Advice on payments taken before the tenancy agreement is signed

This is a warning:

Landlords and letting agents need to be very careful indeed about taking ANY payments from applicants other than the authorised holding deposit before the tenancy agreement is signed and dated.

This warning comes from ARLA Propertymark (ARLA) and is based on the wording of the Tenant Fees Act 2019 which says:

(Schedule 1 (3)(2)) In this Act “holding deposit” means money which is paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2 (treatment of holding deposit).

and

If the amount of the holding deposit exceeds one week’s rent, the amount of the excess is a prohibited payment.

ARLA believe that this means that any payments made before the grant of a tenancy will be deemed to be a holding deposit – and so will be a prohibited payment to the extent that it exceeds one week’s rent.

The stipulation that a holding deposit is only money paid ‘with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2 (treatment of holding deposit)‘ does not entirely let landlords and agents off the hook. As how do you prove an intention?

I discuss the details of this on the Landlord Law Blog here.

The problem

ARLA are concerned that a future legal case could be decided in a way which will put landlords and agents in a position where tenants can call for the refund of payments made and will be able to defend section 21 claims on this basis. They describe it as a ‘potential PPI’ moment for the industry.

ARLA recommend that in order to avoid potential problems it is best that no payments are taken at all other than the proper holding deposit amount. Until such time as the tenancy agreement is signed by both parties and dated.

The Landlord Law view

We think that the ARLA approach has much to recommend it and if you can prove you have only taken the property holding deposit (and dealt with it in accordance with the rules) you will be protected against this problem should it arise.

However, if you take the authorised 5 or 6 weeks rent tenancy deposit and then IMMEDIATELY protect it in a tenancy deposit scheme and serve the prescribed information, our view is that this should be sufficient to evidence an intention to deal with the money other than as a holding deposit.

If you do this though, you should make it very clear in all your correspondence that this money is taken for a tenancy deposit rather than for a holding deposit.

However, the safest course of action is to follow the ARLA advice and take no payments other than the holding deposit.

If any members have any questions on this, please post them in the forum.