• Security deposit cap: How will new legislation impact landlords and tenants?

Security deposit cap: How will new legislation impact landlords and tenants?

Security deposit cap: How will new legislation impact landlords and tenants?

With a cap on security deposits announced during this year’s Queen’s Speech, Your Move takes a look at how landlords will manage riskier tenants going forward.

Words by Christine Toner

If you’re a landlord then you’ve probably had just about enough of 2017 already. Come to think of it 2016 probably wasn’t a barrel of laughs for you either. Indeed, the last few years have been some of the toughest the market has had to deal with, with a host of new rules coming into play which have essentially changed the face of the buy-to-let sector forever.

“The changes to the rental market over the last nine years has been unprecedented in 150 years of tenancy law,” says Joseph Gervin, director, Liverpool Property Solutions (LPS). “[Changes to] Energy Performance Certificates, removing interest relief, Stamp Duty changes for landlords and selective licensing are just a few of the big changes in recent times. It appears the government has a landlord button they press when they feel they need more money in their coffers.”

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The latest proposed legislation, of course, was announced during the Queen’s Speech following this year’s shock General Election. After plans to scrap letting agent fees for tenants were revealed during the Autumn Statement late last year, the government decided to go one step further with the draft Tenants’ Fees Bill. Along with the letting fee ban, the government proposed implementing a cap on security deposits meaning landlords could charge no more than one month’s rent as a deposit for new tenants.

Rob Bence is co-founder of The Property Hub – a global community of landlords and owns a number of buy-to-let properties.

He says the government is missing the point and tenants will lose out as a result.

> Related | Generation Rent: Liverpool’s changing buy-to-let landscape

“Landlords that charge more than a month’s rent as security deposit do so because they feel there is a greater risk to the property than there might be with other tenants,” he says. “A tenant with pets is a prime example. If landlords are not able to manage this risk accordingly with increased deposits there is definitely a danger that a number of them will opt to ban pets from their properties.

“Furthermore, those tenants who may have affordability issues may struggle to find a landlord willing to let to them without the added security of a larger deposit. With the lack of affordable housing to rent already a problem in the UK this is something that should be a major concern to the government. Landlords should be being encouraged (and supported) to let to tenants who, perhaps, might not be considered as safe a bet as others – not being discouraged from doing so”.

Indeed, the lack of affordable properties available to rent in the UK is a growing problem. Earlier in the year the government announced steps to address the issue, including opening up its 2016-2021 Affordable Homes Programme to allow developers to build a range of new homes for rent. But Rob says by hitting out once again at the buy-to-let market the government is actually damaging the country’s affordable rent offering.

“The changes to the rental market over the last nine years has been unprecedented in 150 years of tenancy law.”

“This latest government intervention is yet another example that the government does not fully understand the private rented sector,” adds Rob. “Every time it has stepped in to the the buy-to-let market of late the consequences have been disastrous, not just for landlords but for tenants too.

“Cutting landlord tax relief and increasing Stamp Duty have seen many landlords left with no option but to increase rents  – meaning the very people who the government was apparently trying to protect are losing out. And this new initiative will be no different.”

Liverpool landlords may be spared from the changes somewhat as, according to Joseph, deposits are generally one month anyway in the city, now he admits there will be repercussions for some if the cap comes into play.

“The reason why this figure, in our opinion, is correct is one of affordability,” he says. “Tenants’ costs in moving are always high so why risk losing a good tenant for the sake of a further week or two’s rent to be held back. On the other hand, in high risk tenants such as those with pets, County Court judgements (CCJs) and adverse credit some people could be left without homes for a longer period of time or getting less desirable properties, due to the deposit cap, than they would like.

> Related | Generation Rent: A testing time for tenants

“We believe, like most changes to statute, landlords are pragmatic and adjust quickly to the market forces. One months deposit is common in Liverpool so for 90% of lets the status quo will remain. For landlords requiring more than one month, then possibly more stringent tenancy terms will be implemented to deter damage and arrears.”

But while landlords can be expected to rise to the challenge and adapt – as they have had to do a lot lately – one wonders what impact continued government intervention will have on the sector going forward.

“We would like the government to start working with landlords rather than against them,” says Joseph. “Landlords and agents provide a really important service to society, especially as councils no longer look to build their own social housing. The government should look at reducing the period of time that landlords can get back possession of a property when a tenant is in breach.

In our experience possession can take upwards of six to eight months in which time breaches continue, arrears rack up and deposits become a drop in the ocean in any event. It’s time possession laws become a level playing field and then we probably wouldn’t need deposits.”

Tenants with Pets

According to the National Landlords Association if a cap on security deposits is brought in, tenants with pets may be left out in the cold.

Writing on its official website, the NLA states: “In the initial consultation on the fees ban the government announced their intention to look at putting a cap on security deposits. While we argued that it was unnecessary, the government has not listened. Data from our AST statistics show that the average deposit (of those taking a deposit) is 4.92 weeks’ rent.

“The details of the draft Tenants’ Fees Bill that were released at the Queen’s Speech also included: a cap of one month’s rent for security deposits.

“While not the intention, the government’s plans for imposing this one-month cap on security deposits will reduce landlords’ willingness to accept pets by removing their flexibility to take a higher deposit to cover for pet damage.

“Previous research from the NLA showed that almost half (47%) were unwilling to allow pets, with 41% of those citing the reason as potential property damage.

“The Dogs Trust’s ‘Lets with Pets’ scheme advises landlords to either take a higher deposit or include a “professional cleaning on move-out” clause in the tenancy agreement in order to mitigate the financial risk of property damage.

“However, the government’s plans at present could very well outlaw these practices. The end result? Even fewer landlords willing to let to tenants with pets.”

About Author: Christine Toner