Holding deposit.

Landlord best practice for taking and dealing with tenant's holding deposits.

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Disputes can arise when a tenant believes their landlord or letting agent is retaining their holding deposit unfairly or that they have been misled about the terms and conditions associated with their holding deposit.

This article is designed for landlords and tenants to help explain when holding deposits may be taken, the process that should be carried out, what information should be provided to the tenant and the fees the agent must justify if they are making a deduction from the holding deposit.

The information in this article has been summarised from the Competitions and Markets Authority Guidance for Lettings Professionals on Consumer Protection law. If you would like to read this guide in full, you can do so by clicking the link at the bottom of the page.

What is a holding deposit?

The purpose of a holding deposit is for the prospective tenant to show the agent or landlord) that they are genuine about their intention to proceed with the tenancy application. It is also security to protect the agent or landlord from any loss if the prospective tenant pulls out of the tenancy before it begins.

Holding deposits are widely used in the industry. Generally the Tenant will sign some form of agreement confirming that the holding deposit will not be refunded if the tenant withdraws from the process and that they should be aware that they should not pay the holding deposit unless they are certain they want to rent that particular property.

Once the landlord or agent has received a holding deposit alongside other documentation to secure the tenancy, the property will normally be placed on hold and all future viewings will be cancelled until further references have been completed.

Be clear on costs to be taken from the holding deposit!

The agent must provide potential tenants with clear information about why they are being asked to pay a holding deposit, the sum that is required and the circumstances in which it will or will not be refunded.

All terms regarding the holding deposit should be in plain, intelligible language and set out clearly so that the tenant can understand their nature and effect.

All advertising of a property should include any pre-tenancy payment such as a holding deposit. This information should be highlighted and agreed to by the tenant before any viewing is arranged. All fees should be advertised as inclusive of VAT where applicable.

Material information that the tenant should be given before paying a holding deposit is likely to include:

  • The circumstances in which the holding deposit (or any part of it) will or will not be refunded.
  • The details and sums of any costs and disbursements to be taken out of the holding deposit (e.g for referencing checks or drafting the tenancy agreement) and the approximate dates or stages in the process when these will be incurred.
  • Whether the holding deposit, or any part of it, is to be used as payment towards future rental costs or the security deposit in the event that the tenancy agreement goes ahead.
  • Whether or not payment of the holding deposit means that the property will be taken off the market.

Unfair retention of holding deposits

The holding deposit can be used to cover the costs involved in referencing the tenant/guarantor or in setting up the tenancy documentation. The holding deposit can also be used to cover an agent or landlord's reasonable costs incurred if the tenant decides to pull out of the tenancy after it has been agreed but before it begins.

However terms that allow a landlord or agent to simply keep a holding deposit without a clear justification are likely to be considered unfair. An inherently unfair
term is not binding on the tenant and cannot be enforced.

Describing a holding deposit as non-refundable in any circumstance is likely to be considered an unfair contractual term which court or an ombudsman will not uphold.
This is because there are many circumstances in which a holding deposit should be returned.

Such situations may include (but are not limited to):

  • The tenant pulls out of the tenancy before the relevant costs covered by the holding deposit have actually been incurred by the landlord or agent.
  • The landlord or agent has not yet taken the property off the market so neither party have suffered any loss by the property being 'held'.
  • The landlord decides not to let the property to the prospective tenant because the landlord decides the pre-tenancy checks are unsatisfactory, even though the prospective tenant has been truthful and not misled the landlord or letting agent.
  • Before carrying out the pre-tenancy check, the agent failed to explain clearly the criteria that needed to be met in order to be suitable to rent the property and given the prospective tenant the option not to proceed on that basis.
  • Any loss suffered is less than the amount of the holding deposit - in which case the amount left over should be refunded.
  • The property is not ready on the date the Tenant was told it would be, and the tenant therefore needs to pull out to rent somewhere else.
  • The property does not conform to its description, or its condition does not meet required housing standards when the Tenant is due to move in.

If the landlord or agent is intending to make deductions or withhold the deposit in full for any reason then they will have to set out and justify the losses suffered.

Do not pressure tenants!

The landlord or agent must not place unnecessary pressure on the prospective tenant to pay a holding deposit or any other pre-tenancy payment.

It is a banned practice to falsely state that any property will only be available for a very limited time in order to elicit an immediate decision and deprive tenants of sufficient time to make an informed choice. This includes misleading a prospective tenant into thinking they have to decide (and pay a holding deposit) quickly, or into thinking the property is about to be rented by someone else, when this is not in fact the case. Similarly, agents should not insist a prospective tenant pay a holding deposit before they have been given the opportunity to inspect the property or study the tenancy agreement in detail.

Multiple prospective tenants

It may be a misleading action to take holding deposits from more than one prospective tenant for the same property whilst giving each of them the impression that their deposit has secured the property. Where pre-tenancy checks are carried out on several tenants and the landlord selects one because he has a higher income level, any term that prevents the unsuccessful applicants from getting their holding deposit back in full are likely to be unfair. Both landlord/agent and prospective tenant should check that the tenant meets the basic requirement for income criteria and creditworthiness before agreeing to any pre-tenancy payment. The landlord or agent should not take a holding deposit when they are aware the potential tenant is not a suitable candidate.

Do holding deposits need to be protected?

No - a holding deposit is something separate from a security deposit (the deposit held throughout the duration of the tenancy). It does not need to be protected or registered under an authorised tenancy deposit scheme. However, if the tenancy proceeds, some landlords or agents choose to use part or all of the tenant's deposit towards the remaining balance of the security deposit. This is an accepted practice but can lead to complications regarding the time of the deposit protection.

A security deposit must legally be protected or registered with an authorised tenancy deposit scheme within 30 days of it being taken from the Tenant. If a holding deposit was taken far in advance of the tenancy commencing, the agent or landlord runs the risk of being outside these timescales if he wishes to protect this money as part of the full security deposit.

To avoid this situation, the holding deposit can be returned to the tenant and a new amount taken for the security deposit. Alternatively, if agreed to in writing, the tenant may use the holding deposit to contribute to the first month's rent.
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