What is a holding deposit and how does it work

When a prospective tenant views and makes an acceptable offer to rent a property you may choose to take a holding deposit to reserve or hold the property for the tenant.Ā  At this time, you would take the property off the market while you carry out all necessary checks including references, credit and right to rent checks.

A holding deposit is a sum paid by a potential tenant to demonstrate their commitment to rent your property. However, holding deposits can promote the commitment of both parties. For tenants, it shows they are serious about taking the property and havenā€™t put offers on other properties at the same time. For landlords, holding deposits are a way of accepting that the prospective tenant is committed to renting their property and to provide reassurance that the tenant is serious about renting the property.

Tenant checks, more often than not, cost money which may be recoverable from the holding deposit in certain situations, if the let does not proceed. For example, referencing checks highlights reasons why you are unable to proceed with the transaction. Holding deposits do not need to be protected in a government-authorised tenancy deposit protection scheme as they are not held for the length of the tenancy.

FAQs

  • When can you take the holding deposit?

    If you are renting a property in England,Ā you will need to provide the prospective tenant with clear information as to why you are taking the holding deposit, a draft tenancy agreement andĀ Ā make sure that you have carried out the most basic checks. This may include checking the tenantā€™s ability to pay the rent for the length of the agreement and proof of identity. You should also make the tenant aware what checks may count against them, for example, providing misleading or false information. More detailed information on holding deposits and what constitutes ā€˜clear informationā€™ is in the Government Guidance forĀ landlordsĀ andĀ agents pages 33 - 44.

    WhileĀ the law in Wales is essentially the same, Rent Smart Wales has produced their own guide for the Welsh marketĀ here. It is also important you explain to the tenant that they may lose some or all of their holding deposit if they do not proceed with the transaction.

    A written holding deposit agreement is crucial. Ā Both you and the tenant(s) should sign it.

    For more information on what to include in your tenancy agreement, read our guide.

  • Is there a limit on the amount of a holding deposit?

    The law caps holding deposits at the equivalent of one weekā€™s rent for the whole property even where there are a number of prospective tenants.Ā This can be calculated by multiplying the monthly rent by 12 to get the annual rent and then dividing by 52 weeks.

  • What happens to the holding deposit when the tenant moves in?

    Once the tenant is ready to move in, you can simply refund the holding deposit or agree to deduct it from the first monthā€™s rent.Ā Ā If the holding deposit is being refunded, it must be done within seven calendar days of the tenancy start date.

Other things to consider:

HoldingĀ deposit agreementsĀ should never refer to holding deposits beingĀ ā€œnon-refundableā€.Ā ThisĀ is an unfair term, as clearly defined inĀ Part 2 Consumers Rights Act 2015, and cannot be relied on.

You should never take multiple holding deposits for the same property or waste a tenantā€™s time if you have no intention of proceeding with the tenancy agreement.

You should be aware of the circumstances when you are entitled to keep all or part of the holding deposit and those which mean it must be refunded in full. A tenant may change their mind and withdraw from the proposed let which allows you to retain provable and permitted administrative costs that you have incurred. The balance should be returned to the tenant immediately. Ā If a landlord chooses to withdraw or takes too long to enter into a binding tenancy agreement which goes beyond the ā€˜deadline for agreementā€™ date, the tenant is entitled to a full refund.

If you takeĀ a holding depositĀ and then doĀ not takeĀ the property off theĀ market orĀ decideĀ to rent it to someone else followingĀ acceptableĀ checks,Ā the holding depositĀ should be returned to the prospective tenant in full.

In any situation, where you retain all, or part, of a holding deposit, you must write to the tenant within seven days explaining the reasons.Ā Ā This maintains full transparency. If the tenant does not receive an explanation, they will be entitled to receive their holding deposit back in full.

Complaints about holding deposits are very common, with agents and landlords not always understanding the Tenant Fees Act rules, which are quite specific, so to help you get it right, see our more in-depth guideā€Æhere. For more information read our article on the Tenant Fees Act 2019 ā€“ will it impact tenancy deposits? and our Tenant Fees Act FAQs.

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