Deposit Replacement Schemes — landlord’s loophole or relief for renters?
A long form article looking at new schemes being offered to tenants as an alternative to a traditional deposit — and how they fit with legislation relating to deposit protection, tenant fees, consumer protection and the regulation of financial products. [Extent: England and Wales]
We have seen a number of cases recently of tenants being offered the option of paying a monthly fee in addition to their rent as an alternative to paying a lump sum deposit at the beginning of their tenancy. Such schemes are marketed under names such as ‘No Deposit’, ‘Deposit Replacement’, ‘Deposit Free’ or ‘Zero Deposit’ schemes or options. Notably, these have increased significantly at a time when the Tenant Fees Act 2019 has limited the deposits which landlords can take, and the fees which letting agents are allowed to charge. There was also a successful prosecution last year of an accommodation ‘membership club’ which charged a ‘joining fee’ and ‘monthly contribution’ in a more brazen attempt to evade legislation relating to letting agents and tenancies.
How do deposit replacement schemes work?
Often these schemes are marketed as enabling tenants who cannot raise a large lump sum deposit to more easily access the private rented housing market. Typically tenants pay a monthly fee on top of their rent as an alternative to an upfront deposit, although some providers charge an annual fee. The schemes are marketed as making renting more accessible for tenants, by negating the need to save up for a deposit or to first secure the release of a deposit paid for their current property. Landlords of tenants who use a deposit replacement scheme are offered protection by the scheme against unpaid rent or damage caused to the property by the tenant — which may outweigh the protection offered by a traditional deposit following the introduction of maximum limits on deposit value. We have concerns however that such schemes allow landlords to sidestep restrictions imposed by tenancy deposit protection requirements introduced by the Housing Act 2004 and caps on deposits introduced by the Tenant Fees Act 2019, and in the long run may prove a very expensive option for tenants. A significant function of such schemes is also their potential to generate income for letting agents who operate them, to replace income lost in the wake of restrictions on tenant fees.
While such schemes appear to operate as ‘insurance policies’ which can be relied on in the event that any money (usually unpaid rent or repairs for damage to the property) becomes due from the tenant, they in fact benefit only the landlord (typically allowing the landlord to claim 6–12 weeks worth of rent from the scheme) in such circumstances. They offer no protection against liabilities or losses to the tenant — and so cannot for example be offset against any damage to the property which the landlord claims the tenant has caused. A landlord can make a claim from the deposit replacement scheme for any unpaid rent or damage, but the agent operating the scheme will then pursue the tenant for reimbursement of that sum with no account taken of the payments made by the tenant under the scheme, which are retained in full by the agent.
If no money becomes due from the tenant, then the fees are simply retained by the agent as profit, with no refund available to the tenant as in the case of a traditional deposit. Over the course of a tenancy lasting several years, a tenant may pay hundreds or even thousands in fees under a deposit replacement scheme, with no option to offset these payments against any liabilities which may arise to their landlord, or to recover the money if there are no liabilities when the tenancy comes to an end.
Are payments under a deposit replacement scheme a deposit?
Amounts paid under a deposit replacement scheme are non refundable and offer no protection against future liabilities, and so they are not a deposit. The references to ‘deposit’ in the marketing of such schemes may lead tenants to believe that they offer something equivalent to a traditional deposit — but in view of the fact that payments made cannot be credited against any future liability or refunded in the event there is no liability, this is not the case at all.
We have seen enquiries which suggest that tenants entering into deposit replacement schemes have not always fully understood that payments made offer them no protection against future liabilities. This is Money last year published an article concerning a tenant who alleged that it was not made clear to her that the payments made under a deposit replacement scheme operated by the letting agent Leaders Romans Group could not be offset against any liabilities at the end of the tenancy. Emails sent by the letting agent to the tenant in that case also indicated that she was to some extent influenced into agreeing to the scheme instead of opting for a traditional deposit. The agent advised that it was the landlord’s preferred option, and so would give her an advantage over tenants opting for a traditional deposit in being able to secure the property. The BBC have also recently published the story of a tenant in a separate case, who asserts that it was not made clear to him that payments made under a ‘deposit free renting’ scheme could not be refunded.
Do deposit protection requirements apply?
Deposit protection requirements were introduced in 2007 to ensure that tenants’ money was either held or registered with a Government approved provider. Such providers protect a tenant’s deposit in the event of landlord insolvency, and provide a free Alternative Dispute Resolution (ADR) service in the event of a dispute about the return of the deposit. There are sanctions against landlords for failure to protect a tenancy deposit, such as fines up to 3 times the deposit amount, or restrictions on serving a s.21 notice.
For the purposes of tenancy deposit protection requirements, s.212(8) Housing Act 2004 defines a deposit as “…money held, by the landlord or other, as security for:
- the performance of any obligations of the tenant, or
- the discharge of any liability of the tenant arising out of the tenancy…”
Because deposit replacement schemes do not provide the tenant with any security in the event that there is a breach of their obligations, or some other liability arises, they cannot be considered a deposit. This means that any payments taken under such a scheme do not need to be protected.
Tenants will not have access to the free ADR services operated by deposit protection providers, and instead will have to defend any claim for damages by the landlord or agent in the county court — which can be an expensive and intimidating process, for which legal aid is unavailable and most tenants will be unrepresented. Some deposit replacement schemes do offer non-statutory access to adjudication procedures, but this may well incur a further charge.
Are payments under a deposit replacement scheme a prohibited fee?
The Tenant Fees Act 2019 came into force in England on 1 June 2019, and capped tenancy deposits at 5 weeks rent in most cases, as well as banning many of the fees historically demanded by agents in connection with tenancies — details of payments which are now permitted are available on our website. See also our previous Adviser Online article on this topic.
Tenants charged a banned fee in England and can seek enforcement help via Trading Standards, Housing or Environmental Health officers, the National Trading Standards Estate & Letting Agency Team, or can complain via their letting agent’s redress scheme. Tenants can also recover an unlawful fee by an application to a tribunal, but only where criminal proceedings have not been started by one of the enforcement authorities.
Similar legislation came into force in Wales on 1 September 2019, although in Wales security deposits are not presently capped and permitted payments differ slightly — allowing fees to be charged more widely for breaches of tenancy so long as the tenancy agreement provides for this. In Wales banned fees can be recovered via the county court, and reported to the local council or Rent Smart Wales.
Private tenants in England and Wales must however always be aware of the risk of retaliatory eviction when challenging unlawful fees, due to limited security of tenure.
While we have established that a deposit replacement scheme is in fact not a deposit, it is important to consider whether such payments may represent a prohibited payment in respect of the ban on tenants fees. Such payments do not fall within the list of ‘permitted payments’, and so cannot be required as a condition of letting, and must be clearly described as truly optional to be allowed — with the alternative inevitably being a lump sum deposit (which will be subject to the cap and to protection requirements). It is important to consider whether any fee proposed as a deposit alternative is truly optional — if it is not, then it may be unlawful.
Are payments under a deposit replacement scheme unfair terms?
The Consumer Rights Act 2015 applies to agreements entered into on or after 1 October 2015. An unfair term is not binding on a ‘consumer’ (including a tenant) unless it is exempt from the fairness requirement. A term is unfair if it:
- creates a substantial imbalance in the rights and obligations between a ‘trader’ and a ‘consumer’ contrary to the requirements of good faith; and
- is to the detriment of the consumer.
An unfair term in a tenancy agreement is one that creates such an imbalance between a landlord and a tenant, to the tenant’s detriment.
‘Core terms’ of a tenancy (which might be considered to include provisions regarding a deposit or a deposit replacement alternative) will be exempt from the requirement for fairness if they are ‘transparent’ and ‘prominent’. You would need to look carefully at the terms of any agreement to establish whether this were the case. If a deposit replacement scheme is well explained and clearly presented as optional, it may be difficult to argue that it is unfair.
Unfair business terms and practices can be investigated by Trading Standards via the Citizens Advice consumer helpline, but again tenants will need to consider their security of tenure and weigh up the risk of retaliatory eviction.
Mis-selling of financial products
It appears that deposit replacement schemes could fall within the definition of financial products regulated by the Financial Conduct Authority (FCA), and indeed many providers do appear to be FCA regulated — which raises the prospect that any firms which are not FCA regulated who provide deposit replacement schemes may be acting unlawfully. The FCA states that financial services must be sold in a way which is fair and not misleading, and require regulated agents to adhere to their principles. Mis-selling may occur where a customer is pressured into buying a product or told that it is required when it is in fact optional, is given bad advice, the risks are not explained, is not told in advance about further charges which may be incurred, or is not provided with other information which is relevant to making an informed decision about the product. It is important that any tenant who opts for a deposit replacement scheme fully understands that while providing ‘insurance’ for a landlord, it does not provide any insurance for the tenant who pays for it. Again the terms on which such products are offered as well as how they are marketed and what pressure is placed on consumers may be key to determining whether they have been mis-sold. It is also worth considering that as well as the question of whether deposit replacement schemes represent regulated financial products, there is a further question about whether information given by those selling them falls within the remit of FCA regulated financial advice. Complaints about mis-selling by FCA regulated firms can be made to the provider of the service and then escalated to the Financial Ombudsman Service.
Have deposit replacement schemes faced any legal challenge?
We are not aware of any legal challenges which have been brought in respect of a deposit replacement schemes, although a letting agency presenting themselves as a ‘lifestyle club’ were last year fined £40,000 following a prosecution by Islington Council’s Trading Standards. They pleaded guilty to engaging in unfair commercial practices between 1 October 2017 and 30 April 2018, contrary to Regulations 8 and 15 of the Consumer Protection from Unfair Trading Regulations 2008. The agent had charged tenants a ‘joining fee’ rather than a refundable deposit which meant that they were not required to protect the monies in a deposit protection scheme as required by s.213 of Housing Act 2004. The prosecution however succeeded on the basis of misleading claims, and so does not set a precedent in the question of optional fees more generally.
The unfair practices were
- Requiring an upfront non refundable joining fee, while refusing any opportunity to view accommodation before committing to it, and pressing customers to sign the ‘membership agreement’ without giving them a reasonable opportunity to read and understand it.
- Misrepresenting themselves as a membership club when they were in fact a lettings agency.
- Asserting that complaints could be referred to an ‘independent mediator’ when this was not the case.
It is worth noting that in this case the offences occurred before the introduction of legislation restricting tenant fees. A similar scheme in which payment of the fees was non-optional would now also be likely to breach the Tenant Fees Act 2019 (in England) and Renting Homes (Fees Etc.) (Wales) Act 2019 (in Wales).
Comment
Tenants should be wary of deposit replacement schemes, and in particular should consider the cost over the anticipated duration of the tenancy when compared to a deposit now generally capped at 5 weeks rent in England. Tenants should also be mindful of the fact that a traditional deposit can be offset against any future liability, refunded if no such liability arises, gives access to free arbitration via protection, and allows sanctions against the landlord if protection requirements are not met — deposit replacement schemes offer none of these.
Tenants should also be aware that other assistance may be available in respect of raising a deposit — for example councils may be able to assist under homelessness prevention duties, and Turn2Us can assist in identifying charitable grants. Any deposit replacement scheme which is not truly optional is likely to breach the Tenant Fees Act 2019 or Renting Homes (Fees Etc.) (Wales) Act 2019, and any scheme which is not clearly explained might represent an unfair commercial practice or contain unfair terms. Such schemes may also be subject to FCA regulation regarding mis-selling.
Amy Hughes is a member of the Housing Expert Advice Team at Citizens Advice.
