Understanding security deposits and property damage in 2020 for landlords and tenants

Security deposits might not be required by law, but the general view is that taking a deposit from a tenant is a good idea as it gives them an incentive to look after the property. For landlords meanwhile, it’s a financial safety net in case the tenant causes damage to the property or fails to pay their rent.

But although the rationale for security deposits is sound, having to stump up the cash for one is a major added expense that many first-time tenants struggle to afford. Added to this, some unscrupulous landlords have seen the security deposit as belonging to them, which has tarnished the reputation of the entire sector. Yet improving the industry’s reputation was one of many reasons for introducing tenancy deposit protection in the first place.

Recent legislation, however, has resulted in a change that is anticipated to save tenants in England up to £240 million a year in fees (£70 per household). The Tenant Fees Act (introduced in June 2019) caps tenancy deposits at the equivalent of five or six weeks’ rent, depending on whether the annual rent is over or under £50,000, and bans landlords and agents from charging additional unnecessary fees. It has been championed by the government as a major step towards making the rental market fairer.

Many industry insiders have suggested that these changes were a necessary part of the government’s tenancy reformation package to protect tenants from rogue landlords taking advantage of tenants.

But while the changes clearly offer a major benefit to tenants, how do the landlords who have been playing by the rules feel about the act? Has this attempt at rebalancing the relationship between tenants and landlords tipped the scales a little too heavily in favour of tenants? Or will it lead to a fairer and more affordable private rented sector for all? These are all valid questions, but first, let’s explore what the changes mean for landlords and tenants. 

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What do landlords think?

Google Trends data reveals that both landlords and tenants are concerned about security deposits, but for landlords the benefits far outweigh the drawbacks. For one, if a tenant knows their actions will be the deciding factor in whether they receive their full deposit back, they will be more likely to avoid damaging the property and follow the terms of their agreement. 

The landlord who takes a deposit has a sum of money that can be used to settle any damage caused by the tenant’s negligence during the tenancy or for any outstanding rent. Having a deposit is also preferable to using the court services, which is costly and time-consuming, as well as being detrimental to the tenant/landlord relationship.

The average tenancy deposit across the UK increased by two per cent between 2017 and 2018, with the average deposit being around £1,110 in 2018. This is reflected by the growth of the private rented sector and the increase in protected deposits as rents rise, particularly following the tenant fee ban. 

“Following the Tenant Fees Act coming into force in June 2019, rents have continued to rise, which we believed would happen. The fees agents have been banned from charging are still being paid for by tenants, however it’s now through their rent, rather than upfront costs.”

– David Cox, Chief Executive of ARLA Propertymark

While there is evidence to suggest that many landlords do not take more than one months’ rent as a deposit, since rents seem to be rising following the tenant fee ban, then deposits will increase as well. Therefore it remains to be seen if the Tenant Fees Act 2019, makes as much of an impact as some industry critics have led us to believe.

With a small portfolio of buy to lets, Helen, who has been a landlord for more than 15 years, explains why she always takes a deposit from her tenants. 

“I have friends who rent out properties and don’t bother taking a deposit because they want to avoid tenancy deposit schemes. Personally, however, I would always take a deposit as otherwise it can be incredibly awkward, particularly if you get to know the tenants and there is an issue with damage to the property at the end of the tenancy. For things that go beyond reasonable wear and tear (like badly stained carpets or unpaid rent) having a deposit just makes sense.”

Understanding security deposits and property damage in 2020 for landlords and tenants

There are, of course, landlords that are perfectly happy to let a property without taking a deposit. But even if you know the tenants in question this is still a risk. The ideal tenant/landlord relationship is one that is built on a mutual foundation of trust, and tenancy deposit protection underpins this. 

Without taking any payment, which must be protected in a government-backed tenancy deposit scheme such as Hamilton Fraser’s mydeposits, there is no safety net should anything go wrong. 

Suzy Hershman, Head of Dispute Resolution at mydeposits has a great deal of experience in resolving disputes at the end of tenancies. 

“Having dealt with many disputes and delivered training to numerous landlords and agents over the years, it is clear that our free impartial dispute resolution service has provided peace of mind when things become contentious. We have recently introduced a new early resolution process which allows both the landlord and the tenant to settle their differences quickly and move forward amicably.” 

– Suzy Hershman, mydeposits Head of Dispute Resolution 

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How do the changes affect the tenants?

The number of people renting in the UK is on the rise, with rents having increased by an average of 13.9 per cent over the past five years. While many tenants might be renting because they have chosen to live a more flexible lifestyle, others are doing so out of necessity; simply because they can’t save the huge deposit required to buy a property or afford a mortgage. 

As long as all the rent is paid and the property is returned in the same condition as it was when they moved in the security deposit will eventually be returned. However, it is still an initial expense that many might not be able to afford. 

This presents a barrier to renting and can result in a great deal of pressure on tenants to make sure the deposit is returned at the end of their tenancy.

“My parents had moved away and I really didn’t want to leave my life behind to join them, so I decided that renting was my best option.  While I had saved up for a traditional security deposit I soon realised that a deposit alternative would afford me greater financial security in the case of emergencies. This additional financial cushion made me feel much more comfortable and confident in renting my first home alone.”

– Peter, tenant

Peter, a first-time lone tenant who had just moved home after finishing University, found himself in a situation where he was stuck between homes. For him, the answer was a renting using a deposit alternative. Deposit alternatives are an increasingly popular alternative option to traditional cash security deposits that involve tenants paying for what is in effect a guarantee to cover the landlord’s losses resulting from unpaid rent or damage caused during the tenancy.

These schemes are typically a more realistic option for tenants who are looking for cashflow when renting, as they will generally only set them back the price of one week’s rent and are significantly easier to manage, particularly for first timer tenants such as Peter.

However, tenants must be made aware that these alternatives are not insurance policies and they will still be liable for covering the cost of damages and rent.

What deposit alternative schemes really offer, however, is flexibility. It’s another option and one that prospective tenants ultimately didn’t have until recently. It’s all about making the private rented sector available to more people who might otherwise not even have considered it a long term option.

Explaining his stance on deposit replacements, CEO of Hamilton Fraser, Eddie Hooker, says “For me, the reality is simple: the introduction of deposit replacements should be good for all parties. It introduces choice into the market and, if accepted by landlords, provides tenants with a new way to manage their money and personal cash flow.”

“I have been quite public with my concerns about the practices of selling these products but when they are transparent there is no reason why they cannot be part of a combined suite of deposit products that improve the rental experience for landlords, agents and tenants alike. With this in mind, Hamilton Fraser are actively exploring deposit replacements and intend to offer the market the most transparent and fair flavour of deposit replacement in 2020.”

– Eddie Hooker, CEO of Hamilton Fraser

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Wear and tear or malicious damage?

Whether the tenant has paid a traditional tenancy deposit or chosen a deposit alternative product, the overarching principle for any tenant to understand is their responsibility to pay all the rent on time and return the property in the same condition and standard of cleanliness, recorded in the inventory, when the tenancy ends. 

This includes the principle of fair wear and tear which both landlord and tenant must consider when negotiating any settlement costs as a result of the tenant causing damage to the property.

Section 11 of the Landlord and Tenant Act of 1985 states: “Tenants should make good any damage to the property caused by the behaviour or negligence of the tenant, members of his/her household or any other person lawfully visiting or living in the property.”

Wear and tear is general deterioration over time and is not as a result of negligence. This will include things such as old appliances breaking down due to age and use, general scratches, scuffs and marks to walls, and carpet showing signs of wear.

Malicious damage, meanwhile, is generally caused by the tenant, or their guests, and will be, for example, stains on carpets, crayon marks or holes in walls, broken windows and furniture, damaged electrical appliances and other damage which is down to more than general deterioration.

There are, of course, always going to be disputes involving damage that falls somewhere in-between. Mould is a common dispute between landlords and tenants as it can often be caused by poor preservation of the property (unattended water spillages, lack of ventilation, poor use of heating).