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Landlord’s guide to holding deposits

Landlord’s guide to holding deposits

Holding deposits are popular with landlords and letting agents as they help confirm that a prospective tenant is serious about renting a property. Such deposits are legal in England, Wales, and Northern Ireland but are prohibited in Scotland. If you decide to take a holding deposit, it’s crucial to stick to the rules applicable to where the rental property is. If you don’t, you may face problems later and could invalidate some insurances. In this article, we look at holding deposits, how they work, how to calculate them, and how to ensure you stay within the law.

What is a holding deposit?

A holding deposit is a sum of money a prospective tenant pays to a landlord or letting agent to reserve a rental property before the tenancy agreement is signed. It’s a sign of commitment from the tenant and indicates their serious interest in renting the property. Holding deposits are normally refundable and are intended to discourage tenants from making multiple applications for different properties simultaneously.

What is the difference between a tenancy deposit and a holding deposit?

A holding deposit is a payment that is paid before the start of any tenancy. It is simply a payment that demonstrates the prospective tenant is committed to letting a particular property.

On the other hand, a tenancy deposit is paid by a tenant at the outset of a tenancy. This money is intended to cover unforeseen costs during a tenancy, such as damage or rent arrears. There are very strict rules relating to tenancy deposits. These include the maximum amount of deposit a landlord can ask for. Landlords also have to place the deposit in a government-backed tenancy deposit scheme. These schemes exist to ensure tenants’ deposits are fairly handled.

A tenant can request that the holding deposit is used towards their tenancy deposit or first rental payment.

What are the holding deposit rules?

The rules relating to holding deposits in England are outlined in the Tenant Fees Act 2019. Under this legislation, holding deposits are permitted payments as long as they meet certain criteria. These are:

  • The size of the holding deposit. This must not exceed one week’s rent.
  • The number of deposits. A landlord or letting agent can only ask for and hold one deposit per property.
  • Fees. No fees, including referencing fees, can be deducted from a holding deposit.
  • Length of time the deposit is held. Landlords or letting agents can only keep the holding deposit for 15 days. The only exception is when they agree in writing on a different deadline date with the prospective tenant.
  • Deposit repayment times. Whatever the deadline is, when it expires, the deposit must be repaid within seven days.

The rules relating to holding deposits are broadly the same in Wales. Northern Ireland has less strict rules: for example, there are no rules on how much a holding deposit can be. Holding deposits are illegal in Scotland, so landlords or letting agents must not ask for them.

How do you calculate the holding deposit?

The maximum holding deposit allowable in England and Wales is one week’s rent.

You can calculate this sum in one of two ways. In England, the legislation says you should calculate it as follows:

  • Annual rent immediately after the grant, renewal, or continuance of the tenancy ÷ 52 = maximum holding deposit

In Wales, Rent Smart Wales says you should calculate one week’s rent using this formula.

  • Monthly rent ÷ 4.35 = maximum holding deposit

It is extremely important not to round up calculations. If you do, you risk the holding deposit becoming a prohibited payment. In such cases, tenants could legitimately resist a Section 21 eviction application, making it difficult for you to get your property back.

To illustrate, if the monthly rent is £1,500, the annual rent is £18,000. When this is divided by 52, you get a weekly rent of £346.15. If you round this up to £347, the extra 85p makes the holding deposit a prohibited payment. So always round down your calculation to ensure you remain within the rules.

Insurance considerations relating to holding deposits

From an insurance perspective, adhering to the rules relating to holding deposits is essential.

This is particularly the case if you have rent guarantee insurance. For rent guarantee insurance to be valid, you need to reference your tenants (which you will normally do when you have the holding deposit) and fulfil your legal obligations to tenants. For example, if you ask for too high a holding deposit (even by a few pennies), this is a prohibited payment, and you risk invalidating your insurance and seeing any future claim refused.

When should a holding deposit be returned?

The holding deposit should be returned to the prospective tenant:

  • After they have signed a tenancy agreement (some tenants may ask for the money to be put towards their tenancy deposit, which will then be protected in the normal way).
  • If the letting agent or landlord withdraws from the application process within the 15 days or other agreed deadline for agreement.
  • If the landlord or letting agent doesn’t take all reasonable steps to enter the agreement.
  • If the prospective tenant fails credit checks (unless they have provided false or misleading information).

When can a holding deposit be retained?

Landlord and letting agents can retain a holding deposit:

  • If the prospective tenant fails a Right to Rent
  • If the prospective tenant withdraws the application before the agreed deadline.
  • If the tenant has provided false or misleading information in their application (such as falsified evidence of income).
  • If the tenant doesn’t take all reasonable steps to enter into the tenancy agreement.

Does a holding deposit go towards a deposit or the rent if a tenancy agreement is entered into?

Once the tenancy agreement is signed, the landlord or letting agent should return the holding deposit.

However, some tenants may choose to put the money towards a tenancy deposit or use it as a part of a first rent payment. These things can only be done with the tenant’s permission.

Holding deposits are a useful way of discouraging prospective tenants from applying for multiple properties at the same time. However, if you decide to take a holding deposit, it’s vital to stick to the rules. If you don’t, you risk the deposit becoming a prohibited payment. If you end up in this situation, you may not only face difficulties if you need to evict a tenant, but you could invalidate your rent guarantee insurance. It’s all too easy to miscalculate holding deposits, but getting them right is important – charging even a few pence extra by mistake can lead to expensive consequences.

To learn more about our tailored insurance products for landlords, visit our landlord advice hub or contact our team at 01603 216399.