What is a no deposit tenancy?

Ask almost anyone who has ever rented out their property – or for that matter, who has ever rented their home – and they will be familiar with the concept of the tenancy deposit.

Landlords or letting agents tend to request a tenancy deposit from a prospective tenant who wishes to move into and live in their rental property.

This deposit is a sum of money that effectively acts as a guarantee against such risks as tenant-caused damage to the property, unpaid rent, and/or cleaning bills if the tenant leaves the building in poor condition.

But is a tenancy deposit mandatory, and what is a no deposit tenancy?

An introduction to a no deposit tenancy and how it works

The current legal situation in England is that, as a landlord, you are not allowed to force your tenant to pay a deposit of more than five weeks’ rent – or six weeks if the annual rent is more than £50,000.

Amid the cost-of-living crisis of recent years, a lot of tenants find saving up for the standard five weeks’ rent deposit extremely difficult to do.

So, given your understandable eagerness to get a tenant into your property, you might consider the option of not demanding a deposit from your potential tenants at all.

A no deposit tenancy agreement is a rental agreement that does not require a tenant to pay a security deposit to the landlord before they move into the property.

You might have heard of this arrangement being referred to as a ‘no deposit option’. It takes the form of a guarantee or insurance from a private company.

These zero deposit companies vary in their exact terms and conditions. However, if you go ahead with such an arrangement, it will typically work as follows: your tenant will pay a non-refundable fee at the beginning of the tenancy, or a monthly premium.

If, then, you have such an agreement in place with your tenant, and you wish to charge your tenant for such expenses as damage, cleaning, or rent arrears when the tenancy comes to an end, you will be able to make a claim to the zero deposit company.

In such a situation, the company will pay your claim, and then reclaim the money from your tenant, taking them to court if they fail to pay.

Advantages of a no deposit tenancy

So, in your position as a landlord, why might a no deposit tenancy make sense, or what factors may cause you to prefer traditional tenancy deposits?

The potential advantages of a no deposit tenancy agreement from a landlord’s perspective include the following:

It could help ensure a tenant moves in faster

In some sought-after localities, gaps between tenancies might not be much of a problem. As soon as one tenant moves out, there is often another tenant eager to move in.

But that might not be the case every time, even in popular areas. This may be especially so given, as we mentioned above, the potential barrier the need to save up a deposit can represent for tenants.

So, your participation in a no deposit scheme could help make sure your property is never vacant for long. This will help ensure a steady income for you – and of course, it will save you the worry of trying to keep an unoccupied home secure as well.

It could offer you improved protection

As we explained above, there is a limit to the amount you can request when it comes to traditional security deposits – five weeks’ rent if the annual rent is less than £50,000.

Some zero deposit schemes, however, provide a minimum guarantee equivalent to six week’s rent. So, if you do need to claim, you could have enhanced protection from a no deposit tenancy agreement, compared to a conventional security deposit.

Indeed, it’s not unheard of for some zero deposit scheme providers to offer as much as eight weeks’ worth of rent as security.

It could lower your administrative burden

If you’re an experienced landlord, you will probably be familiar with how tenancy deposit schemes work. To use such a scheme, it is necessary for the landlord to register their details and secure the deposit, followed by sending the tenant confirmation of this having been done.

While that shouldn’t be a massively onerous procedure, there will still probably be less admin work for you if you use a zero-deposit company instead.

This is largely because, with zero deposit schemes, the emphasis is on the tenant registering for the relevant scheme and paying any joining or other fees.

Disadvantages of no deposit tenancy agreement?

Despite the benefits, there are a few reasons why you might shy away from a no deposit tenancy:

The zero deposit sector is largely unregulated

Although some zero deposit schemes are subject to regulation by the Financial Conduct Authority (FCA) and adhere to industry best practices, the sector as a whole presently lacks regulation.

Some zero deposit companies haven’t been around for very long. You may be taking a certain amount of financial risk if you use one.

If you use a scheme that isn’t regulated or part of the Financial Services Compensation Scheme (FSCS) – which is the UK’s statutory compensation scheme for customers of authorised financial services providers – and the given provider goes out of business before the tenancy ends, you could be taking a sizeable financial hit.

You might need to wait for compensation

In the event of you using your chosen zero deposit scheme to make a claim, you may be left waiting so long for compensation that you are forced to deal with the financial shortfall yourself. For example, by covering any urgently needed repairs out of your own pocket.

Some schemes do pledge that if a valid claim is made, the funds will be released within just a few days. Closely scrutinise the terms and conditions of whatever zero-deposit companies you consider.

The lettings agent may receive a commission from the scheme

You might be enlisting the help of a lettings agency. If that’s the case, bear in mind that your lettings agency may be given a commission from the zero deposit scheme provider.

Can you force your tenant to use a no deposit tenancy?

No, you cannot force your tenant to use a no deposit tenancy. The Tenant Fees Act 2019 states you must also give a tenant the option to pay a traditional deposit.

Should you use a no deposit tenancy arrangement with your next tenant?

As we cited above, a zero deposit scheme can present advantages to landlords. These include more tenants who may consider your property, as well as a probable reduction in unoccupied periods.

On the other hand, there is considerable demand for rental properties in the UK and a strain on supply. If your property is in a desirable area of the country, you might not need help shortening gaps between tenancies.

Whether a no deposit tenancy agreement is right choice for you will depend on your circumstances and the level of risk you are prepared to accept.

Think about whether a zero deposit option is likely to appeal to your target tenants. Some tenants will probably appreciate how such a scheme can make your property more accessible. Others may not feel it offers much value for money.

To discover landlord insurance for your property portfolio, why not ask for a quote through the CIA team today? You are welcome to contact us via email or to give us a call on 01788 818 670.