AST Clauses, Holding Deposits and Affordability Checks

by Simon Coppen

16:57 PM, 5th March 2014
About 7 years ago

AST Clauses, Holding Deposits and Affordability Checks

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AST Clauses, Holding Deposits and Affordability Checks

Hi All,

I’ve been getting the paperwork ready for a BTL property that I’m close to completing on. There’s three things that I’m not 100% sure about and was hoping for some advice on. They’re all unrelated, so apologies if I should be raising these under separate discussions…

(1) Adding clauses to an AST
I’m aware that you have to be VERY careful with ASTs. I’m using a NLA template but am wanting to add the following two items under the tenants obligations:

“Not to light any fires in the Property. Fireplaces in the Property have been retained as decorative features and are no longer suitable for open fires or fuel burning appliances.” AST Clauses Holding Deposits and Affordability Checks

and

“To have the use of all appliances in the property, as laid out in the Inventory save those which are noted as not working. However, should any items require repair, or be beyond repair, the Landlord does not undertake to pay for any costs to repair or to replace the appliance, except those which the Landlord is required by law to maintain.

Do these clauses sound reasonable? The first one is entirely my own concoction, so if anyone has any better ideas or thinks it is unnecessary, please tell me. I was just wanting to cover myself in case the tenant causes damage and claims never to have been aware that he couldn’t use the fireplaces. I was going to add something similar to the general notes in the inventory, and of course tell them in person.

The second one I wanted to add in case I end up with ‘heavy handed’ tenants. I’m happy to fix or replace one or two white goods a year, but don’t particularly want to be liable for replacing the entire lot!

(2) How much to charge for a holding deposit
I know there’s been some good discussion about holding deposits on this site already, but I don’t remember anyone saying how much they should be. I’ve read somewhere that ‘about a weeks rent’ should be asked for as a holding deposit, which seems reasonable. However, I’ve also read that up to ‘half a months rent’ can be asked for, which, although it would deter tenants pulling out at the last minute (which might end up costing the landlord several weeks rent), does seem rather steep. If asked for at all, what are other landlords asking for as a holding deposit?

(3) Affordability checks
Do people think that the standard referencing check of income being at least 2.5 x rent is enough? If the tenant is losing say 20% of their income to tax, that means half of their net income would go on rent. After council tax and utilities, not to mention any debts or other financial commitments they might have, many are going to be broke. It’s no wonder rent arrears are such a problem. Mortgage lenders require incomes to be 4 to 5 x mortgage, so a rental affordability check of 2.5 x rent seems rather low. Does anyone impose their own, more stringent criteria, such as 3 x rent? Or would this be too restrictive…?

Any advice or comments to any of these queries/topics would be most welcome and appreciated.

Simon



Comments

Mark Alexander

17:05 PM, 5th March 2014
About 7 years ago

Hi Simon

Your additional clauses seem to be fair, clear and not unreasonable, well done. Please don't sue me if they don't work, I'm not insured to give professional advice, this is just my personal opinion.

I don't do holding deposits, I prefer to start a tenancy early and discount it significantly for an initial period - BUT only if I really have to. I hate void periods and think holding deposits are more trouble than they are worth. Having said that, I don't operate in the student lettings market where I understand that holding deposits can be a vital component of the business model.

With regards to affordability checks, my rule of thumb is that is the referencing company are prepared to back their judgement by offering Rent Guarantee Insurance that's good enough for me. I also recommend you to read this FREE guide to finding perfect tenants >>> http://lettingagentsonline.co.uk/free-guide-to-finding-perfect-tenants/
.

17:17 PM, 5th March 2014
About 7 years ago

Thanks for the mention and the link Mark 🙂

Note for Simon, if you are at all concerned about rent arrears or having to evict bad payers please take a look at this >>> http://lettingagentsonline.co.uk/rent-on-time-every-time/
.

Simon Coppen

19:50 PM, 5th March 2014
About 7 years ago

Thanks for your comments Mark and Adam.

I was surprised to hear that you don't do holding deposits Mark but, since you have infinitely more experience than me, assume that it's a sound approach. I guess the tenant paying their referencing fees is evidence of their commitment. I was also surprised to read the National Lettings article saying that the holding deposit is usually the same as the damage deposit. Four to six weeks rent as a holding deposit can't be right?!

Good point about the RGI backing for the referencing companies. If RGI only costs about 1% of the rental income, the risk is probably much less than 1% on tenants defaulting or causing damage.

Adam, I can see how the 'rent on time every time' will appeal to some people but, as long as short term cash flow isn't an issue, it doesn't seem to offer much more than RGI yet is significantly more expensive. Thanks anyway though.

Industry Observer

8:44 AM, 6th March 2014
About 7 years ago

Clauses are fine especially as the second is word for word in an agreement I know very well - be careful not to be accused of breaching copyright or passing off.

Anything called deposit is dangerous and much depends on not wehy the money is take up front, but what hapooens to it later, and exactly when. Call anything like that a reservation fee, it might still be a deposit but is camouflaged as best you can. Amount is critical - start taking £1000 on a £750 rent and that will be a deposit for certain. I'd suggest no more than 50% of rent.

You must also be VERY specific about what happens to it if the tenant drops out. Under Consumer Law you cannot make a deposit fully non refundable because it is a payment made as part performance of a contract. You can only deduct reasonable costs, not start charging rent in lieu etc. Indeed if you do then it was a deposit all along.

Referencing companies usually allow 40% maximum of gross income to pay the rent - 35% is a very safe yardstick

Yvette Newbury

13:37 PM, 6th March 2014
About 7 years ago

I have no problem with your first clause, but the second I disagree with completely. I suspect it would be difficult to prove if your tenants have been "heavy handed" and if an appliance stops working and you do not replace it, could lead to a dispute with the rent that is best avoided. We had a tenant that did not look after the fridge/freezer and we had to throw it away once they had left as the whole thing was a solid block of ice! We bought a new one once they vacated and they sent a thank you letter for being fair with their deposit, but if it had stopped working during their tenancy we would have replaced it at that time as you cannot do without a fridge/freezer and sorted out the money between us, or at the end of the tenancy.

Holding deposit - 6 weeks the norm in London.

Affordability checks - yes we find them appropriate.

Simon Coppen

13:38 PM, 6th March 2014
About 7 years ago

Thanks for the comments IO. I was going to ask for 25% of rent as a 'reservation fee', although am having second thoughts and wondering if it's more trouble than it's worth.

I was aware that it has to be refunded if the landlord declines the prospective tenant, but had thought that you were entitled to deduct for lost rent if they pull out. In my template for a receipt, I had:
"If the prospective tenant fails to progress the tenancy for any reason, or provides inaccurate information about themselves which leads to a failed reference check, the holding deposit will not be refunded."
I can see how the above statement might be considered an unfair term but, if it were changed to deductions for "reasonable costs" or something, I can't see why you couldn't keep the reservation fee (assuming you couldn't fill the property and had an enforced void)? Isn't it similar to losing deposits for late cancellation of restaurant bookings, or missed appointments? In any case, I will amend my statement, so thanks again for the advice.

Industry Observer

13:42 PM, 6th March 2014
About 7 years ago

Yvette

You may not like it and it is a practice I discourage with my clients, but there is absolutely no legal reason why a Landlord cannot disclaim repair and replacement responsibility. The alternative is simply to remove the item.

I think a better technique is a supplementary inventory, a page added on and signed by both with statements to the effect that say the tumble dryer is safe and fit for use but if it fails the Landlord will not be responsible for repair or replacement.

But I discourage it and I don't like it in an agreement though it is bevomeing more of a standard practice.

Forgot to mention in first post by the way that if it is an HMO then the clause would not be legal.

Industry Observer

13:45 PM, 6th March 2014
About 7 years ago

Simon

Sorry missed your post.

It is a debatable point but I certainly would never use the D word unless it was for what was beyond all dount THE deposit. Your wording could act like a silent friend and be a bit like it used to be in Scotland - OK if you can get away with it but if challenged smile and return the money less reasonable and easily justifiable costs.

Simon Coppen

14:02 PM, 6th March 2014
About 7 years ago

Hi Yvette,

I agree that it would be very difficult to prove that tenants have been heavy handed with appliances, but is this not the very reason that you'd want the second clause? Otherwise you could be liable for replacing four or five appliances that you provided out of your own good will (admitedly tenants expect them nowadays).

Do you really mean 6 weeks for a holding deposit / reservation fee, or do you mean the damage deposit (to be protected)?

Industry Observer

14:08 PM, 6th March 2014
About 7 years ago

Good point Simon a 6 weeks holding deposit if challenged is going to be a deposit - too large an amount.

On these clauses I have just realised we are all missing the point of clause 2 it isn't for damage and heavty handedness, who broke something or did it just break is always a tricky one to prove.

The clause is there in case the item conks out and is beyond repair etc - so LL doesn't have to replace it.

I assume everyone is aware even in an agreement with no such clause, like yours Yvette, that any replacement item can be second hand with same expected life left in it as a failed item.

This assumes major repair not having reached end of life and so zero years left you couldn't replace for a tenant with that!!

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