Deposit Replacement Schemes - should landlords embrace or beware?

Mike White, Martin & Co. Pic: www.edp24.co.uk

If you haven't seen them yet, you will; not least because the government has taken notice of a select committee's recommendations 'and will encourage further innovation in the deposit free renting sector'.

There's a number of different variations on the theme but broadly speaking what happens is that a tenant, instead of having to find, say, a month and a half's worth of rent, as a security deposit, pays the equivalent of a week or so's rent to provide their new landlord with an insurance policy covering any dilapidations to the property during their tenancy. The theory is if the landlord does need money to put things right at the end of the tenancy, the insurer coughs up and then goes to the tenant for reimbursement. The tenant is obliged to pay and if they don't then the insurer pursues them through the court system.

Sounds fantastic doesn't it – the landlord gets their money and the tenant doesn't have to find a hefty security deposit upfront, not seeing it again until the end of the tenancy. So, along with paying no agent fees, for a few hundred pounds, they'll be able to move into your house. What could possibly go wrong?

The reason some agents are so keen on them, particularly the corporate agents, is that they get a big wedge of the 'few hundred pounds' paid back to them as a commission payment. There are many agents up and down the country who have structured their whole being around offering cheap deals to landlords and recouping the cost of doing business by whacking tenants with big fees. Come the fee ban, those agents are going to have a bit of a problem unless they can replace the lost revenue.

So, let's have a quick look at the plus and minus points from a tenant perspective. For good and bad tenants' alike, there's the obvious advantage of not having to stump up so much at the outset. However, for the good tenant who pays their rent and leaves the property as they found it, while they would previously have received their entire deposit back, a deposit replacement scheme will cost them a non-refundable fee. Many of these schemes require the tenant to pay an ongoing monthly fee as well, so if the tenancy lasts for a couple of years or more, this will cost them dear in the long run.

For the tenant who leaves a mess or damages the property, they'll still be required to cough up the remediation costs in full just as they would if they had put up a security deposit. But, it'll have cost them the same fees as for the good tenant and should they choose not to pay for the dilapidations, then it will definitely be a case of 'See You in Court', since no insurer will take that laying down.

What about for the landlord? Well there's the argument that they'll be more potential tenants for your property as fewer people will be 'priced out'. On the other hand, without that commitment of putting up a real deposit, they're not going to think they have any 'skin in the game', so will they look after the property quite so well? I'd also be concerned about the length of time it took for the scheme provider/insurer to pay out the damages at the end of the tenancy. While the current Deposit Protection Schemes can be slow, at least the process is well established and, moreover, if a deposit dispute goes to adjudication, you know that it will be done fairly and independently.

Since I was taught to be cautious and am much more of a risk manager than just someone trying to flog you landlord services and products at every opportunity, I will be very wary of these schemes until they are proven beyond doubt. Hence, you won't see Martin & Co Norwich marketing them as the next best thing. For now, cash will remain King!

For more information and for a better understanding of deposit replacement schemes, give Mike White a call at Martin & Co Norwich, column sponsors, on 01603 766860.