If your agency is in England, Wales, or Northern Ireland, you can charge prospective tenants a holding deposit before they sign a tenancy agreement. There are strict rules about how much you can charge and how long you can keep it. Not complying with the law can lead to heavy fines and in some cases, prosecution.
We look at how holding deposits work, how to calculate them, and what you’ll need to consider to stay within the law.
What is a holding deposit?
A prospective tenant pays a holding deposit to ‘reserve’ a property before a tenancy agreement is signed. It’s viewed as clear indication that someone is serious about renting a property and was designed to prevent people from making applications for multiple rentals at the same time.
Holding deposits are normally refundable but can be kept by a letting agency (or landlord), but only under certain circumstances.
These deposits are sometimes called holding fees and are only legal in England, Wales and Northern Ireland. In Scotland, holding deposits (also known as key money) are illegal.
What is the difference between a tenancy deposit and a holding deposit?
Holding deposits can be charged before a tenancy agreement is signed. Your agency may ask for a holding deposit while it carries out tenant referencing checks.
A tenancy deposit is paid by the tenant at the start of a tenancy. This money can be used to cover any unexpected costs during the tenancy, for example, paying to repair damages or rent arrears.
Tenancy deposits must also be secured in a government approved tenancy deposit scheme, which ensures deposits are fairly managed.
A tenant can request their holding deposit be put towards their tenancy deposit or first rental payment.
What are the rules for holding deposits?
Holding deposits are considered a ‘permitted payment’ under the terms of the Tenant Fees Act 2019. However, for the holding deposit to be legal, you must follow certain rules:
- Holding deposits can only be equivalent to one week’s rent.
- You can only ask for one holding deposit per property.
- Holding deposits cannot be used to cover additional fees (such as referencing fees).
- You cannot keep a holding deposit for more than 15 days (unless agreed with the prospective tenant).
- When the 15 days expires, you will be expected to repay the holding deposit within seven days (there are a handful of circumstances where you can keep it).
The rules relating to holding deposits are broadly the same in Wales and Northern Ireland, but you should check for any local differences:
How do you calculate the holding deposit?
The maximum holding deposit allowable in England and Wales is one week’s rent. In England, the formula used to calculate a holding deposit is:
- Monthly rent x 12 ÷ 52 (for example £1,000 x12 ÷ 52 is £230.76).
In Wales, the formula used is:
- Monthly rent ÷ 4.35 = (for example £1,000 ÷ 4.35 is £229.88).
It’s important not to round up calculations. If you do, it risks becoming a prohibited payment, leading to a fine of up to £5,000. The fine can rise to £30,000 for subsequent breaches and also result in prosecution. It can also lead to complications if you need to later evict tenants.
When should a holding deposit be returned?
Holding deposits can only be kept for a maximum of 15 days. This is usually enough time for you to carry out tenant referencing checks.
If the tenant signs the tenancy agreement, you can either give them back the holding deposit or put it towards the tenancy deposit (if the tenant agrees). Remember that you’ll need to register this with an approved deposit scheme.
When can letting agents keep holding deposits?
There are very few circumstances where you can keep a holding deposit, but you may keep it if the prospective tenant:
- Fails a Right to Rent
- Withdraws their application before the agreed deadline.
- Gave false or misleading information in their application (such as falsifying evidence of income).
- Doesn’t take all reasonable steps to enter into the tenancy agreement.
What happens if tenants fail a credit or reference check?
As long as the prospective tenant has been honest, you must still return their holding deposit even if they fail a reference or credit check.
How does a holding deposit affect insurance?
Rules about holding deposits and other permitted payments must be followed, or you risk being fined or prosecuted.
If your agency has any insurance (such as rent guarantee insurance), you’ll be expected to follow the laws in place. The insurance premiums cannot form part of the deposit. If not, any policy your agency or landlord has will be invalidated. This means any claim you make can be rejected.
If you’re looking for ways to protect and grow your income, while also supporting your landlords, speak to a member of our team on 01603 649727.
Information provided in this article was correct at the time of publication. This article is intended as a guide only. Please note that legislation does change, it is always best to check the most up to date guidance on gov.uk.
