who have no deposit left, at a disadvantage and unable to access mydeposits alternative dispute resolution service, as an adjudicator would not have any deposit left to distribute. Landlords are then left with two options; namely taking the tenant to court or absorbing the costs themselves.

Although using the deposit to pay rent arrears before the tenancy ends can be a tempting and efficient method of settling the outstanding debt in a strong and trusting landlord tenant relationship, all parties should be aware that this may cause issues further down the line.

When it comes to rent arrears, it’s vital to raise any concerns early, keep communicating rather than ignore the situation and to use all available resources, such as the ones we have referred to, to reach a mutually agreeable solution.

Final tip – make sure any agreements are recorded in writing!

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