What is a holding deposit agreement?

The rental market can move incredibly fast, which can be frustrating for prospective renters. They see a property they love, but should anything slow them down whilst they’re getting ready to go through the checks and secure the property, they can easily and quickly lose out.

That’s where a holding deposit agreement comes in. A holding deposit allows a tenant to essentially reserve the property and stop any other viewings. Let’s explain more about how a holding deposit agreement works, the benefits and what a landlord needs to know.

Holding deposit agreements explained

First things first – a holding deposit refers to the money, and the holding deposit agreement is the written terms around that money. Once a tenant has paid the holding deposit, the property is typically taken off the market, and the referencing and pre-tenancy checks can commence.

The holding deposit agreement is the conditional contract that sets out what the holding deposit is for and sets out the responsibilities of both the landlord and the prospective tenant during the holding period. It also stipulates the conditions under which it will be refunded, applied or retained. It should all be housed within one clear written document.

So, how much do tenants usually pay for a holding deposit? It’s actually capped at a maximum of 1 week’s rent for that property. You cannot ask for more than that. You’ll also be subject to strict rules on when it must be refunded and when it can be retained.

What are the rules around refunding and retaining a holding deposit?

The last thing you want to do is get caught out by the rules around refunding and retaining a holding deposit. Here’s a breakdown of the rules.

You must give the holding deposit back if:

• The tenant goes ahead and signs the tenancy agreement
• You decide not to rent the property to them
• You don’t manage to agree and sign the tenancy before the deadline for agreement (usually 15 days after you receive the holding deposit) and it’s not the tenant’s fault
• You break the tenant fee rules or behave in a way that makes it unreasonable for the tenant to carry on, such as harassing them.

You can keep the holding deposit if:

• The tenant gives you false or misleading information that affects your decision to rent to them, such as lying about their income
• The tenant fails a Right to Rent check
• The tenant pulls out and decides not to go ahead with the tenancy
• The tenant doesn’t do their part to get the tenancy agreed.

Other legal considerations

Holding deposits is serious business, with legal considerations to take into account. Between caps, time limits and the rules on retention and refunds, there are some important things to learn.

For instance, you cannot take the money before you’ve provided the written terms in the holding deposit agreement. Once you’ve received the money, you need to keep a clear record of payments, communications and decisions.

If you don’t comply with the legalities around holding deposits, you run the risk of disputes, reputational damage and complaints, and worse, fines, penalties or enforcement action.

Why do landlords use a rental holding deposit agreement?

It’s easy to see why a holding deposit agreement is beneficial for the tenant, but there are also a few very valid reasons why landlords enjoy using them too. Firstly, if a tenant is willing to put down a holding deposit, you can assume that they mean business. The chances are that they won’t be messing you around. They want your property for themselves, and they are willing to part with money to ensure it, which can only be a good thing.

It also covers your risk and time while the referencing and checks are carried out, so it offers some added security on your side, too. Also, if you’ve got a serious interest and you’re able to take the property off the market temporarily, you don’t have to deal with turning other applicants down continuously.

What’s included in a rental holding deposit agreement?

If you’re interested in using a rental holding deposit agreement, but you’re not sure where to start when putting one together, we can help. Here’s a simple run-down of what should be included in your agreement document.

• Parties and property details – full names and contact details of you and the proposed tenants, along with the address of the property being reserved
• Holding deposit amount – the sum paid, how it’s calculated (i.e. 1 week’s rent) and brief reference to any legal caps or limits
• Reservation period – the start and end dates of the holding period, what happens during this period and the landlord and tenant obligations during this time
• Conditions for proceeding to tenancy – passing all relevant checks, agreement on move-in date and tenancy start date and any pre-tenancy requirements, such as providing a guarantor
• Holding deposit refund conditions – when and how
• Holding deposit retention conditions – specific reasons in which the deposit may be retained
• GDPR and use of tenant information – briefly explain how an applicant’s data will be used and reference your privacy notice if you have one.

Remember to put everything in writing and keep copies, and stick to clear, plain language without legal jargon.

So, should you use a rental holding deposit agreement?

For some landlords, using a rental holding deposit agreement makes perfect sense – but not always. If you find yourself dealing with more informal arrangements or working with existing and trusted tenants, it’s unlikely that a holding deposit will be necessary. If your property/properties are in low-demand areas, it also may not be worth the extra admin.

For landlords who operate in high-demand areas, particularly during busy letting seasons, however, they can prove extremely useful and attractive to prospective tenants who want to ensure that they can beat the competition and secure the property that they want.

A holding deposit agreement is a small document, but it carries a lot of weight. It sets out what you and your prospective tenants can expect while the property is ‘on hold’. Getting it right means you can reserve a property with confidence, reduce time-wasters and protect yourself from lost rent – without falling foul of the Tenant Fees Act or creating unnecessary disputes.

A clear, compliant holding deposit agreement is one piece of the puzzle when it comes to protecting your rental income and managing risk. The next step is making sure you’re covered if something does go wrong during the tenancy – from accidental damage to loss of rent. That’s where specialist landlord insurance comes in.

Do you have up-to-date and comprehensive landlord insurance cover for your investment? Get in touch with CIA Landlord Insurance today to get a quote. With over 20 years of experience, you can rest assured that you’re in the best hands.