Can a theoretical deposit be relabelled rent?

by Readers Question

14:22 PM, 4th October 2016
About 2 years ago

Can a theoretical deposit be relabelled rent?

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Can a theoretical deposit be relabelled rent?

A fellow landlord found themselves in the unenviable position of landing a tenant whose history was hidden but rapidly caught up with them after only 6 weeks in the property.jif

The paperwork was fine and the prospective tenant had a backstory worthy of Harry Pearce himself. Now, with 8 weeks hindsight the clues are there; I doubt a bank would have spotted them.

The tenant moved in without funds for rent and deposit being cleared. After a short delay and many attempts (apparently it’s the banks fault), the tenant’s father managed to make a payment to the landlord and the tenant called it ‘the deposit’.

No rent though. Apparently the tenant has as many difficulties with incompetent banks as the father.

The landlord hung on to the deposit outside the deposit scheme they usually use whilst the tenant made and broke many promises to pay rent. The landlord has their own cash flow to mind and was forced (by the need for their own survival) to pay their mortgage with some of the deposit.

But on day 31 of ‘the deposit’ being handed over the landlord was (and this is rather a strong word, I can think of no other) blackmailed regarding penalties as it wasn’t deposited within 31 days.

Still no rent.

So, my question is simple and in two parts…

The tenant has failed to pay any rent and the tenant’s bank continues to be incompetent (Apparently). Rent, by agreement should have been monthly in advance. Can a landlord re-label the money previously handed over as ‘the deposit’ to cover unpaid rent?

The landlord (is not me by the way) is seeking an eviction Section 8 – non-payment of rent, fraudulent references and two other unpleasant clauses. It is clear to me that this will go to the bailiff stage. The landlord will refuse to release the deposit, but they are desperately worried that the Deposit Scheme rules will find against them. Does anyone know what their view might be?

Thanks

Hamish



Comments

Neil Patterson

14:29 PM, 4th October 2016
About 2 years ago

Hi Hamish,

How explicit was it that the payment was for deposit and not rent and was it for the same amount as the outstanding rent?

I am guessing that the landlord was duped into being caught out and it is probably recorded in writing somewhere as a deposit payment. Hence the landlord holding on to it and not using it initially as rent.

From experience the law on this is very explicit and I have to date seen no mitigating circumstances for not protecting the deposit. Although I do hope I am wrong in this instance.

I think the landlord needs to now consult professional help even if it cost money to save an even more expensive mistake going forward. Please see out tenant eviction page >> https://www.property118.com/tenant-eviction-2/

14:37 PM, 4th October 2016
About 2 years ago

It sounds like the landlord has been taken for a ride by someone who knew exactly what they were doing.

Craig / lgfa92

Hamish McBloggs

18:47 PM, 4th October 2016
About 2 years ago

Reply to the comment left by "Neil Patterson" at "04/10/2016 - 14:29":

Neil,

Thanks for the response.

I suspect the landlord's records are irrelevant. They paid the money into the protection scheme after the 30 day limit. To the casual judge, this at face value would imply sloppy land-lording or worse. A modicum of scrutiny will demonstrate that this was defensive land-lording in the face of adversity.

From what I understand, the fear of the fine made them find the money. This then caused them to default on one of their own mortgage payments. (landlords, watch your gearing for goodness sake)

Was the law regarding deposits so poorly thought through as to allow a judge no options or are they simply asked to be hard nosed even if it puts the landlords family in financial difficulty?

I have told them to approach legal people rather than rely on what I think but I believe them to be 'uncomfortable' financially. I am certain that costs will not be recovered from the tenant as it turns out the queue of disaffected creditors is rather long and angry.

How do we balance trust with the need to know which can feel awkward and very intrusive? What do we have a right to ask for?

I work on the principle that if a bank can ask me for it (recent mortgage application) then I can ask a tenant for it. Sad but true, there is no room for trust and I apologise to the good tenants.

Is there a comprehensive list of that which could be covered as part of due diligence?

Warnings to others:

If your prospective tenant has other identities then reference checks are useless.
Do not rely entirely on reference companies do your own footwork.

Play hardball. There is no front door key or contract if upfront funds have not cleared. I'm am really sorry to honest tenants but I have had the "I'm waiting for my old landlord to return the deposit and he/she won't" one before myself and I don't care if it is genuine. It won't wash.

Always always always insist on direct contact with the previous landlord. NEVER accept a letter 'to whom it may concern' that provides a glowing reference. PARTICULARLY if it is printed for you. Go back to source. Check the signature. If there is no signature then you should smell a rat.

Check the old landlord out YOURSELF, they may turn out to have the same friends on facebook as your prospective tenant. You want to talk to a real soon-to-be ex-landlord. If you are seeking a reference after the tenant has moved in then it is too late. Visit when possible.

If there is a way to search for ccj's at an address without knowing the name of the defendant (pseudonyms) then share it. There should be.

Check the previous 3 addresses/7 years

If the prospective tenant gets the bank transfer wrong twice before moving in date then all bets are off. This is evasive behaviour. It will continue after moving in. Even if it is moving in day and everyone is weeping on the pavement - No money, no contract no key

Research facebook and twitter.

Do not be embarrassed to ask to see bank statements, utility bills, employers reference (make sure that the employer exists at least). If you don't do this then your insurance is almost certainly invalid. Remember, banks aren't embarrassed to ask for your inside leg measurement when you apply for a mortgage.

If they run a company, use companies house.

One of the tenancy contract conditions must be that the landlord becomes an 'Authorised User' on accounts for utilities. (I don't think it is possible with council tax). Check the state of the accounts throughout the tenancy. It happens all to often that the tenant's private life is private for the wrong reasons and the landlord is left having to show the power companies copies of title deeds to prove ownership and then arguing whether the tenancy agreement is valid so as not to be lumbered.

(Aside - I am concerned that power companies will seek a trivial solution and have the law changed to make a landlord responsible. I have asked power companies not to do this but to provide some facility that offers landlords a less intrusive 'team working' 'traffic light' monitoring approach. Proactive and sensible)

NEVER accept screen shots or print outs that purport to be from a substantiating source. Demand (nicely) that you go to that source directly yourself and get your own copy.

One of the major problems re utilities and council tax I face time after time is 'can't tell you, data protection'. If they can't tell us then we can't tell them. If you have information useful to their debt collectors they are keen to point out you won't get into trouble for sharing it. Funny though, I have found they won't put in in writing.

Facebook accounts can be deleted. If you rely on evidence of conversations on facebook then get your messages emailed to you AND take screen shots.

Important mobile phone text MUST be followed up with a brief email.

NEVER use facebook for formal landlord/tenant communications. Always use email. Delivery receipts do not always work from Client Outlook (desktop) to webmail like Hotmail. Read receipt requests can be denied by the recipient.

If you deal with cash get the tenant to sign a copy of the receipt that you keep. Scan and Email.

Fraudulent references from and misrepresentation of self and others by a tenant are 'discretionary' grounds for eviction under section 8 and things become very difficult if there are young children in the middle of a mess.

Right, rant not over but I have to cook dinner (or if up North, tea)

Pasta tonight. Where's my oversized pepper grinder?

Hamish

Damon Haughey

19:29 PM, 4th October 2016
About 2 years ago

Hi we had a similar situation,where we had a tenant who also did not pay his rent so ended up in court after issuing a section 21. The tenant claimed the first rent payment to be a deposit that had not been protected by us, as we had classed it as rent as no other payment had been maid.
On the day of the hearing we took bank statements and a rent schedule in to court to prove that they were behind with the rent.The judge decided in our favour, as during the tenancy on no occasion had the payments made exceeded the monthly rent so in her view no deposit had been paid no penalties and possession order made in our favour
So maybe worth taking your chances in court it may not be as clear cut as they are making it out to be. Damon

Hamish McBloggs

7:50 AM, 5th October 2016
About 2 years ago

Reply to the comment left by "Damon Haughey" at "04/10/2016 - 19:29":

Damon,

Thanks for that.

As with all cases there will be differences both obvious and nuanced but this may prove useful.

Are we allowed to share the case number and the judgement's narrative somehow?

Hamish

Romain Garcin

8:14 AM, 5th October 2016
About 2 years ago

I fear the landlord brought this on himself here.

First, allowing a tenant into occupation with no rent or deposit paid was very unwise.

Second, the tenant made a payment with explicit instruction that it was to cover the deposit. It wasn't up to the landlord to then decide what to do with the money.

Hamish McBloggs

9:12 AM, 5th October 2016
About 2 years ago

Reply to the comment left by "Romain Garcin" at "05/10/2016 - 08:14":

Romain,

I agree with you on both counts.

And there is no proof that the tenant's actions were premeditated. Everyone's circumstances can change in a heartbeat.

But consider for a moment that you have hold of the deposit for 25 days say, you have received no rent, your cashflow is now precarious and the tenant's references unravel in a spectacular fashion.

What should the actions be?

Hamish

Romain Garcin

9:27 AM, 5th October 2016
About 2 years ago

This is a red herring.

The key issue in your scenario is that the landlord isn't able to financially cope with unpaid rent. His situation is the same with or without a deposit.

If the landlord holds a deposit he will be able to withhold it at the end of the tenancy.

In fact, if the deposit is protected with an insurance-backed scheme then the landlord can also use the money to help with cash flow, though that may be risky.

Trying to flaunt deposit protection regulations will only brig even more pain sooner or later.

Hamish McBloggs

10:27 AM, 5th October 2016
About 2 years ago

Reply to the comment left by "Romain Garcin" at "05/10/2016 - 09:27":

Romain,

Again, I won't disagree. But I think there is more.

How many months cover should a landlord be reasonably expected carry? Banks can only withstand a run for a day or so before they shut their doors.

Time to tidy, clean, fix and find a new tenant
Add on 2 months of no rent
Add on time to get a hearing
Add on time for the bailiffs
Add on time to fix, tidy, find a new tenant
Add on unrecoverable costs

We know that this is at least 2 months. What would better estimates be, 6?

Yes, insurance will help

What happens if you do everything right but are just unlucky and get another bad tenant?

Will insurance continue to help?

Should the bar be set much higher for entry into the BTL market?
Should insurance be compulsory?
Should there be a legal minimum standard of diligence when interviewing a prospective tenant?
Should there be compulsory stress testing of fledgling landlords?
Should 'self insuring' landlords have a higher minimum level of liquidity?

Thanks

Hamish

Michael Barnes

11:07 AM, 5th October 2016
About 2 years ago

Reply to the comment left by "Hamish McBloggs" at "05/10/2016 - 10:27":

You seem to be talking about insurance to cover tenant defaulting; Romain was talking about an insurance-backed deposit-protection scheme.

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