Rental Best Practice: Rental Deposits

Some of the best practices that I cover in this article might seem trite, but I have dealt with enough deposit related disputes to know that what might seem like common sense often isn’t that common.

Best practices with respect to rental deposits

2 months deposit should be a minimum requirement
If the tenant is responsible for other amounts (over and above the rent) in terms of the lease, require an additional deposit equivalent to 2 months average expenses
Ensure that the approval of a rental application is always subject to the payment of the deposit
Require the deposit to be paid in full upfront
The lease agreement should only be signed after the full deposit has been received.
Do not entertain any requests for payment plans for deposits
Invest the deposit with a financial institution as required under the Rental Housing Act (RHA)
Do not release any portion of the deposit during the course of the lease – even with the permission of both the landlord and tenant
Do not agree to any timeframe for the payment of the deposit before you have concluded the outgoing inspection and it’s been signed off by both parties
Do not deduct the cost of repairs to the property from the deposit unless you have both an ingoing and outgoing inspection as proof of damages – you can still recover the cost of any outstanding amounts the tenant is liable for at the end of the lease
Only deduct the actual cost of repairs carried out at the property from the deposit – not estimated costs or compensation in lieu of repairs
Never agree to release the deposit under pressure or in a hurry
Ensure you adhere to the timeframes specified in the Rental Housing Act for the release of deposits
Require the landlord to attend the joint outgoing inspection if they want to confirm the state of the property for themselves before the deposit is released

How much deposit should you hold?

There is absolutely no doubt whatsoever in my mind that a rental agent should require a non-negotiable deposit equivalent to at least 2 months’ rent to protect their landlords.

In addition, if there are other amounts that the tenant is liable for in terms of the lease you need to add on an additional amount to cover these expenses as well.

Why am I so adamant about this?

I think there are three considerations here . . .

what is the purpose of the deposit?
what may be deducted from the deposit?
what is your responsibility as a rental professional?

The purpose of the deposit

The deposit is the only security the landlord holds if things go wrong. If there are no problems or damages during the lease, and no amounts outstanding at the end of the lease, the deposit is returned to the tenant in full, with interest.

The only purpose of the deposit is to protect the landlord in the event that they are out of pocket at the end of the lease.

It’s important to highlight here that the landlord is the agent’s client and, as such, the agent is duty bound to act in their best interests.

What the deposit may be used for

In terms of the Rental Housing Act (RHA) the deposit may be applied to cover the following costs at the end of the lease:

payment of all amounts for which the tenant is liable for under the lease
the reasonable cost of repairing damage to the dwelling during the lease period
the cost of replacing lost keys

That’s the extent of it.

So, the deposit is to cover the landlord if there are any problems with respect to property damages, lost keys or any amounts owing at the end of the lease.

Amounts owing at the end of the lease are usually rent and / or utility arrears.

As I explained in a previous video post, if there is a rent payment issue, the tenant would probably be 2 months in arrears by the time you can legally cancel the lease.

In other words, a 2 month deposit would actually only cover rent arrears up to the point of the lease cancellation if there was a rent payment issue. No money would be left out of the deposit to cover damages or outstanding utilities.

That’s why I say, as an absolute, and non-negotiable minimum, you should require a deposit equal to:

2 months rent, plus
2 months average utilities costs

Payment of the deposit

The deposit should be paid upfront in full.

I’ve actually found that a very safe and practical way to implement this, and to avoid any deposit related issues at the start of the lease, is to actually make the approval of any rental application subject to the payment of the full deposit within 1 or 2 business days.

In the letter or email confirming the approval of a rental application I suggest including a statement like the following . . .

“. . . your application to rent the above property has been approved, subject to payment of the move-in costs and both you and the landlord signing the lease . . . “

It’s clear that the approval is conditional on receipt of all of the move in costs, which should then be listed.. Often it’s not actually about the costs, but it’s about communication, and this type of statement clarifies the requirements and leaves no one in any doubt.

I have also found that including a statement to this effect in your application form and in your rental advertisement ensures that everyone knows the ground rules from the start. When included in the application form, and requiring the applicant/s to sign it, there are no surprises – they know right from the time of applying what will be expected of them when they are approved.

My procedure for new leases requires the deposit to be paid in full prior to the lease being drawn up. The tenant is provided with a copy of the terms and conditions of the lease so that they know what the general lease terms are. Also, if they want to make any amendments to these terms this can also be dealt with upfront as part of the application process.

I also strongly advise against entering into any payment plan for the deposit. In my view this is an absolute no-no. Agreeing to a payment plan it’s just another way of actually agreeing to a reduced deposit – even if only for a limited time. In my experience the ‘limited time’ in practice often becomes a lot longer.

My experience has taught me that the tenant’s motivation to secure the property is highest at the start of the lease – in particular before the lease agreement is signed.

Do you really want to have to explain to your landlord at the very start of the lease that the lease is signed and the tenant has moved into the property but you still haven’t received the full deposit? The only recourse in this instance would be to issue the tenant with a notice of breach and to follow the required breach procedure. The problem is that you don’t have any security to cover any losses the landlord may suffer.

Take control at the start of the lease, get 2 months deposit and make sure it’s paid in full, upfront before the lease agreement is signed.

Managing the Deposit

Management of the deposit during the course of the lease is clearly spelt out in the Rental Housing Act:

the deposit must be invested with a financial institution in an interest bearing account
the interest must be at least equivalent to that of a savings account
the interest earned must be paid to the tenant

The only exceptions to this are the exceptions permitted under the Estate Agent Affairs Act, but most agencies simply pay all of the deposit and full interest to the tenant.

It’s not uncommon for an agency to retain a portion of the interest earned to defray expenses or to cover the cost of administering or disbursing the deposit. However, 50% of any retained interest must be paid to the Estate Agents Affairs Board (EAAB).

What is, however, less well known, or maybe less well understood, is that neither the deposit, nor the interest, may be touched during the course of the lease – even if both the landlord and the tenant agree to it.

Marlon Shevelew, the award winning rental property attorney, summed it up for me as follows . . .

A deposit cannot be used during the lease period, in a residential lease, even if the parties agree to it.

Why?

Section 5(3)(d) of the Rental Housing Act specifically states that the tenant’s deposit must be invested in an interest bearing account.

Section 5(4) of the Rental Housing Act specifically states that the standard provisions referred to in Section 5(3) may not be waived by the tenant or the landlord.

So, the deposit must remain invested, even if the parties to the lease agree otherwise.

This includes that reasonably regular request, “Can we pay our last month’s rent out of the deposit?”. In terms of the RHA, the only right answer is, “Unfortunately, no”, or, “Unfortunately the RHA doesn’t allow me to do that.”

Disbursing the Deposit

It’s not uncommon for tenants to want to discuss the release of the deposit prior to the end of the lease. They may need the deposit for their next lease or they may want you to pay their last rent out of the deposit.

Never enter into any discussions – or at least don’t enter into any agreement with respect to the deposit – until the lease has ended and the outgoing inspection concluded. The property may look fine and the tenant may be up to date with all payments, but until you have done a thorough outgoing inspection you simply do not know.

Also, remembering your role here as agent to the landlord – you have no authority whatsoever to enter into any agreements of this type on behalf of the landlord. Only the landlord can enter into such agreements and, in my opinion, you as a rental professional, should be advising them not to based on the reasons above. After all, part of the reason they have contracted you is getting the benefit tof your knowledge and experience to.

To reiterate the above, the first rule is that the deposit may not be touched until the lease has ended.

Remember, you work for the landlord and the deposit is your client’s only security if there are any issues.

The second requirement would be ingoing and outgoing inspection reports that show proof of damages. This is a requirement if the landlord wants to claim damages.

“The lack of an ingoing and/or outgoing inspection does not, however, preclude the landlord from claiming other amounts they are entitled to recover under the RHA”
Marlon Shevelew

The RHA states very clearly that where an outgoing inspection has not been done on a property, the landlord is deemed to have acknowledged that the dwelling is in a good and proper state of repair.

The fact of the matter is that any claim for damages to the property needs to be supported by proof, The only proof that would be indisputable would be copies of the ingoing and outgoing inspection reports, comparison of which show the damages to the property.

Furthermore, the tenant is entitled to request to view receipts of the repairs deducted, which implies that the landlord is only entitled to deduct the cost of actual repairs carried out. So, for example, the landlord wouldn’t be able to deduct the cost of repairs based on a quote, or monetary compensation for damages where the repairs have not actually been carried out.

Another common reality in practice is that the agent does the outgoing inspection with the tenant and the inspection report is signed and finalised. Then, often a few days later, the landlord requests to inspect the property and points out other damages that they want repaired at the cost of the tenant.

In my opinion the entire concept of a joint outgoing inspection of the property, as required in terms of the RHA, is actually intended to avoid this kind of situation. The intention is that there is a single opportunity for both parties to inspect the dwelling together, after which the inspection report is finalised and any claims for the repair of damage is limited to damage noted in the outgoing inspection report.

The lesson here is that if the landlord wants to have any say or input into the final inspection report they need to attend the joint outgoing inspection and make sure their input is included in the report. That’s the only fail-safe way to ensure they will be entitled to the cost of any repairs.

Lastly, the above also highlights how important it is to carry out a thorough final inspection of the property because the landlord’s claim for damages is totally reliant on this report. For example, test that things like windows are working by opening and closing them, open the taps to sure they’re all working, check the shower, open and close all cupboard doors, etc.