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In this article we explore commonly asked questions landlords and tenants have about holding deposits.
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Written by
Ben Luxon
PUBLISHED ON
The holding deposit procedure can be confusing, especially for first-time landlords and tenants. Questions like what is a holding deposit? How is it different from a tenancy deposit? When will a holding deposits be refunded? And why it isn't considered a tenant fee?
This article aims to provide comprehensive answers to these questions and more by delving into the intricacies of the holding deposit, highlighting its significance, and outlining scenarios that might result in the retention of the holding deposit.
A holding deposit, also referred to as a "holding fee," is an amount that a tenant submits as part of their rental property application. This deposit serves to reserve the property for the tenant and is paid to the landlord or their rental agent. Legally, the holding deposit cannot exceed the equivalent of one week's rent.
A holding deposit differs from a standard tenancy deposit, as it is paid before an individual becomes a tenant and prior to any formal agreement being signed.
In England, a typical tenancy deposit is paid just prior to a tenant's move-in date and is subject to legal limitations. For properties with an annual rent below £50,000, the tenancy deposit cannot exceed 5 weeks' rent, while for properties with an annual rent above £50,000, it cannot surpass 6 weeks' rent.
In Scotland, the maximum allowable deposit amount is capped at two months' rent. For instance, if the monthly rent amounts to £500, the deposit cannot exceed £1,000.
In Wales, a security or "tenancy" deposit encompasses any sum of money held by the landlord or agent to cover potential losses due to tenant actions. This sum typically equates to approximately one month's rent.
It is obligatory for a tenancy deposit to be placed within a government-approved deposit protection scheme, such as the Deposit Protection Service, MyDeposits or the Tenancy Deposit Scheme (England and Wales). In Scotland, you can use the Letting Protection Service, Safe Deposits or MyDeposits Scotland. Failure to legally secure a tenant's deposit within the initial 30 days of receipt could result in a fine of up to three times the deposit amount and the inability to issue a Section 21 notice.
In contrast to a standard tenancy deposit, a holding deposit is not legally mandated to be held within a deposit protection scheme.
You might also like: What Landlords Need to Know: Deposits and Tenancy Deposit Schemes
A holding deposit is taken from the applicant following the submission of a rental application and upon the landlord's selection of their preferred tenant. The chosen tenant is provided with an online form to complete. This form will seek additional information about the applicant to help the landlord make a final decision, often including the applicants annual income, credit history, and a reference from a prior landlord. A holding deposit taken at this stage will reserve the property for the selected tenant, assuming they pass the tenant referencing process.
These details are requested at this stage to ensure that the applicant will successfully pass formal referencing in the future. The referencing process involves the submission of:
This preliminary screening phase of the application allows applicants to transparently disclose any factors that might influence their ability to pass referencing, such as County Court Judgements or an income falling short of the requirements. And can offer the tenant an opportunity to come to a compromise with the landlord should they fail in one aspect.
For instance, if the property mandates an income of £20,000, but the tenant's earnings amount to £18,000, we would recommend that the tenant secure a guarantor to proceed with the property rental.
In England and Wales, it is legally permissible to request a holding deposit equivalent to one week's rent, whereas in Scotland, this practice is not allowed. Instead, tenants renting properties in Scotland can solely be requested to provide a tenancy deposit.
After the holding deposit has been submitted, a comprehensive tenant reference check is undertaken. Successfully passing these checks allows the tenant to progress to the stage of finalising and signing their tenancy agreement and coordinating a move-in date.
However, in instances where a potential tenant doesn’t pass the reference checks, the tenant may need to reevaluate their provided details, undergo reference checks anew, secure a guarantor, consider advance rent payments, or ultimately choose not to proceed with the property. This incurs expenses and consumes time for both landlords and their letting agents.
To put it succinctly, the holding deposit serves as compensation to the landlord for any incurred losses resulting from the tenant's actions.
If a prospective tenant knowingly provides false information leading to their failure in the reference checks or if an applicant initiates the application and referencing process but then withdraws from the property with short notice, receiving a full refund for the holding deposit becomes less likely.
However, if it's the landlord that decides not to proceed for any reason, the deposit will be returned to the tenant in full.
If all processes proceed without issues – applications are endorsed, references are cleared, and agreements are finalised – the tenant will then either get their holding deposit back in its entirely or have their complete holding deposit subtracted from their first month's rent.
A holding deposit should not be misunderstood as a fee charged to the tenant. Instead, its purpose is to serve as a precautionary measure, aimed at safeguarding the landlord – as well as us or their appointed letting agent – against potential financial setbacks.
Given the implementation of the Tenant Fee Ban in 2019, it's understandable for both tenants and landlords to assume that requesting a holding deposit might no longer align with legal regulations. Nevertheless, because the tenant eventually receives a full deposit refund, it’s not categorised as a fee.
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