When a prospective tenant views and makes an acceptable offer to rent a property you may choose to take a holding deposit to reserve or hold the property for the tenant. At this time, you would take the property off the market while you carry out all necessary checks including references, credit and right to rent checks.
Holding deposits can promote the commitment of both parties. For tenants, it shows they are serious about taking the property and haven’t put offers on other properties at the same time. For landlords, holding deposits are a way of accepting that the prospective tenant is committed to rent their property and to provide reassurance that the tenant is serious about renting the property.
Tenant checks, more often than not, cost money which may be recoverable from the holding deposit in certain situations, if the let does not proceed. For example, where referencing checks highlights reasons why you are unable to then proceed with the transaction. Holding deposits do not need to be protected in a government authorised tenancy deposit protection scheme as they are not held for the length of the tenancy.
When can you take the holding deposit?
If you are renting a property in England, you will need to provide the prospective tenant with clear information as to why you are taking the holding deposit, a draft tenancy agreement and make sure that you have carried out the most basic checks. This may include checking the tenant’s ability to pay the rent for the length of the agreement and proof of identity. You should also make the tenant aware what checks may count against them, for example, providing misleading or false information. More detailed information on holding deposits and what constitutes ‘clear information’ is in the Government Guidance for landlords and agents pages 33 – 44.
While the law in Wales is essentially the same, Rent Smart Wales has produced their own guide for the Welsh market here. It is also important you explain to the tenant that they may lose some or all of their holding deposit if they do not proceed with the transaction.
A written holding deposit agreement is crucial. Both you and the tenant(s) should sign it.
Is there a limit on the amount of a holding deposit?
The law caps holdings deposits at the equivalent of one week’s rent for the whole property even where there are a number of prospective tenants. This can be calculated by multiplying the monthly rent by 12 to get to the annual rent and then divide by 52 weeks.
What happens to the holding deposit when the tenant moves in?
Once the tenant is ready to move in, you can simply refund the holding deposit or agree to deduct it from the first month’s rent. If the holding deposit is being refunded, it must be done within seven calendar days of the tenancy start date.
Other things to consider
Holding deposit agreements should never refer to holding deposits being “non-refundable”. This is an unfair term, as clearly defined in Part 2 Consumers Rights Act 2015, and cannot be relied on.
You should never take multiple holding deposits for the same property or waste a tenant’s time if you have no intention of proceeding with the tenancy agreement.
You should be aware of the circumstances when you are entitled to keep all or part of the holding deposit and those which mean it must be refunded in full. A tenant may change their mind and withdraw from the proposed let which allows you to retain provable and permitted administrative costs that you have incurred. The balance should be returned to the tenant immediately. If a landlord chooses to withdraw or takes too long to enter into a binding tenancy agreement which goes beyond the ‘deadline for agreement’ date, the tenant is entitled to a full refund.
If you take a holding deposit and then do not take the property off the market or decide to rent it to someone else following acceptable checks, the holding deposit should be returned to the prospective tenant in full.
In any situation, where you retain all, or part, of a holding deposit, you must write to the tenant within seven days explaining the reasons. This maintains full transparency. If the tenant does not receive an explanation, they will be entitled to receive their holding deposit back in full.
Complaints about holding deposits are very common, with agents and landlords not always understanding the Tenant Fees Act rules, which are quite specific, so to help you get it right, see our more in-depth guide here.