For first-time landlords and tenants, the holding deposit process can often raise a few questions. When is the deposit returned? Why isn’t it classed as a tenant fee? Why do I need a holding deposit in the first place?
In this article, we’ll cover the ins-and-outs, explaining what exactly a holding deposit is, why it’s so important and what kind of situation can lead to a deposit being retained.
- What is a holding deposit?
- What is the difference between a holding fee and a tenancy deposit?
- When is a holding deposit taken?
- Is a holding deposit legal in Wales and Scotland?
- Holding deposits and reference checks
- Why do we ask for a deposit and when is it retained?
- When does the tenant get their holding deposit back?
- How are holding deposit disputes solved?
- Is a holding deposit a tenant fee?
What is a holding deposit?
A holding deposit or “holding fee” is a financial sum that a potential tenant will pay as part of their application to rent a property. The deposit secures the property for that tenant, payable to the landlord or their letting agent and can legally be no more than one week’s rent.
What is the difference between a holding deposit and a tenancy deposit?
A holding deposit is different to a regular tenancy deposit as it is payable before the person becomes a tenant and before any agreement is signed.
A normal tenancy deposit is paid just before a tenant moves in and – England – can legally be no more than 5 weeks’ rent for properties with an annual rent under £50,000 and 6 weeks’ rent for annual rents above £50,000.
In Scotland, the amount that can be charged as a deposit cannot be more than two months’ rent. For example, if the rent is £500 a month, the deposit can be no more than £1,000.
In Wales, a security or “tenancy” deposit is any sum of money intended to be held by the landlord or agent as security against any losses incurred through the actions of the tenant. This is typically equivalent to around one months’ rent.
A tenancy deposit must be stored in a government approved deposit protection scheme such as the Deposit Protection Service, MyDeposits or the Tenancy Deposit Scheme (England and Wales). If you are letting in Scotland, you can use the Letting Protection Service, Safe Deposits or MyDeposits Scotland.
If a landlord does not legally store their tenant’s deposit within the first 30 days of receiving it, they could face a fine of up to three times the deposit amount and the inability to issue a Section 21 notice.
Unlike a regular tenancy deposit, a holding deposit is not legally required to be kept under a deposit protection scheme.
When is a holding deposit taken?
A holding deposit is requested once a person has made an application to rent a property.
The landlord will put their chosen tenant forward to us and that person will then receive an online form to fill out. This form asks the potential tenant for a bit more information about themselves, including their annual income, credit history and ability to receive a positive reference from a previous landlord.
We ask the potential tenant for these details at this point to make sure they will pass formal references later on. Reference checks require tenants to provide:
- A previous landlord reference
- A 6-year credit check
- An employment reference
- An annual income of 30 times to monthly rent
This “prescreening” part of the application gives tenants the opportunity to be honest about anything that will affect their ability to pass referencing, such as County Court Judgements or an income that doesn’t meet the requirements. This then gives our team a chance to discuss the tenant’s options with them, provide them with any support they need and negotiate the situation with the landlord.
For example, if the required income for the property was £20,000, but the tenant earned £18,000 – we would advise the tenant to find a guarantor in order to continue to let the property.
Once the initial application has been processed and approved, the tenant would then receive an online request to pay their holding deposit.
The terms and conditions of a holding deposit should be made clear to the tenant. This ensures they have a full understanding of what a holding deposit is for and will minimise any conflicts later on.
Tenant referencing and all legal paperwork are included in our fixed-fee rent management plans (starting from £59 a month). Take a further look here.
Is a holding deposit legal in Wales and Scotland?
A holding deposit of one week’s rent is legally permitted in England and Wales, but not in Scotland. Tenants of Scottish properties can only be asked to pay a tenancy deposit.
Holding fees and reference checks
Once the holding deposit has been paid, the team will then carry out formal tenant references.
If the tenant passes referencing, they can then move on to signing their tenancy agreement and organising a move-in date. If, however, they unfortunately fail – this is where the holding deposit comes into play.
If the potential tenant has failed their reference checks, they may have provided inaccurate information during their initial application. These circumstances are costly and time-consuming for landlords and their letting agents: the tenant may have to review their details and be referenced again, provide a guarantor, pay their rent in advance or simply not proceed with the property.
Why do we ask for a deposit and when is it retained?
In short, the holding deposit reimburses the landlord for any wasted time or money lost caused by the actions of the tenant.
If a potential tenant knowingly provides inaccurate information and consequently fails reference checks, the deposit is likely to be retained. Similarly, if a tenant submits an application, proceeds to referencing but then backs out of the property at short notice, they are unlikely to get their holding deposit back.
If – for whatever reason – the landlord chooses not to proceed, the deposit is returned to the tenant.
We have a duty to protect all tenants that come our way – not just landlords. Our team follow strict security measures and identification processes to verify the legitimacy of all properties and protect tenants from fraud.
When does the tenant get their holding deposit back?
If everything runs smoothly – applications are approved, references are passed, and agreements are signed – the tenant will get their entire holding deposit deducted from their first month’s rent.
How are holding fee disputes solved?
Any disputes surrounding holding deposits are dealt with on a case-by-case basis. As each situation is different, our team will assess the details of the case to make an informed and fair decision.
Some deposits will be distributed between the us and the landlord, depending on the costs incurred and to whom.
Is a holding deposit a tenant fee?
No, it isn’t. A holding deposit is not a fee charged to the tenant. It’s a safety measure put in place to protect the landlord – and us, or whoever their letting agent is – from financial loss.
With the Tenant Fee Ban coming into force in 2019, it’s understandable why many tenants – and landlords – would assume that it is no longer legal for tenants to be asked to put forward a holding deposit. However, as the tenant will get their deposit back, it is not considered a fee and is completely acceptable – and encouraged – under the law.
Got a question we haven’t answered? Leave a comment below and we’ll get in touch!