Lifetime deposits set to shake up the status quo for letting agents and renters alike
10 February 2020
"Lifetime deposits" or "deposit passporting" looks set to become a reality under the Government's Renters' Reform Bill, but there a number of operational and financial issues that would need to be resolved before they are introduced.
Lifetime deposits are on the horizon, after being included in the Government’s Renters’ Reform Bill, a package of proposed reforms to the private rented sector. The Government has made affordability for tenants moving home a major legislative focus as part of its efforts to improve the experience of those living in the private rental sector and the concept of "deposit passporting" has emerged as one of its favoured ways to achieve this.
Currently, most letting agents and landlords take a five-week security deposit at the outset of a new tenancy, to protect themselves against the risk of damage to a landlord’s property or in the event of unpaid rent. In most cases, a tenant will not have received the deposit on their previous property back before paying a deposit on the next property, although the Tenancy Deposit Protection Working Group noted in its report, Tenancy Deposit Reform: A Call for Evidence, that it’s “unclear how significant the problem of deposit affordability is for tenants and how they are managing to bridge the gap of needing to find two deposit amounts”.
Deposit replacement products have emerged as one solution to potential affordability issues, allowing tenants to pay a non-refundable fee - often equivalent to one week’s rent - instead of a refundable five-week deposit. The tenant remains liable for damages at the end of the tenancy and are generally unable to make claims below the level of excess. However, deposit replacement products are still a relatively new concept and Goodlord’s State of the Industry Report: Winter 2019/2020 found that only 19% of property professionals were currently offering a deposit replacement product.
“Lifetime deposits", however, are the government's favoured alternative to the status quo and look set to become a reality after being included in the Renters’ Reform Bill. The concept of a lifetime deposit - sometimes referred to as “deposit passporting” - is simple in theory: a tenant’s deposit is transferred from one landlord to the next without first being returned to the tenant. This means that tenants could move home without having to provide an additional deposit to their new landlord. Data from the Deposit Protection Service showed that on average, tenants receive 77% of their deposit back, and 51% of tenants have their deposit returned in full, which means that some or all of this amount could be available for “passporting” to a new tenancy, which could be “topped up” by the tenant as necessary.
In practice, lifetime deposits are likely to prove more complex. The Tenancy Deposit Protection Working Group identified a number of operational and financial issues that would need to be solved before lifetime deposits are introduced - they would need to work with the different Government-approved providers of deposit protection (currently, DPS, Tenancy Deposit Scheme (TDS) and mydeposits) and be compatible with both the custodial and insurance-backed deposit protection. Meanwhile, landlords would need the assurance that their property would still be protected by their deposit in the event of damages or unpaid rent during this transition period.
It’s also unclear how lifetime deposits would impact tenant behaviour. Tenancy Deposit Protection Working Group notes that most tenants look after their rented property well, in part because requiring a deposit creates a disincentive for tenants to do damage to the property - it’s clear under the current system that tenants are accountable for any damages and that deductions could be made from the deposit as a result. If lifetime deposits were introduced, part of a tenant’s deposit would move to their new landlord before the end of their old tenancy and could potentially lead to confusion about whether tenants would still be liable for damages at the end of their tenancy.
Consultation on lifetime deposits closed in September and will inform the new legislation. No timelines have been announced for the introduction of the Renters’ Reform Bill.
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