There is no doubt that the lettings industry is going through a period of change.
In recent years, both government and proptech businesses have been coming up with new ways to make renting easier for all parties, resulting in a flurry of both new legislation and new business propositions introduced to the industry.
Most recently, with the introduction of the Tenant Fee Act 2019 came a huge number of changes to the way in which agents and landlords are allowed to charge tenants for renting a property.
One of these changes was the introduction of a cap of five weeks’ rent for deposits on properties renting for up to £50,000 per year, and six weeks for those with rents above £50,000.
While this is a step forward in making the initial cost of renting more manageable for renters, for many getting the cash together for five weeks’ rent can still be almost impossible.
This is where deposit replacement schemes come in.
The idea is that instead of paying a deposit, tenants can choose to pay for a service which ‘guarantees’ the tenancy (either via an insurance or through a membership/bond arrangement) by paying a small upfront fee to cover the cost of any damages, missing rent etc on the property.
It appears to be a win-win – the tenant doesn’t have to save a large sum of money for a deposit to be able to rent the property of their choice, and the landlord is assured that they are covered for any misconduct of the tenant.
Of course, as is the case with many of these things, the landlord must opt in to a scheme to be able to offer it to tenants, so it’s not guaranteed for all tenancies.
However, those that are opted in could see a significant reduction in void periods as, in theory, no deposits mean tenants aren’t left waiting for large chunks of money to be returned to them at the end of their previous tenancy, making them more financially able to move around.
Plus, many of the available deposit replacement products cover landlords for six weeks’ rent instead of the government standard of five, allowing for better peace of mind that they will be covered for any potential loss or damage at the end of the tenancy.
Wary landlords
Clearly, these schemes are highly appealing for tenants, but we have found that landlords are still wary of them for several reasons.
Firstly, there is more scope for tenants to damage a property if they don’t have cash ‘invested’ in their tenancy.
They argue that tenants could leave the property in poor condition because the deposit replacement provider will pick up the bill at the end of the tenancy.
As you would imagine, providers of the deposit replacement services have wised up to this and have written relevant tenant liability clauses into their agreements with them.
However, as with most new products, it takes time for them to become trusted in the eyes of the consumer, and so landlords may remain sceptical for some time. The question landlords have to ask themselves is whether one extra week’s rent cover is enough to sway them to using a deposit-free scheme.
There are also a number of potential issues to consider with these types of product.
Risk of being mis-sold
We must remember that they are basically untested and carry a high risk of being mis-sold, accidentally or not, to tenants and/or landlords.
There are already worries about these products leading to financial claims further down the line, with fears that some agents could try to push these services onto their landlords and tenants in order to recover the revenue which has been lost in the post fee-ban world.
Plus, with many of the companies offering these products being start-ups themselves, they could be at higher risk of going bust. If this happens, where do the landlord and tenant stand?
And who is then liable should the landlord need to claim for any damages? The answer of course is their insurance policies, but no one enjoys having to claim through insurance.
And on the subject of liability, whose responsibility is it to chase missing rent or money for damages should the tenant leave the country?
Would it be the responsibility of the landlord who is covered by the deposit replacement provider? Or would it be the deposit replacement scheme which is in contract with the tenant?
Actually, it is probably a little of both depending which deposit replacement provider you opt to work with, which could understandably make things complicated for the landlord.
Question marks
It could be argued that it shouldn’t be the tenant’s responsibility to pay for a product that covers the landlord with very little benefit to themselves.
Yes, tenants are able to move between properties more easily, but essentially, the tenant is paying for a product on behalf of someone else.
While it’s great that landlords may finally benefit from something in this market, is it the right sort of benefit?
With traditional deposits, the tenant is at least likely to have their money returned to them (minus damage claims), but in the case of deposit replacement products, most tenants will pay one week’s rent and never see that money again. In some cases, it could even end up being more expensive for tenants to rent in this way.
There are also questions surrounding Alternative Deposit Resolution (ADR) and damages at the end of the tenancies.
Most deposit replacement providers have tied in with one of the three traditional deposit schemes to use their ADR services, but does this mean that disputes raised via deposit replacement solutions will be resolved quicker than they would for traditional deposits, as some companies claim?
Possibly not, as they will just be added to the already very long queue of disputes.
Some deposit replacement providers are even asking tenants to pay a small sum towards ADR, which is arguably against the spirit of the fee ban.
I understand the logic in order to keep disputes to a minimum, but again, are landlords really benefiting here?
New and untested
I can’t deny that deposit replacement is a good idea and fits well with the increasingly tenant-centric industry we are in.
However, as a new and untested product, I feel that the unknown nature of these schemes raises some risks that both landlords and tenants need to be aware of before entering into any contract.
In any case, we are always on the look-out for great new initiatives to benefit our franchised offices, our landlords and our tenants, so I do hope for the industry’s sake that deposit replacement schemes can prove themselves to be a viable alternative.
* Claudia Green is head of lettings at Winkworth.
The company does not back any specific provider of tenancy replacement products
A very interesting opinion piece and Claudia raises some valid concerns. Agents are right to do careful due diligence when signing up to deposit replacement, to avoid the traps mentioned below. There are some highly dubious products out there who seem to be advertising “protection” but when you look at their detailed terms it is hard to see how landlords are protected at all.
We have worked hard to ensure that Zero Deposit addresses Claudia’s points, with our FCA regulated product and the extensive work we did with letting agents to design a product that works for everyone. Allow me to cover a few of the points mentioned:
Landlord benefits from protection and speed
Landlords benefit from additional protection (6 weeks) and with Zero Deposit, whilst our Guarantee is insurance backed, disputes are resolved by the TDS, not an insurance company, so the landlord will get the same outcome from a Zero Deposit as they will from a cash deposit. The reason we can do things quicker is that the TDS are not bound by the onerous Housing Act time frames on our disputes, so for example we give tenants 21 days to respond to a dispute, rather than the 90 days on a cash deposit. All of this leads to fair and speedy dispute resolution.
Marketing potential
The main benefit to landlords is the enhanced marketing potential with many tenants putting a property that is more affordable to the top of their shortlist with up to 26% more clicks on the portals. Landlords also enjoy a reduction in void periods and potential move-in delay with less tenants having to “wait until payday”.
Landlord signup rate
Some landlords are wary, but we provide training to our partner agents and this enables them to explain the product clearly to their landlords and handle any questions. Our top agents have 90-100% of landlords signed up because their landlords quickly see the above benefits of a Zero Deposit Guarantee.
Do tenants benefit?
Tenants who choose to take a Zero Deposit Guarantee benefit by having a more affordable move in, and this being a big enough benefit is clearly backed up by our 5 star rating on Trust Pilot – they love that it gives them the freedom to use their cash in other ways. Tenants have skin in the game because they remain fully liable for any damage/unpaid rent etc in exactly the same way as they do with a cash deposit and in the event of a dispute awarded to the landlord by the TDS, we will pay the landlord and then pursue the tenant for the money – whether in the UK or overseas. Unlike other schemes, we do put in place an unfair barrier by charging tenants to dispute a landlord claim – it is a fair process for all.
Mis-selling risk?
This is an understandable area of concern with some agents already abusing this opportunity and negative stories spilling into the press.
Our partner agents receive detailed face to face training and we follow a fully regulated sales process that removes the risk from the agent of mis-selling the product – largely because the agent doesn’t sell our product. We handle the sale process and ensure that the tenant fully understands their liabilities. We are hugely concerned that there are some unregulated providers out there who are emphasising that their products allow agents to “sell with freedom”, because we see this as the starting point for a mis-selling scandal.
I’d be happy to discuss these points with any agent that would like more detail. The majority of agents that sit down with us and get to understand the product realise how useful it can be for their business.
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A lot will depend on the type of policy. However, with landlords being squeezed left, right & centre, I can see DRI becoming the norm.
After all, if a LL can get additional cover/protection, why would they not choose that route and if a tenant only has to pay a fraction of the maximum capped deposit, why would they not want it.
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A total lack of understanding of the need for the tenant to contribute a liability to renting. All that is being offered is an easy option to the tenant not needing to commit, not a sound business direction.
The only need for these types of products are for tenants that cannot afford to rent!
History has proven these are the tenants that cause grief sooner or later and while you may be covered by insurance or not, (subject to small print) it shouldn’t be made easier to get into the mess in the first place, that then needs cleaning up afterwards. Many landlords rent out properties that were family homes and no amount of insurance cover will protect the emotional distress and cleaning up doesn’t make the property rentable the next day. often weeks or even months later.
Landlords need to remember one of the golden rules … don’t rush into renting the property until you have the right tenant.
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‘if you can’t lump up a deposit then you’re some kind of delinquent tenant’. suggests woodentop. Struggling, once more, to say anything intelligent; just othering tenants for a living. no amount of insurance cover will protect the emotional distress Spare us the hysterical war cries, you fool.
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Rent Rebel …. if the hat fits keep on wearing it M8! I never used the word delinquent or implied such. PRS is exactly what it says it is and not SHS. At least my posted grammar isn’t short of being delinquent or intended to be insulting.
If a tenant cannot stump up one month deposit, means their ability to pay rent every month is always at risk for PRS. I’d love to see how unemotional you would be to have the filth and damage done to your belongings that you cherished for years, without a care in the world by some other person, running into £k’s. Oh yeah, can just see you turning the other cheek!
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You did imply it dear. Keep up.
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