Tenancy Deposits – a rounding error could cost landlords dear!

The Renters’ Rights Act 2025 (RRA) has received Royal Assent and will be implemented in stages starting on 1 May 2026. Landlords need to be aware of a new risk, and those who try to protect themselves by taking the maximum permissible tenancy deposit need to check their procedures, as they may already be in breach of the law.

The Tenant Fees Act 2019 (a stain on the Statute Book – https://www.property118.com/tenant-fees-act-2019-draconian-legislation/) limits the amount of a residential tenancy deposit that can be taken where the annual rent is below £50,000 to “five weeks’ rent”.

One week’s rent is defined as the annual rent divided by 52

A monthly rent of £1000 equals an annual rent of £12,000. Dividing £12,000 by 52 and multiplying by 5 gives £1,153.846.

Another way of calculating the maximum deposit is monthly rent times 60 divided by 52.

If a landlord or agent takes more than the maximum, the excess is a prohibited payment. Under the RRA, the fine will be increased to up to £7000 for a first offence.  Currently, if a landlord seeks to evict the tenant, any section 21 notice (so-called no-fault eviction) will be invalid unless the prohibited payment has been repaid. From May 2026, s21 notices will be abolished.

However, in a change that has not received much attention, the RRA will provide tenants with a defence to most section 8 notices (including for arrears of rent) if a prohibited payment has been taken but not repaid to the tenant. If the point is not picked up in time, an eviction case involving thousands of pounds of rent arrears may be thrown out at the last minute and the tenant continue in occupation.

Furthermore, if rent is payable on 1^st of the month and the tenancy is signed at the end of a month, the common practice of taking rent for the few days to the end of the month plus a month’s rent in advance will breach the Tenant Fees Act. The few days’ rent will be a prohibited payment. (Of course, as soon as it is repaid, the tenant owes precisely the same sum, but logic has escaped the Parliamentarians.)

Many landlords and letting agents have a policy of taking the maximum permissible tenancy deposit. If they use a simple pocket calculator or an Excel spreadsheet, they may take too much. If the calculation is done to two decimal places (or the Excel cells are formatted to show only two decimal places), any amount of 0.5 pence or above will be rounded up to the next whole penny.

In the example above of £1000 a month rent, calculating the deposit to two decimal places gives £1,153.85 which is 0.38462 pence too much.

With a rent of £1890 per month, the maximum permitted deposit is £2180.7692.  To two decimal places this is £2180.77, an excess of 0.0769 pence.

With monthly rents between £1000 and £4000, calculating a 5 week deposit to 2 decimal places will give too high a figure in over 46% of cases. Those prohibited fractions of a penny may mean a section 8 notice is thrown out. The landlord or agent may still be liable to a fine. Perhaps not as much as £7000 for a first offence but a fine of even £700 might be close to a million times the amount of the prohibited payment!

Landlords with non-paying tenants are involuntary creditors. Every day that a defaulting tenant remains in occupation the debt increases. It can now take many months to get to court. If the case is thrown out on a technicality such as this, the landlord may face thousands or even tens of thousands of pounds of irrecoverable arrears.

The safe course is to round down the deposit to the nearest whole pound or ten pounds

The extra few pounds or pennies are trivial compared to having a case is thrown out and having to start again. Furthermore, under the RRA Councils will have greater powers and duties to pursue landlords for breaches.

If a landlord serves a section 8 notice and the tenant agrees to surrender the lease – perhaps in exchange for the landlord waiving some or all of the arrears – then, to add insult to injury, the landlord may be guilty of an offence.  The RRA provides that an offence may be committed under a new section 16J of the Housing Act 1988 if the landlord is reckless as to whether he could obtain an order for possession. He might even be guilty under new section 16E if he relies on the ground of rent arrears and does not “reasonably believe that the landlord is, will or may be able to obtain an order for possession on that ground”.

The law is clear-cut, and the heinous crime of taking a fraction of one penny too much deposit is obvious once the matter is addressed. Arguably, in such circumstances, the landlord’s belief that a sum in excess of three months’ rent arrears – more than his annual profit in most cases – would entitle him to possession will be found to be reckless and unreasonable because the landlord has failed to repay the tenant that one penny. So much for “levelling the playing field”!