A deposit is there to protect landlords from the horrors of property damage, so you’d need to be a trusting sort to blithely offer a tenancy without asking for any security deposit.
Zero deposit or deposit replacement schemes are relatively new. They are designed to make upfront deposits more affordable for tenants.
Read on to find out:
- Why some landlords are replacing traditional deposits with zero-deposits
- How zero-deposits work
- A Landlord Law video on zero-deposits
- The pros and cons of using deposit replacement schemes
- The rules and legality surrounding Zero deposits
- And finally, whether landlords should use them
Why Some Landlords are Replacing Traditional Deposits With Zero-Deposits
There is an administrative burden associated with deposit protection. Landlords must place a tenant’s deposit in a registered protection scheme and then hand it back at the end of the tenancy if there are no issues. The deposit must be protected within 30-days of receipt. Details of the deposit protection scheme used should be handed to the tenant within that 30-day window.
Failure to protect a tenant’s deposit can lead to a fine up to three times the value of the deposit. It also means a landlord can’t rely on a Section 21 notice to evict a tenant.
Prior to The Tenant Fees Act 2019, landlords could charge what they liked as a security deposit, which meant they could charge extra for pets and cleaning. Now, deposits are capped, and landlords can only request up to five weeks deposit if the annual rent is £50,000 or less.
In an area where rents are low, such as the North East, this would amount to around £750, but in London, tenants would have to cough up a staggering £2,400 in addition to a month’s rent in advance.
Even worse, tenants often have to raise enough money for a new deposit if they want to move to a new property, as in most cases, they don’t get their deposit back in time from the former landlord to pass it on to the new landlord.
One month’s rent in advance, as well as six weeks’ worth of rent as a deposit, is a lot of money to find when you’re on a minimum wage zero-hours contract. Not surprisingly, many tenants get into debt just to afford a deposit on a rental property.
It is also dead money that sits in someone else’s account and earns no interest.
What is a Zero Deposit?
Instead of handing over up to six weeks’ rent to a landlord, the tenant pays a non-refundable fee. This is the equivalent of one week’s rent. In a shared property, i.e. a student house, the cost can be split between the group. There are also schemes whereby the tenant pays nothing while the landlord protects their interests with a plan not dissimilar to insurance. It is important to note here that the zero deposit schemes are NOT insurance policies and very few of them are regulated at all.
Zero deposit schemes make renting a property far more affordable for tenants. They can also be beneficial for landlords, as we’ll explore below.
How do Zero Deposits Work?
Zero-deposit schemes all work slightly differently. The key unifying factor of these schemes is that the tenant doesn’t have to find a large sum of money up-front, but that that landlord’s interests are protected in much the same way as a traditional deposit.
In some zero-deposit schemes, the tenant makes a payment. In others, a fee is paid by the landlord or letting agent, so the tenant doesn’t need to pay anything upfront, apart from their rent.
The zero-deposit scheme guarantees to settle landlord claims if there are any damages incurred, up to a maximum figure – typically around six weeks’ rent.
In the event that the landlord needs to claim money they would have traditionally recovered from the deposit, the zero-deposit company pays out to the landlord. The zero-deposit company then seeks to recover the sum from the tenant via a ‘subrogation’ clause in the contract that lets them pursue a third-party for the money (i.e. the tenant).
Another scheme we know of charges tenants a non-refundable fee, which is the equivalent of one week’s rent. This fee is a one-off charge for the duration of the tenancy. If there are no issues, the tenant will be charged a lower fee when they move into a new property. As with the other schemes, when landlords make a claim, the company pays out and then pursues the tenant for the money
Any disputes at the end of a tenancy are resolved via arbitration, in much the same way as deposit protection schemes are run.
A Landlord Law Video on Zero Deposits
Suzy Hershan of My Deposits discusses these zero deposit schemes at the Landlord Law Conference 2019. You can watch the video here or read on for the transcript.
We now have on the market some other products. Hands up in the room who’s heard of the alternative deposit products. Hands up anyone who’s using these alternative deposits. That’s interesting, nobody in the room is using them.
Okay, they are increasing in popularity and I have met one or two people in the room who are actually looking at these possibilities. And I know that, certainly David this morning, actually referred to them under the Tenant Fees Act, so they are being acknowledged by the government as existing.
I think the other thing is that the government are also watching and waiting to see how these work. What David said I just want to reiterate, the tenant must be given the option. If you want to look at this option as an option for your deposits, the tenant must be given the option of taking a traditional deposit and it being protected or the alternative. You can’t just channel them down this route. The government are quite strong on that and they’ve put that into the Tenant Fee Act.
It doesn’t change the evidence on negotiation when you’re negotiating at the end of the tenancy the requirement for evidence is the same.
The Pro’s for these products, which is why the government is sitting back and watching them, is it’s cheaper for tenants at the start of a tenancy. All they have to do is pay the premium for the product itself, it’s usually equivalent to about a week’s deposit. It’s used to give the landlord comfort as well. So he knows his cover will be up to about 6 weeks’ worth of rent. That’s generally how they work. And if there’s no dispute at the end then the policy dies, and the tenancy is finished, and everyone moves on happily.
The cons of this product is what the government is really watching and waiting, is all these products are slightly different, the models are slightly different, so they’re not offering the same thing.
And if there is a dispute at the end of the tenancy the tenant has to find that money on top of the price of the policy they paid at the start of the tenancy, so actually they’re not necessarily going to be any better off than having a traditional deposit protection.
Landlords may, if the tenant doesn’t negotiate at the end of the tenancy, and they have to make a claim against the policy, the landlord may have to pay upfront costs till that policy is actually paid out. So again, they will need the evidence to prove that they can claim on the policy.
The tenant failing to pay where he is entitled to do so, could lead him to having a poor credit rating as well, so it’s not in the tenant’s best interests. But what the government is most interested in is the offerings under all of these policies are different, they’re watching and waiting to see whether the tenants actually complain that the product they have purchased was not properly explained to them. So they’re looking at a possible PPI kind of situation but it remains to be seen where that leads, so it’s a watch and wait.
I know I’m from my deposits I believe in traditional deposits, but I also appreciate the fact that tenants can’t always find that deposit, so is there a product out there that would work or does work. So watch this space.
For more legal tips, interviews, legal landlord news and landlord training videos:
Pros and Cons of Zero-Deposits
As with any scheme, there are pros and cons.
The advantages of a zero deposit scheme
The advantages of a zero-deposit scheme for tenants are obvious. Zero deposits make renting far more affordable by easing cash flow at the start of a tenancy.
But there are also advantages for landlords.
- Implementing a zero-deposit scheme for your properties widens your pool of potential tenants, which is beneficial when market conditions are tough.
- Properties advertised as “no deposit” get more clicks when advertised online.
- Empty properties are filled faster, so fewer void periods.
- Traditional deposits are now capped at five weeks for most landlords, but deposit replacement schemes offer up to six weeks deposit.
- There is no risk to landlords, as they still receive the deposit in full.
- There is less hassle for a landlord with no deposit to protect or return at the end of a tenancy.
- It takes less time to get a tenancy up and running, as the tenant doesn’t need to scrape together a security deposit.
- Compensation in the event of a claim is usually paid out within a matter of days.
The disadvantages of a zero deposit scheme
Naturally, there are a few disadvantages to zero-deposit schemes.
Firstly, a tenant may not want to pay a non-refundable fee, as this is money they can’t claim back at the end of the tenancy. In most tenancies, deposits are returned without any issues, so even though a tenant has to pay a large sum upfront, they know this money is still theirs and it will be returned eventually.
Landlords will have to make a case if they feel the tenant has caused damage or there is any other reason to make a claim. Evidence will be required, and spurious claims are likely to be rejected. Whilst it shouldn’t take long to make a successful claim, landlords may still have to pay for repairs up-front.
From a tenant’s perspective, if a claim is made against them, they then must find the money to settle the claim. So, in that respect, they are no better off than if they had to claw together money for a deposit up-front. And if a tenant can’t pay a claim made against them, this will be ruinous for their credit rating.
Very few zero deposit schemes are regulated, this can represent quite a worry when money and arbitration are involved. So, it’s important to do your due diligence before embracing the zero-deposit.
Some zero-deposit schemes are offered by letting agencies and companies that are relatively new to the market. The landlord’s ability to claim for any damages at the end of the tenancy relies on that company still being around. If a zero-deposit company goes bust before you need to claim you’ll likely be entitled to a tiny fraction of the money you invested and be left with no protection thereafter.
Are Zero Deposits Legal?
Yes, they are, but the scheme must be administered correctly. In addition, the tenant must not be coerced into signing up for a zero-deposit scheme without the full ramifications being explained to them. The Tenant Fees Act covers all things related to deposits, so steer well clear of a hard sell approach. You can find more information about the dangers of miss-selling a zero-deposit scheme here.
Zero Deposit Rules
There are several zero-deposit schemes running in the UK, at least one of which is endorsed by the RLA. Each one is administered in a slightly different way, so it’s important that you are aware of how the scheme you choose to work with operates.
Landlords must explain to tenants exactly how the product they have purchased works. Without accurate information, tenants can’t make an informed decision about whether the scheme is right for them. It must be made clear that if a landlord claims for damages at the end of the tenancy, the tenant is still liable and must foot the bill.
Even if you believe zero deposits are the future, be very careful not to push a tenant into signing up for a zero-deposit scheme. As mentioned above, they must be allowed to decide for themselves. Failure to give the tenant the option will put you in breach of the Tenant Fees Act.
Not all Zero Deposit Schemes are Created Equal
There are many different zero deposit schemes out there, so it’s important for landlords to do their research before they sign up.
Find out what the scheme offers, how much protection it can give you, and which company underwrites the scheme. You need to know that the scheme will last for the duration of the tenancy. You also need to know it will pay out if you have a claim.
Check how the scheme actually works in practice.
- What is the procedure if you do make a claim?
- How easy is it for a tenant to use?
- Is the scheme easy to administer?
- How does arbitration work if there is a dispute?
- Is the company offering the scheme regulated?
It’s essential to give tenants the option of paying a deposit in the traditional manner or using a zero-deposit scheme. Whilst some tenants will welcome the idea of not paying a huge sum up-front, others will prefer to do it the traditional way. Failing to offer a genuine choice will put you in breach of the Tenant Fees Act which carries hefty fines.
Should Landlords use Zero Deposits?
Zero deposit schemes sound great on paper, but they won’t be suitable for all landlords.
Ask yourself what type of tenant you are hoping to attract. Older, more affluent tenants can afford to pay a hefty deposit up-front and would probably prefer to lodge their deposit in a protection scheme, safe in the knowledge that this sum will be returned to them at the end of the tenancy.
Younger tenants, tenants on benefits, students, and those who might struggle to scrape together enough money for a deposit, are more likely to be enthusiastic about zero deposits. For anyone who sees a deposit as a major obstacle to moving into rental accommodation, zero deposits are a godsend.
So, for landlords targeting a diverse demographic or low-income tenants, zero deposits are a great option, but if your target market is older, more affluent renters or families, zero deposit tenancies may not be necessary.
Market research carried out by Your Move suggests zero deposits are attractive to around half of all tenants, and as rents continue to rise, it’s likely that tenants will increasingly look for landlords who can offer zero deposits. However, before you jump on board, investigate the different schemes available. Decide whether a zero-deposit scheme is a good fit for your tenants and see if your preferred scheme is right for you and your tenants.
Do you use a zero-deposit scheme for your tenants? If so, have you had a positive experience? Tell us more below or reach out on social media. We’d be very interested to hear how it works in practice!
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