Rent in advance, deposit and premium fees
Paying for accommodation in the private rented sector may involve payments other than monthly rent, such as rent in advance, deposits, and premiums.
Rent in advance
Most private landlords require rent to be paid in advance (ie before it is due) before the tenant can move in. Landlords will vary as to how much rent in advance (if any) they will demand of a prospective occupier. Landlords are free to ask for any amount.
A holding deposit is a sum of money paid to a landlord or letting agent to secure accommodation prior to the signing of a tenancy agreement.
From 1 June 2019, new provisions relating to holding deposits were introduced under the Tenant Fees Act 2019. These include a cap (equivalent to one week's rent), a deadline for agreement and rules governing the return of a holding deposit. The provisions affect a holding deposit taken in connection with an assured tenancy, licence, or a tenancy granted to a student by a specified educational institution.
A binding contract?
Payment and acceptance of a holding deposit may create a conditional binding contract between tenant and landlord, under which:
the tenant agrees to provide honest representations as to their income, tenancy history and references, and to enter into the tenancy on the terms agreed with the landlord
the landlord agrees to enter into the tenancy as per the agreed terms conditional on satisfactory fulfilment of all pre-tenancy checks
The property, the amount of rent and the move-in date must be precisely identified in the agreement. If not, the contract might not be binding.
A holding deposit agreement made by agents on behalf of a landlord will usually also bind the landlord.
Some holding deposit agreements may include the phrase 'subject to contract'. This could be intended to mean that the agreement is not in fact a contract. A prospective tenant should inquire as to the meaning of the phrase if it appears on the agreement. However, the words will have no effect if the true intentions of the parties are that the holding deposit should be binding.
Agreeing the terms
The landlord or the landlord's agent and prospective tenant must agree the terms of the tenancy prior to exchanging the holding deposit, and cannot renegotiate them once the deposit has been exchanged. If the landlord or agent subsequently revokes the offer to enter into the tenancy or varies its terms this will amount to repudiation of contract and give rise to contractual remedies such as injunctions for specific performance and/or damages for breach of contract.
Right to cancel
If the tenant's references prove unsatisfactory, the landlord has a right to cancel the contract but (provided the applicant has not misled the landlord) must usually refund the deposit. If the applicant has not been truthful, the deposit will be forfeit to the extent necessary to cover the landlord's costs. Where a third party referencing agency recommends that an applicant who has failed its credit referencing checks (but who has been honest about their income and credit history) is not accepted as a tenant, this does not automatically give a landlord a right to cancel the contract.
After the tenancy starts
After the tenancy starts, the holding deposit is usually credited to the tenant's rent account and put towards the first month's rent. Alternatively, when this is not the case and the holding deposit is not repaid to the tenant, it will become a tenancy deposit which, if the tenancy is an assured shorthold tenancy, will need to be protected in accordance with the tenancy deposit protection legislation.
A 'non-returnable holding deposit' is effectively a premium or an agency fee.
Government guidance for lettings professionals on consumer law advises on fairness in relation to holding deposits.
A tenancy deposit is a sum of money that a landlord (or an agent acting on behalf of a landlord) can request at the beginning of a tenancy to act as security against incidences such as non-payment of rent, damage to property or removal of furniture.
A tenancy deposit for an assured shorthold tenancy must be protected in a Government-approved scheme.
From 1 June 2019, a tenancy deposit for an assured shorthold tenancy, licence or tenancy granted to a student by a specified educational institution entered into on or after that date is capped at the equivalent of five or six weeks' rent (depending on the annual rental).
Deposit replacement insurance
Deposit replacement insurance policies are marketed as an alternative to tenancy deposits. They are sometimes referred to as ‘smart deposits’.
Either the landlord or the tenant may take out the policy. A tenant may be asked to take out a policy rather than pay a tenancy deposit. If the landlord takes out the policy they may recoup the money through the rent or a regular payment on top of the rent.
If money is owed to the landlord after the tenancy ends, for unpaid rent, damage to the property or for other recoverable amounts (as specified in the policy), the insurance company can make a pay out to the landlord. Many policies contain a (subrogation) clause, which allows the insurer to pursue the (former) tenant to recoup any money it pays out to the landlord.
Any money paid out by the tenant is usually less than required for a tenancy deposit, however, none of the money paid by the tenant is returnable at the end of the tenancy.
It is probable that any payment made by an assured shorthold tenant towards a 'smart deposit' will fall outside the statutory tenancy deposit protection regime, because a tenancy deposit is defined as money ‘held as security’. It is possible that this interpretation may be challenged in the courts.
A premium is a payment for a tenancy, that is not rent. In the past premiums were often known as 'key money. Today, they are most commonly payments for long leases.
Tenancies protected by Rent Act 1977
Very few new or renewed tenancies will be governed by the Rent Act 1977; however, for those that are, there are sections in the Rent Act 1977 governing the use of premiums. The Act makes it an offence for any person to require a premium or to receive an unsolicited premium. The Act also makes it an offence for any person to require the payment of a premium as a condition of the assignment of a protected tenancy. There are very limited circumstances in which premiums for Rent Act tenancies are lawful, including where there are alterations to the property and long tenancies.
Tenancies protected by Housing Act 1988
Landlords are able to charge prospective tenants premiums because they were made lawful for assured and assured shorthold tenants by the Housing Act 1988. The definition of a premium in the Housing Act 1988 is:
any fine or other like sum
any other pecuniary consideration in addition to rent
any sum paid by way of deposit, other than one which does not exceed one-sixth of the annual rent payable under the tenancy immediately after the grant or renewal in question
If a periodic assured or assured shorthold tenant is charged a premium by the landlord, they will be able to assign the tenancy and sublet the whole or part of the accommodation. For those tenants who did not pay a premium, there is a prohibition on assignment and subletting without the consent of the landlord.
Last updated: 16 March 2021