Renters' Reform Bill: Lifetime deposits set to shake up the status quo
"Lifetime deposits" or "deposit passporting" were originally proposed in the government's Renters' Reform Bill in 2019, but there are a number of operational and financial issues that would need to be resolved before they are introduced.
Lifetime deposits were originally announced in the 2019 Queen's speech and are part of a sweeping package of reforms for the private rented sector. They aim to “ease the burden on tenants when moving from one tenancy to the next, helping improve the experience of those living in the private rental sector”.
However, the Queen's Speech in May 2022 made no mention of lifetime tenants' deposits, so we wait to see if this proposal will be included in the Renters' Reform Bill White Paper, which is expected "shortly".
How do deposits currently work?
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”.
What alternatives to traditional deposits are currently available?
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.
What is a lifetime deposit?
“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 scheme - 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 rental 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.
What are the potential issues with setting up lifetime deposits?
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.
How could lifetime deposits work?
A side event of the Conservative Party Conference 2021 indicated that a solution being considered is a "variation on an insurance product", which gives the tenant access to the money while the landlord decides on how much they'll retain at the end of the tenancy, which may help alleviate some of these concerns.
Consultation on lifetime deposits closed in September 2019 and will inform the new legislation, to be outlined in Autumn 2021 and will brought forward in "due course".
This article is based on the Tenancy Deposit Protection Working Group’s paper Tenancy Deposit Reform: A Call for Evidence. This article is not exhaustive and is intended as a guide only.
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