What Are the Proposed Changes to Deposits? Here’s a Heads Up on What COULD be in Store for Landlords

Talitha Burgess, Managing Director of Clarity Property Management has done her research, so you don’t have to. Briefly, there’s reform on the cards, and we think you need to know about it.

Another month, and another piece of legislation afoot, with some key developments that will directly affect you as a landlord. 

Or so it seems.

Here at Clarity, our aim is to make your life easier, taking away the hassle and the stress that comes with the dotting and crossing of endless I’s and T’s that clog up the day-to-day running of your property portfolio business. To be fair, there’s a lot of information out there, so we’ve taken the key points of everything you need to know right now and summarised them in this handy blog.

The Headlines – Look Out for the Renters’ Reform Bill

Further to a Renters’ Reform Bill released in 2019, the government plans to publish a White Paper in the late autumn (2021), likely to lead to a Renters’ Reform Bill. The aim is to make everyone’s lives easier – tenants, rental agencies and landlords alike.

We think we know what’s going to be in it, but of course none of us has a crystal ball.

In our opinion, the main flags will be with regard to deposits, which we’ll look at later on. But for completeness, let’s start with:

Abolishment of Section 21 repossessions, otherwise known as “no-fault” evictions.

Springing from consultations that took place during the pandemic, ending Section 21 is about creating longer tenancies. Currently – as you know – there’s a 2-month no-reason eviction notice period after a fixed-term contract has ended.

There are plans to dissolve this.

Instead, Section 8 notices could be strengthened, that is, you must give your tenants a proven justification for giving them notice to quit. Examples could include non-payment of rent, damage to the property or disturbing neighbours. And, everything has to be done ultra-correctly, otherwise the notice will be void. (We can advise you on all of these issues.)

Do be aware that the time periods involved will vary, depending on which part of the tenancy agreement they have breached. There’s only so much we can include in a blog, so if you’d appreciate some jargon-free advice on the above, and you have a property potentially to place with us, do get in touch.

All this notwithstanding, it’s the thorny subject of deposits that’s got everyone talking.

Why The Proposed Changes?

With the average deposit in or around the £1,000 mark, it’s obvious that for many renters, moving home is a heavy financial burden. Not least for those on lower incomes, prevented from finding a much-needed new property and therefore stuck – figuratively and literally.

Even for those earning more, factor in a 5-week deposit, plus a month’s rent in advance, plus fees to a removals company, plus, well, all the other unforeseen costs associated with moving home, and you’re looking at a hefty sum.

The result? It’s potentially slowing down the rental market.

The Issue with Deposits

Deposits have always been a bit of a Thing.

On the one hand, they’re there to provide you with protection against property damage during a tenancy. On the other, whether they’re fair or not (especially when it comes to end of tenancy negotiations) is under constant scrutiny.

The Tenancy Deposit Scheme, introduced in 2007 requires that the deposit paid to you has to be protected, then returned to your tenant when they leave, subject to agreed deductions, if any. So far so obvious, but – and this may grind your gears a little, this legislation appears to weigh heavily in favour of property owners.

Why?

Well, popular opinion has it that just because the scheme is protecting your tenants’ deposit, doesn’t mean that they’ll get all, or even most of it back. And, one person’s minor damage is sometimes another’s major repair costs – it’s inconsistent in other words.

According to the National Residential Landlords’ Association (NRLA), most landlords are okay with the current system, but would prefer to embrace lifetime deposits as an option, rather than a must-do:

https://www.nrla.org.uk/news/renters-reform-bill-spotlight-lifetime-deposits

Also, this body has raised concerns that proprietors can only feel comfortable if they’re totally satisfied that they won’t need to make a claim against it. Therefore, they’ve made two recommendations to the government during its consultation process:

1. A financial bridging facility, to ensure that the new landlord is fully covered by means of a kind of credit mechanism, even if the tenant is in dispute about the deposit with their previous one.

2. A deposit builder ISA, a protected savings scheme, whereby a minimum sum is held in the account and renters would be able to accrue funds, eventually to put down money as a deposit to buy a property. Any deductions for damage etc would be withdrawn to the landlord at the end of the tenancy, with the account clearly associated with the Tenancy Deposit Protection scheme.

And of course, the lifetime deposit plan doesn’t mean that you wouldn’t be able to deduct money for damage. You still can.
And then, welcome to the…

…Zero Deposit Scheme

(or a low deposit. Zero sounds more dramatic, though!)

These schemes are already in operation. Do you find this idea alarming? They’re  increasingly popular in certain areas of the UK. They work like this:

Instead of a 5-week upfront sum, the tenant pays one week’s rent plus an agreed set-up fee, as well as a yearly admin charge every year. The benefits to the tenant are obvious.

Or rather, they seem obvious.

The Deposit Dilemma

But are they? Could the person renting your property treat it with less care as a result of paying less up front? Could the annual (or even monthly) fees eventually add up to more than the deposit? Perhaps tenants aren’t aware that they’re not actually paying into an insurance policy that covers them for damage. And, do they know that these monies are non-returnable?

And, there’s no right to free dispute resolution as offered by traditional deposit schemes, should there be a disagreement about payments for damage.

We should make it clear – Clarity is our name, after all – that in our view, there is a possibility of mis-selling here; and that it’s conceivable that tenants could, repeat could, be paying over the odds for the privilege of not paying a deposit.

So, let’s keep an eye out for developments about all these changes. The aim of reducing red tape and making moving more affordable is praiseworthy. Perhaps Generation Rent needs a break. But so you do, as a property owner.

One thing IS for certain: this Bill is likely to be subject to strong debate, face various amendments and may not sail smoothly through parliament. Feasibly, we’re looking at late 2022, at the earliest.

In the ever-changing rental property sector, the only consistency is constant change – a kind of property paradox, if you see what we mean. We’ll keep you up to speed with all the news you need to know. It’s what we do, and it’s what we do best.