You often hear reference to a ‘deposit’ being needed with properties, which can appear as a mysterious amount of monies that must be paid by one party when there’s something happening at a property, often a new letting or sale. It’s often a significant sum where there’s talk of getting it back or being deducted from a cost somewhere along the lines.
Therefore, they’re important things to understand. Whether you’re the person having to pay it, the party having to receive and hold it, or a middle man looking to manage and process it.
There will be various information around regarding the technicalities of what a deposit means in your situation, which is important to look into. Alongside this, you need a few practical pointers as to how they should operate and be safely handled, as even with the best information to hand, these can be chunky pieces of money that will cost if you get them wrong.
So here are some practical pointers to get your head around them:
1. The Basic Principle
The gist behind all deposits is to hold money in case something does not work out, and therefore you can fall back on this set-aside money. So if you are taking a lease of a new property, you may need to give one month’s rent in advance as a deposit, which is set aside for the landlord to be able to use if you fall short on rent payments.
This is actually different to other monies you might pay, for example the first month’s rent, and the idea is that you get the money back at the end if all goes well. After all, it’s meant as a last resort and only used if needed.
So make sure it is just for this purpose, and clearly stated so.
2. The Different Types
The popular forms are with property transactions, although you can see them in activities like a contractors carrying out works. So for often larger projects, a deposit or retention is kept back from the contractor until all works have been satisfactorily agreed.
With property transactions the two popular forms are with selling and letting. With sales, a deposit is paid up front of, say, 10% - the idea being that there is an incentive for the sale to go through otherwise the seller gets to keep it.
In addition, technically this is actually paying for something in advance, with the final purchase price having this knocked off, although these are similar principles to you taking, say, a mortgage and paying a deposit - this is a separate form of ‘deposit’.
The second is with lettings, popular with short term residential lets but can also exist with, for example, commercial leases where there is uncertainty about tenants paying under their lease. This money is set-up as back-up reserves to fall back on, and typically related to what the monthly rental level is.
3. The People Who Hold
This may sound blatantly obvious, as it’s the person you’re giving the money to who actually has it, although in reality it gets a little more tricky, with there perhaps being at least two other potential holders.
Firstly, it may be a completely separate third-party who has the money and technically acting on behalf of both the landlord and tenant. This is a requirement for short-term residential leases, and may be worth considering by choice.
Secondly, there may be representatives of the landlord, for example their managing agent or solicitor who holds the money.
As this should be separate to a landlord’s own money, whether they or their representatives hold it, it should all be ring-fenced, so that even if a landlord does bust this money is retained for a tenant’s benefit.
4. The Basis of Holding
It not only needs to be clear why you hold a deposit, but also the requirements for it to be re-paid or used by people. So is it just for using against rent arrears, or can it be sued for any damaged to the property at the end of the lease.
When you then get in to the nitty-gritty of how it is handled, it may appear over the top at the beginning, but can save huge confusion later on down the line. So for example, does a landlord have full authority to release, and when must a tenant repay monies back into it?
Whatever is decided, get it all documented, ideally through a formal Rent Deposit Deed or similar document.
5. The Money Involved
Half the battle is agreeing what the base figure is - maybe a month’s rent, or a fixed amount that can be afforded.
The other half, though, is all the little extras on top of this, for example VAT and any costs involved. Also, if any interest should accrue by the money being in a separate interest-bearing account.
6. The Transfers
Okay, so you have the deposit agreed and all completed, and when you’re at the end it can all be sorted out.
Before then you may have other transactions though, for example a tenant’s lease ends early or is assigned to another tenant, or a landlord sells their investment. These deposits will be sitting somewhere, and should be transferred to the new beneficiaries unless otherwise agreed.
The trick is to not only clarify this in the transaction documentation, but practically how you get the money, whether a direct and separate payment or an adjustment to any new rent or sale price.
7. The Negotiation Tool
The last point links to the first, but is worth a separate mention. Because of the purpose of a deposit offering security and help from one party to another, this means it can be a helpful tool in any negotiations.
So rather than just assuming the norm, if a tenant with, say, a difficult credit rating causes a landlord to be hesitant in offering them a new lease, maybe the tenant can offer a larger deposit upfront to calm their fears.
On a separate issue, they may also offer further rent upfront as well, although deposits of course being separate pot of money in this context which the tenant should eventually receive back.
Don’t Let Deposits Depress You
Therefore, when it comes to handling deposits with your property interest, whether you’re having to pay them, hold them, or handle them; don’t get overwhelmed or confused by them.
Begin with understanding what on earth the purpose of them is for, and if there’s any alternative means or amounts to them. You can then go through the detail as to how they’re held and what the procedures are for handling them.
Then you may breathe a sigh of relief, and crack on with the property transaction or job at hand.