What are No/Zero/Low Deposit/Replacement schemes?
Zero Deposit, No Deposit, Deposit Replacement schemes. Whatever they are called by whichever provider is offering them, they’re an alternative option to a Tenant paying a traditional Security Deposit, formerly known as a Bond.
As a Landlord, if you’re using a Letting Agent to find you a tenant, regardless of who manages it after the tenancy starts, you must give your consent for this scheme to be offered to potential tenants. It is not mandatory.
Zero Deposit/Deposit Replacement schemes can be offered for properties of all types, size and price range.
Following the introduction of the Tenant Fees Act 2019, Security Deposit amounts are now capped at equivalent to five weeks’ rent for annual rents up to £50,000 and six times rent equivalent for annual rents above this amount.
This is not too dissimilar to pre-Tenant Fees Act, where it was commonplace for a Security Deposit to be 1 months’ rent, or a months’ rent plus £100.
There was however no upper limit on the amount of deposit a Landlord or Letting Agent could request.
How do zero deposit/no deposit/replacement schemes work?
Essentially this is an option that may be offered to tenants as an alternative to a traditional Security Deposit. It cannot be the only deposit option and must be an either/or.
Tenants pay less money upfront before moving into a property, typically around the equivalent of one weeks’ rent to the scheme provider, along with the usual first months’ rent payment in advance.
Both Landlord and Tenant must sign an agreement along the lines of an insurance policy. Tenants would then pay premiums/policy renewal costs to extend this arrangement for the duration of the tenancy.
Commonly the terms of a Deposit Replacement Scheme agreement would make the tenant liable for a cash equivalent of around 6 week’s rent. Some providers do offer up to 12 weeks’ rent and this varies between supplier.
At the end of a tenancy if there is damage to the property or rent arrears, the Landlord, or Letting Agent operating on the landlord’s behalf, can apply to the scheme provider for repayment of claimed amount, providing adequate supporting documentation.
The deposit replacement scheme will make their decision and payout to the landlord where required, invoicing the tenant directly for reimbursement.
If there is no damage or rent arrears the cover will simply cease. No payments will be made back to the Tenant.
An objective look at Deposit Replacement Schemes as an alternative option
In my previous employment, I’ve seen a Zero Deposit/Replacement scheme operated very effectively and I’ve also seen it end in disaster and frustration for varying reasons.
The allure of paying out less and still moving into your chosen property can be attractive to tenants initially, however paying renewal costs/premiums instead can quickly lose it’s original appeal.
If agreed by all parties this can be changed to a traditional Security Deposit payment mid tenancy instead where the rules of the new deposit protection scheme provider would apply.
Should a tenant default on the agreed payment terms to the provider, cover will cease.
As in a lot of contracts these days, Tenants have a 14 day Cooling-Off period, so if your Tenant is choosing to use one of these schemes make sure they have paid the premium at least 14 days before the tenancy begins as they do have the right to cancel meaning the policy will be void.
There are currently concerns being investigated by the CMA (Competition & Markets Authority) about tenants’ understanding of their liabilities when using a Deposit Replacement Scheme, leaving the longevity of such options very much up in the air.
Certainly when I was offering this option in my former employment, a large proportion of tenants declined to take up a deposit replacement scheme after reading the terms & conditions as the on-going costs and renewal fees were “money down the drain” with no payments being refundable even if the property was returned in an immaculate condition.
The majority were confident of looking after their home and returning it in an acceptable condition as & when they do come to vacate, meaning they would then receive their Security Deposit amount back in full.
Many landlords also felt that a Security Deposit serves as a damage deterrent.
FAQs:
Will Deposit Replacement Schemes attract the “wrong” type of tenants
Possibly, possibly not. For tenants to qualify and be approved to use one of the schemes the majority that I’ve come across will only offer it if a tenant has been satisfactorily referenced.
If they don’t meet the referencing criteria and cannot revert to offering a traditional Security Deposit payment ahead of the tenancy start date, the application is likely to fail with the tenant search resuming.
Can a Tenant use a Deposit Replacement Scheme and then not pay the renewal cost and not pay a Security Deposit either?
Unfortunately yes they can. A tenant’s policy can be cancelled by them, or payments declined, and they may find themselves unable, or unwilling, to provide the required traditional Security Deposit that would have been requested if a replacement scheme was not used.
This essentially means as a Landlord that you have no financial recourse to fall back on, other than to pursue the matter through the small claims court, if there are breaches of the tenancy agreement such as damage or rent arrears at the end of the tenancy.
Who benefits from Deposit Replacement Schemes?
Handled correctly they can benefit both the Landlord and Tenant.
Handled incorrectly they benefit no one. The Letting Agent will likely benefit by receiving a kick-back from the scheme provider for each policy entered into.
In my opinion
Personally I don’t offer any kind of deposit replacement scheme in my letting agency as I don't feel they are a better option all round than the current deposit system.
It’s a traditional Security Deposit all the way in my opinion. Many Tenants in my experience, prefer paying a traditional deposit, knowing exactly where they stand when it comes to the end of tenancy, rather than paying regular "premiums" for the entirety of the tenancy that could end up costing more than the original deposit amount.
If you have questions about security deposits, Property Management or letting a property in Lancaster then please don’t hesitate to get in touch.