TFA – Holding Deposits

17th July 2020 Commercial Litigation

The First-Tier Tribunal recently considered an application for return of a holding deposit under the Tenant Fees Act. This provides a good opportunity to consider the Act and holding deposits more generally. The TFA applies to holding deposits paid on or after 1 June 2019.

What is a holding deposit?

The Act, unhelpfully, does not provide a definition of a holding deposit. However, some clarity is provided in the Guidance accompanying the Act. 

In the Guidance Glossary, a holding deposit is described as ‘money paid by or on behalf of a tenant to a landlord or letting agent to formally agree they will proceed with a tenancy on the agreed terms, provided certain conditions are met by the tenant (i.e. reference checks).

The Statutory Enforcement Guidance described holding deposits as ‘money paid by or on behalf of a tenant to a landlord or letting agent before the grant of a tenancy with the intention that it should be dealt with by the landlord or letting agent in accordance with Schedule 2’.

The Landlord and Tenant Guidance and the Tenant Guidance state that a holding deposit is taken by a landlord or an agent ‘to reserve a property whilst reference checks and preparation for a tenancy agreement are undertaken’.

It is unclear why a single clear definition has not been adopted among the various Guidance documents and the diversity hardly helps but the statutory guidance should probably be adopted as the definitive definition. In practice there is not a huge amount of difference between the definitions. 

The payment of a holding deposit does not necessarily obligate the landlord to proceed with the tenancy even where the tenant meets all conditions they are required to. However, a holding deposit agreement should be clear as to what is being offered for the taking of a holding deposit and that any tenancy is ‘subject to contract’. The County Courts have treated holding deposits taken without any written statement at all as evidence of an intention on the part of a landlord to grant a tenancy. 

Some consolation for tenants could be that both the Landlord and Tenant Guidance and the Tenant Guidance state that a landlord should stop advertising a property once a holding deposit has been paid. The legislation is also clear that no more than one holding deposit per party can be accepted at any one time, i.e. a landlord should not be taking several holding deposits from different prospective tenants at the same time; or several holding deposits from prospective joint tenants – joint tenants still pay only one holding deposit to the landlord or agent and the landlord must return it if they want to take a deposit from a different applicant and go with them instead.

The above ‘imbalance’ is probably to reflect a landlord’s exposure to costs and losses where they commence reference checks on a prospective tenant and cease advertising the property before there being a tenancy agreement.

How much can a landlord/agent charge for a holding deposit?

The Act caps holding deposits at one week’s rent.

Does a landlord/agent need to repay a holding deposit?

In general, a holding deposit should be repaid to the tenant, unless an exception applies.

A holding deposit will usually be repaid once the parties have entered into the tenancy agreement, the landlord has decided that they do not wish to enter into the tenancy agreement or the parties fail to enter into a tenancy agreement within 14 days of the payment of the holding deposit.

Ms Louise Stewart and ProjectPay Ltd v Onslows & Co Ltd

The FTT considered Ms Stewart’s application for repayment of a holding deposit paid in respect of a high-value property in South Kensington. Initially the tenancy had been a company let but after the deposit was taken it was changed to an AST. It was argued by Onslows that this meant the holding deposit was outside the legislation but their acquiescence in the change and their preparation of an AST without any change to the holding deposit sum or agreement doomed their argument in this regard.

Onslows sought to retain the deposit as Ms Stewart had decided not to go ahead with the tenancy. Ms Stewart claimed, among other things, that a requirement to mop the floors 2-4 times per month was unfair and therefore sought to rely on the exception that it would be unreasonable for her to enter into the tenancy agreement.

Had Ms Stewart been successful in convincing the FTT that the floor cleaning requirement rendered it unreasonable for her to enter into the tenancy agreement, she would have been entitled to a repayment of the holding deposit.

A term in the tenancy agreement provided as follows:

SA.2 The wooden floors are soap finished wooden Douglas plank floors by Dinesen. When Dinesen Floor Soap White is used regularly, a soap membrane is formed that protects the wood floor against grease, dirt and depletion. The wooden floors should be washed with the ‘Floor soap white’ two to four times a month, based on use and wear. If the floors are not treated with the white soap at least twice a month, they will be damaged and will have to be professionally sanded and washed after the completion of the tenancy – at the expense of the tenant. Tools for applying the soap are provided by the Landlord and Dinesen Floor Soap White is provided by the Landlord for the first six months of the tenancy – whereafter the tenant must buy the soap from . Instructions on how to wash the wooden floors can be seen on the Dinesen website.’’

Ms Stewart claimed that this term, the requirement to clean the floor and the liability for any damage if the floor is not cleaned, made it unreasonable for her to go ahead with the tenancy, entitling her to withdraw and recover all of her holding deposit. She was also unhappy that this requirement was placed into a draft tenancy agreement very late in the negotiation process. The FTT agreed that the clause was added late but this only assisted Ms Stewart if the clause was unreasonable. The FTT did not think that a stipulation that the floors be washed 2-4 times a month was unreasonable in the context of the entire agreement especially in the context of the nature of the floors. It also did not agree with Ms Stewart’s contention that she should not be held liable for failing to wash the floors.

There was discussion as to whether the cleaning clause was the true reason for Ms Stewart’s withdrawal from the agreement but in the event it made little difference. 

The effective second part of the argument was, having decided that Ms Stewart had withdrawn unreasonably, was Onslows allowed to keep all of her holding deposit or just a part of it. Despite preferring most of Ms Stewart’s evidence as opposed to that of Onslows, the FTT concluded that the ‘strong encouragement’ set out in the Landlord Guidance to consider returning the holding deposit was ‘of no statutory force’ and, accordingly, declined to order the repayment of the deposit.

This case shows some of the outlines of where future problems are going to lie. There is the potential for problems if a holding deposit is taken for one tenancy type but then that changes to another tenancy type which has a different treatment under the TFA. The issue of why a tenant has withdrawn is clearly also going to be a problem with tenants potentially seeking to re-cast their reasons later to make them fit within the legislation. Finally, agents need to make sure that unusual or onerous clauses are being highlighted to tenants at the earliest opportunity, ideally before the holding deposit is taken so that there cannot be an argument that the terms of the letting were changed.

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David Smith is a Partner located in Londonin our Commercial Litigation department

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Neli Borisova is a Solicitor located in Londonin our Commercial Litigation department

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