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Tenancy Deposits

Published 12th Mar 2007

Wondering if you can: Charge two months rent in advance? Use a guarantor who is a home owner? Use professional referencing?

It’s still business as usual until April 6th - and we know that isn’t far off. But joining one of the announced scheme isn’t yet a requirement if you are going to take deposits. Any deposits received before then remain under your control as landlord.

The RLA legal team is working through a number of apparent problems. “Frankly we expected to be able to give clear advice before now” says RLA lawyer Richard Jones who is taking counsel’s opinion on key aspects of the regulations, as well as having discussions with CLG – the government department for Communities and Local Government responsible for introducing the scheme.

Meanwhile ingenious landlords are looking at how remain in control when negotiating with tenants.
It is being suggested that you can protect your property without taking a deposit in the following ways:-

• Charge two months rent in advance – the RLA has received advice that this should be effective so long as your tenancy agreement is properly drawn up to make this clear. Clear dates and amounts payable are required. The agreement must state that payments are made in respect of rent and not by way of security for rent.

• Use a guarantor who is a home owner and would provide assurance that rent/damage will be paid for before the end of the tenancy – taking a guarantee is outside the tenancy deposit scheme. You are well advised, however, to satisfy yourself as to the financial status/ability to pay of the guarantor. You should also check with the guarantor’s identity. You need to make sure that the person who actually signs the guarantee is in fact the guarantor. This could be done by meeting the guarantor, ensuring the guarantor provides you with a proof of identity, and arranging for a third party to witness the guarantee (you should not witness the guarantee yourself because it is in your favour). You need to use a properly drawn up Deed of Guarantee. The guarantor does not need to be a home owner but the advantage of a guarantor who is a home owner is that you may be able to obtain a charge on his house to enforce a court judgment in the event of you having to sue the guarantor to enforce payment. Guarantees are often used in the case of students where a parent is asked to guarantee the tenancy.

• Use professional referencing and rent guarantee insurance – references should be an indication of the tenancy ability but is not unknown for a tenant with a glowing reference to default. Rent Insurance is an option but someone has to pay the premium. The insurance company will only be able to accept suitable tenants.

Other ways which have been suggested are:-
Protecting your property without a tenancy deposit
• Charge rent and offer cash back to the tenant if the property is left in a good condition with the rent paid in full – RLA legal advice is that this arrangement falls foul of the tenancy deposit scheme. The cash back element would have to be paid into the custodial scheme or protected under the statutory insurance deposit scheme.

• Take a bankers draft/cheque and only cash it if necessary at the end of the tenancy – the bank draft or cheque might end up being out of date. RLA legal advice is that this would also be caught by the tenancy deposit scheme. A cheque/draft would be security in this situation. It would have to be paid into the custodial scheme or the landlord/agent receiving it would have to be within on of statutory insurance tenancy deposit schemes.

! Warning !
Landlords who try to avoid complying with the tenancy deposit scheme run the risk of penalties.

1. The landlord/agent could be the subject of a court order and if a court order is made there is an automatic penalty on three times the amount of the deposit.

2. The landlord will not be able to issue a valid Section 21 Notice until the deposit requirements have been complied with. If challenged in assured short hold possession proceedings the court would dismiss the proceedings unless the landlord could show that the tenancy deposit scheme requirements have been complied with by him.
If you subscribe to a Code of Conduct then most Codes of Conduct provide that deposits much not be taken in advance of the tenancy agreement being signed up. You are reminded to check the requirements regarding deposits if you are a member of a code and you should of course comply with these.

Source: ' Residential Landlords Association '

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