What is a a holding deposit and how does it work?

What is a holding deposit and how does it work?

What is a holding deposit?

A holding deposit is a type of payment that is paid in the UK property rental market by a tenant, to a landlord, at the beginning of the rental application process – to reserve the property while the tenant is referenced and credit checked.

You as a renter will almost certainly be asked by your landlord or agent to pay a holding deposit, before the pre-tenancy checks can begin. These checks will involve contacting previous landlords and agents who have rented to you, a right to rent check, and income and affordability, or credit worthiness checks.

Before you pay a holding deposit, make sure you have read our guide below in this article, so you understand the law relating to holding deposits, and what happens in situations where the referencing checks are failed, or for other reasons, you or the landlord decide not to proceed with renting the property.

What is the difference between a holding deposit and a tenancy deposit?

A holding deposit is the correct legal term in England and Wales that refers to this payment made to reserve a property, as described above. “Holding fee” is a colloquial term sometimes used, referring to the same type of payment.

The amount of the holding deposit asked from renters in the UK is usually the maximum allowable amount by law, which is to say, one week’s rent.

If the tenancy goes ahead, the holding deposit will count towards the tenant’s first rent payment.

If the tenancy does not go ahead, the holding deposit should be refunded in full to the tenant, less any reasonable costs incurred by the landlord or agency, such as payment for carrying out pre-tenancy checks.

On the other hand, a “tenancy deposit”, is a refundable payment made as a security for the landlord against possible damage to the property. It cannot be associated or combined with rent payments, as a holding deposit can. The level of a tenancy deposit that can be asked for, depends upon the total annual rent for a property, again differentiating it from a holding deposit in this respect, because a holding deposit is capped by the total weekly rent amount.

The holding deposit amount, and and the terms under which it will be refunded should ideally be agreed upon in writing (for example in a rental application terms agreement with an agent) before any money changes hands.

When is a holding deposit taken?

A holding deposit is typically taken when you as a tenant found a property you wish to rent and the landlord or agent has accepted the rental offer (in terms of money, and also any conditions on furnishing, fixing up the property and so forth). Then, the holding deposit is paid by the tenant. After that, the referencing and credit checks process begins.

How do you calculate a holding deposit?

The maximum holding deposit that can legally be requested of the tenant, is equivalent to one week’s worth of rent (also referred to as the “weekly rent”).

For example if the monthly rent is £1,200, the maximum holding deposit would be £276.92
(1200 x 12 will give the annual rent. Then that annual rent is divided by 52. There are 52 weeks in a UK calendar year.)

Holding deposits and reference and credit checks

After the holding deposit has been paid, landlord or your letting agents will conduct formal tenant references. If the referencing process is passed, then your can move on to signing your tenancy agreement and organising a move-in date. The holding deposit you paid will be offset against the first rent payment you owe. You as the renter will not be short any additional money.

However, if these pre-tenancy checks are failed, then the situation becomes a bit more complicated.

The holding deposit can be kept by the landlord in certain circumstances, depending on why the rental application and tenancy is not continuing. This is allowed by law to help cover the costs of carrying out the reasonably justifiable checks a landlord needs to make in order to rent to you.

Alternatively, the holding deposit may be refunded to you as the tenant, if the reason for the failure

When does the tenant get their holding deposit back in full?

The holding deposit should be refunded to the tenant within 7 days of signing the tenancy agreement, provided that they have met all the conditions set out in the written agreement. If the tenant has not met those conditions, then the landlord may withhold the holding deposit.

Holding deposit refunds must be issued within 7 days if:

  • A tenancy agreement is being signed (usually, all parties- tenants and landlords agree to deduct the holding deposit from the balance of rent due for convenience).
  • The landlord or agency decides to cancel and did not proceed with the application.
  • The deadline for agreement has passed, and the applicant has made all possible efforts to sign a lease.

Do holding deposits need to be protected?

Holding deposits are not required to be protected by law like tenancy deposits. There is no protection scheme for holding deposits. The landlord must take reasonable safety precautions with the money so that they are in a position to refund it, in whole or in part, to you the tenant if and when necessary.

When can a landlord or letting agent keep the holding deposit?

If a tenant does any of the following, you may keep part or all of the holding deposit:

  • Provides either inaccurate or deliberately misleading information, and which you could reasonably take into account when deciding whether to rent a property.
  • Fails a right to rent check, or other legal check
  • Tenants withdraws from a property

The tenant fails to take all reasonable measures to enter into a tenancy contract and the landlord or letting agent takes all feasible measures.

This is not the case if you, as the landlord, have acted in a manner that would be unreasonable for a tenant to accept. This is also subject to the ban on tenant fees.

Within 7 days of deciding not to let the space to a tenant, you must communicate in writing your reasoning for retaining all or part of their holding deposit. Failure to do so within this time frame will result in losing the right to retain any portion of the deposit and being legally obligated to return it in full to the tenant.

Where a landlord or agent forces a tenant to pay anything in excess of the tenant fee ban, the tenant is entitled to a complete refund of their holding deposit.

When can’t the landlord or letting agent keep the holding deposit?

In order to protect your interests, please be aware of the law and what it states regarding holding deposits.

If any of the below occurs, landlords cannot keep your holding deposit:

  • If the landlord doesn’t offer you a tenancy
  • If the deadline for agreement isn’t met and it’s not due to any fault of yours
  • If you fail certain reference checks (e.g. if your credit score is low)

You should receive the deposit back within 7 days. If you don’t hear anything, reach out to the landlord or agent.

What happens when the tenancy proceeds?

If you go ahead with the tenancy, your landlord can:

  • Give your deposit back within one week
  • Use it as payment for the tenancy deposit or first month’s rent (you should be told in advance and get written confirmation)

How are holding deposit disputes solved?

If there is a disagreement about the return of the holding deposit, it can be dealt with in one of two ways:

  1. Small claim procedure – if the amount in dispute is less than £5,000, you as the landlord or agent can raise a claim through your local county court.
  2. Tenancy deposit scheme adjudication – if you have used a tenancy deposit scheme, you will need to follow their internal dispute resolution process. This is a free service that will assess the evidence and make a decision about who is entitled to the holding deposit.

Regardless of which route you choose, it is always advisable to seek legal advice before taking any action.

What does the Tenant Fees Act state about holding deposits?

The Tenant Fee Act, which was passed in 2019, prohibits most previously common letting fees and sets the maximum cost of tenancy deposits in England.

The act allows for refundable holding deposits that may not exceed more than a weeks rent. Even if the paperwork is filed on behalf of multiple tenants, a joint tenancy prohibits any one tenant from being charged of holding deposits more than the rest of the flatmates combined weekly rent.

In other words, if four flatmates agree to pay £300 per week in rent, their holding deposit cannot exceed £300; they will not be charged £300 each.

Is a holding deposit a tenant fee?

The holding deposit can be considered a tenant fee, yes. More precisely, it is a payment that is subject to the Tenant Fees Act 2019. It can be a refundable fee, depending on the circumstances in which the rental application falls through. This differentiates it from other fees banned by the 2019 law, for example inventory fees, for which there is not any such refundable aspect.

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