Setting up a new tenancy can be confusing. Rules and laws have probably changed since the last time you let your property — especially with the introduction of the Tenant Fees Act (2019).
The Act completely changed the rules around holding deposits, and you may have some questions.
- What do I do if a tenant places a holding deposit unexpectedly?
- What is a holding deposit’s legal role?
- Do I need to ask for a holding deposit?
Here we answer all these questions and many more.
Holding Deposits: a Quick Overview
So what is a holding deposit? It is a payment made by the tenant to show their serious intent to rent the property. The money is returned to the tenant when the let goes ahead, usually by putting it towards the rent or tenancy deposit.
If the let does not go ahead due to the landlord pulling out (e.g. the landlord decides against letting to this tenant following referencing) then the deposit is returned.
If the let does not go ahead due to the tenant pulling out or misleading the landlord, then the deposit is forfeited to the landlord.
What Is Being “Held?”
The real function of the holding deposit is not to hold the property for the tenant. In reality, it is the tenant that is being “held” for the landlord. The risk of forfeiting the deposit discourages the tenant from pulling out of the let once the landlord has agreed to proceed exclusively with them.
The money itself is paid to OpenRent and held on behalf of the landlord. It is then put towards the first month’s rent when the tenancy goes ahead.
The New Rules for Holding Deposits
The Tenant Fees Act (2019) set out new rules for how holding deposits have to be treated from 1st June 2019.
- Landlords can only ask for up to one week’s rent as a holding deposit.
- Landlords cannot subtract fees (including referencing fees) from the holding deposit.
- Landlords cannot take holding deposits from multiple tenants at once.
- Landlords will only be able to keep the holding deposit for 15 days unless another ‘deadline’ date is agreed in writing.
- After the deadline expires, the holding deposit must be repaid within 7 days.
Once a holding deposit has been placed, the property should be taken offline while referencing is carried out and a contract is agreed.
OpenRent can handle the holding deposit and make sure you comply with all these rules on your behalf. It’s just one part of Rent Now, our complete tenancy creation service.
Landlords who don’t want to use Rent Now can arrange their holding deposit privately and set up the tenancy themselves.
Why Does OpenRent Use Holding Deposits?
We have built holding deposits into our system because they reassure both landlords and tenants about the level of commitment to making a new tenancy.
By placing the deposit, the tenants show that they are committed to the property while also being reassured that the property isn’t being marketed to other tenants. It’s a two-way street that benefits both parties.
Tenants also like that they can pay the deposit to us and not straight to a landlord they may have only met once. This reassures them that their money is being protected.
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How Does a Tenant Place a Holding Deposit?
All listings on OpenRent have an option for tenants to place a holding deposit by clicking the Rent Now button.
By clicking the button, tenants will be able to place a Holding Deposit that is equivalent to one week’s rent.
If you’ve found a potential tenant for your property, you can invite them to place the holding deposit via your OpenRent Dashboard.
Once a holding deposit has been placed on a listing the landlord will be notified by email and SMS.
The introduction of the Tenant Fees Act (2019) in England in June, and its upcoming introduction to Wales in September, means that it’s no longer possible for more than one Holding Deposit to be taken for a single property.
If you want to accept the holding deposit, you can either choose to move straight to drafting the contract or you can run reference checks on tenants first.
What If a Tenant Places a Holding Deposit Before I’ve Asked for One?
This is very rare and we tell tenants not to place a holding deposit before getting your permission.
Don’t be too concerned if you do receive an unexpected holding deposit, however. We will let you know straight away via text and email when a tenant makes a holding deposit offer, so if you weren’t expecting it, you can cancel their Rent Now application in a few clicks.
The marketing of your listing continues until you actually accept the holding deposit offer, and there’s no cost to either party, so there should be no real downside either to you or the over-eager tenant. In any case, this situation is rare and we always recommend that tenants wait until after they have viewed a property and met the landlord to place a holding deposit.
Can I Ask for Several Holding Deposits at Once?
No, the Tenant Fees Act (2019) means that landlords can now only ask for, and accept, one holding deposit at a time.
If you’ve received interest from more than one set of tenants, or if you want to check that your prospective tenants are suitable for your property, you can order referencing before you ask for a holding deposit.
If you do this, your advert will continue to be live throughout the referencing process.
What Happens to the Holding Deposit If Someone Pulls out?
Stopping marketing a property is a risk for landlords in terms of both lost time and other costs. A holding deposit is designed to help mitigate that risk for you.
If the worst does happen, and your tenants pull out before the tenancy is fully set up, the holding deposit is normally forfeited to you as compensation. If OpenRent have taken the holding deposit on your behalf, the two parties can report and confirm the forfeit through their OpenRent account. We will also re-market the property for you at no extra cost.
If your circumstances change and you’re no longer able to continue setting up the tenancy, then the holding deposit is returned to the tenant.
But what if a tenant fails referencing?
The law is clear that a tenant failing referencing isn’t automatically grounds for claiming their holding deposit.
Part of the reason for this is that just because a tenant fails referencing does not mean you cannot let to them, as referencing is largely advisory for the landlord. There are other options that will let you continue setting up the tenancy, such as asking for a guarantor, or more than one month’s rent in advance of the tenancy starting.
Our guide to what to do if a tenant’s reference fails explains these options in more detail.
Before referencing begins, it is also sensible for landlords to check with the tenant that they have a reasonable chance of passing the reference.
If a tenant is shown during referencing to have lied initially and provided false or misleading information so as to misrepresent their circumstances, then the Tenant Fees Act says that the holding deposit does not need to be returned. I.e.the landlord can claim this as forfeit.
This scenario applies only where the tenant provides misleading information which materially affects their suitability to rent the property, or where the fact that they tried to mislead the landlord gives reasonable grounds for refusing to grant them a tenancy.
Can I Ask for a Holding Deposit If I Don’t Want to Use Rent Now?
Yes, even if you choose not to use our Rent Now service we would always recommend that you ask for a Holding Deposit once you’re ready to set up your new tenancy.
It’s important, though, that you are aware of the best practice on how to do this:
Don’t ask for cash
Tenants can feel uncomfortable handing over cash to a person they’ve only just met. Where possible, it’s best to accept bank transfers as this allows tenants to keep a record of the transaction.
Always provide a receipt for the payment and terms on how the money will be treated
This will be invaluable for both you and the tenant if there are any future disagreements. You might want to take a look at OpenRent’s own holding deposit terms as a guide. Your terms will have to be in line with what the Tenant Fees Act (2019) requires.
Being Asked for Identification
Don’t be surprised if a tenant asks for ID before they hand over a Holding Deposit – remember that a Holding Deposit can be a large sum of money for a tenant and it’s understandable that they want a bit of reassurance before they make such a commitment
Holding Deposits shouldn’t be held for more than 15 days
This is a change introduced by the Tenant Fees Act (2019) and is designed to help speed up the process of setting up new tenancies. In the unlikely event that a tenancy does take longer than 15 days, you should get written agreement from the tenant to extend the standard 15-day deadline.