Should residential tenancy deposits be capped at five weeks’ worth of rent?

29 March 2018

Today, the BBC has reported on a “row over deposit demands on tenants”. It observes that “MPs and landlords are at loggerheads over the acceptable level of deposits demanded of tenants in England.”

Row over deposit demands on tenants - BBC

In November 2017, the Government published its draft bill ‘Tenant Fees Bill’, setting out its legislative proposals on making renting in the private sector fairer and easier for tenants. As part of the process, the Secretary of State asked the Housing, Communities and Local Government Committee to review the draft bill ahead of its passage through Parliament. The Housing, Communities and Local Government Committee has today released its report on making the private rented sector more affordable. 

The Committee recommends (amongst other things) a cap to the security deposit that may be requested from tenants of the equivalent of five weeks’ rent. The Government had initially proposed to limit the deposit to six weeks’ worth of rent. Clive Betts MP, Chair of the Committee, said that, "Lowering the cap from six weeks' worth of rent to five will help make the private rented sector much more affordable while also keeping protection for landlords from rogue tenants”. 

A landlord will often seek to take a deposit from a tenant at the commencement of a tenancy to cover any losses it could have as a result of the tenant breaching one or more of its obligations in the tenancy agreement. Such losses could include unpaid rent and damage caused to the property which is beyond normal 'wear and tear'. Deposits are not currently limited, but are commonly 1.5 - 2 times the monthly rent. Landlords’ groups have warned that limiting the deposit as proposed could lead to landlords refusing to rent to 'riskier' tenants or refusing to allow pets in view of the fears of increased damage. 

The concern for landlords is to ensure that any tenant's breach is covered by the deposit and, the lower deposit, the greater the risk of there being insufficient funds. In this scenario, a landlord's only option would be to issue a County Court claim against the tenant to recover any losses in excess of the deposit. Some landlords will be reluctant to do this due to the potentially disproportionate costs of litigation. It is possible that landlords may seek to charge a higher rent or require a guarantor to cover this risk. It may also lead to an increase in landlords obtaining insurance to cover tenant's breaches, the cost of which is most likely to be reflected in the rent charged.

The imposition of a cap may encourage landlords generally to call for the maximum amount regardless of the riskiness and the particular circumstances of the tenant. Tenants are, therefore, likely to feel prejudiced by a higher cap, which may be hard for a tenant to find when factoring all the other associated costs in moving. 

It is worth noting that the draft Bill also proposes to ban landlords (and agents) demanding payments from tenants for anything other than rent, security deposits, holding deposit (up to one week’s rent) and default fees (i.e. chasing letters for non-payment of rent). Landlords (and agents) will not, therefore, be able to recover from tenants the cost of credit reference checks, preparation of the tenancy agreement and inventory checks. This will be beneficial to tenants who will have to find less money up front, however, the likelihood is that landlords and agents will simply raise rents to cover these costs or charge higher default fees which are not capped. 

At present, the proposed cap is still in debate. Landlords and tenants will have to wait for the Bill to be finalised before they can fully understand the impact.

The content of this article is for general information purposes only. For further assistance or advice please contact a member of the Birketts' Property Disputes Team. Law covered as at March 2018.