Holding Deposit Agreements: Pre-Tenancy Obligations and Rights

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2015

Holding Deposit Agreements: Pre-Tenancy Obligations and Rights Holding Deposit Agreements: Pre-Tenancy Obligations and Rights

Samuel Beswick

Allard School of Law at the University of British Columbia

, [email protected]

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Samuel Beswick, "Holding Deposit Agreements: Pre-Tenancy Obligations and Rights" (2015) 19:4

Landlord & Tenant Rev 143.

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Holding Deposit Agreements: Pre-tenancy

Obligations and Rights

Samuel Beswick

Lawyer; Frank Knox Memorial Fellow, Harvard Law School

Deposits; Landlords’ duties; Leases; Residential tenancies; Tenants’ rights

There is confusion in the rental market over the legal significance of holding deposits, which are

routinely paid by prospective tenants prior to signing a lease document. The purpose of this

article is to clarify the legal position of holding deposit agreements (HDAs) entered into in the

pre-tenancy period. In particular, to emphasise that, in the usual course:

• The agreement to, and payment of, a holding deposit creates a binding contract

between the prospective tenant and the landlord.

• A HDA is a conditional contract, which grants the applicant both the right and

obligation to enter into the proposed lease provided conditions, such as passing

reference checks, are met.

• Neither party may insist on the terms of the lease being “renegotiated” contrary to

an agreed HDA. An attempt to do so would ordinarily amount to repudiation of the

contract, entitling the innocent party to remedies under contract law.

Agreement for lease

Holding deposits serve as a practical solution to the problem of a rapid rental market, where

decisions to rent are swift but lease formalities can take days or weeks to complete. A holding

deposit is a payment by a prospective tenant to a landlord (or their agent) prior to the signing of

the lease document. Its purpose is to assure the landlord that the applicant is serious about

leasing the property and to assure the prospective tenant that the property is “locked in”, provided

the necessary reference checks and conditions to lease are satisfied. Whilst amounts vary

considerably, in London a holding deposit will typically be the value of at least one week’s rent

(often much more).

A holding deposit will correspond to a HDA between the landlord and prospective tenant. The

HDA is a brief written document or oral agreement (often both) that records the basic terms of

the agreement for which the deposit is being paid. It should stipulate the key terms upon which

the lease will be entered: the parties and the tenancy address, the amount of rent, the type

and/or duration of the lease and the start date for the tenancy. Ideally, it will record the amount

of the security bond and any fees that will be due. It might also include specially negotiated

terms, such as a lease break clause or a provision for the applicant to add another tenant to the

lease at a later date (common in shared flatting situations). In agreeing the HDA, the expectation

is that the applicant will enter into the tenancy if the applicant passes a reference checking

Thank you to Chris Jenkins, (Trinity College, Cambridge) and James Fox, (BA (Oxon), LL.M (Harv)) for their insightful critiques and

suggestions. The views expressed herein are my own.

144Landlord&TenantReview

process(toverifytheapplicant’sincomepositionandtenancyhistory)andanyotheragreed

conditions.

Aholdingdepositisnotatenancydeposit.Itisnotsubjecttothestatutorytenancydeposit

protectionscheme,althoughaftertheleaseissigneditwilltypicallybecreditedtowardthe

tenancydepositdue:see,S.Bright,LandlordandTenantLawinContext,(Oxford:HartPublishing,

2007),para.16.4.3;D.Cowan,HousingLawandPolicy,(Cambridge:CambridgeUniversity

Press,2011)pp.224–228.NorisaHDAalease.Rather,intheusualcourseaHDAisan

agreementforlease—aconditionalcontract,whichgrantstheapplicanttherighttoenterinto

theproposedleaseprovidedtheconditionsaremet.Itsatisfiestherequirementsofoffer,

acceptanceandvaluableconsiderationintheformoftheholdingdepositpayment.HDAsare

thusgovernedbycontractlaw,notbyresidentialtenancieslegislation:S.GarnerandA.Frith,

LandlordandTenant,7thedn(Oxford:OxfordUniversityPress,2013),paras3.10–3.12;Clark,

HillandRedman’sLawofLandlordandTenant,(Release97,2015),paras444–445,450–460.

(Seealso,thediscussionofholdingdeposits(includinganexampleHDA)inM.Stewart,R.

WarnerandJ.Portman,EveryLandlord’sLegalGuide,12thedn(NOLO,2014),pp.28–31).

Intheory,HDAsshouldbemoresignificanttotheparties’intereststhanthefinallease

document.Theyrecordtheessentialtermsandarethebasisforenteringintothetenancy.HDAs

protectlandlordsfrombadtenants,bygivinglandlordsan“out”inrespectoftenantswhose

referencescomebacknegative.Theyalsogivetenantspeaceofmindthatthepropertythey

havepaidadepositonwillnotbeletouttoanotherpartyduringthepre-tenancyperiod.Once

itcomestimetosignthelease,thekeytermsreflectedintheHDAwillbeofmostimportance

totheparties,particularlyincomparisontodetailedstandardformleasetermswhicharesubject

tostatutoryrestrictionsandregulatoryoversight.Theultimateleasedocumentshouldnotdeviate

fromtheagreedHDAterms.

Inpractice,however,thisisoftennotthecase.Inthefranticrentalmarket,applicantscompete

tobefirstintimetonegotiatewiththelandlordoragentand,ifagreementisreached,topaythe

holdingdepositimmediatelytosecuretheirposition.Oncepaid,applicantsinvariablyshifttheir

positioninrelianceontheHDA.Theydeclineotherrentalproposalsandceasesearching;they

cannotfeasiblyarrangea“backup”placewithoutthepaymentofasecondholdingdeposit,

whichwouldbeliabletobeforfeited.

Yet,oncethepre-tenancyadministrationiscompletedandtheleaseisreadytobesigned,it

isnotuncommonforlandlordstochangetack.Itmaybethatmanyaresimplymoreunwitting

thanunscrupulous:intheinterimperiod,alandlordmightreceive“abetteroffer”andsowishto

renegotiatethekeytermsoftheproposedlease,perhapsbyincreasingtherentoramending

otheragreedterms.Inlaw,thisisbreachofcontractandisimpermissible.Ittakesadvantage

ofincomingtenantswho,bythatstage,havecommittedtotheleaseonthebasisoftheHDA,

whowillusuallyhavenorealisticalternativearrangementsandwhoareatasubstantialnegotiating

disadvantage.Unfortunately,thisisalltoocommonintherentalmarket.

Prospectivetenants’obligationsandrights

ProspectivetenantsbeartwomainobligationswhenagreeingaHDAwithalandlord.Thefirst

istoprovidehonestrepresentationsastotheirincome,tenancyhistoryandotherqueriesthe

landlordmakesduringnegotiationsoverthelease.Applicantswhomisleadlandlordsastotheir

backgroundcanexpecttohavetheiragreementcancelledbeforetherighttoenterthelease

accrues.Tenantsshouldalsoendeavourtocomplywithreasonablerequestsfromanyreference

verificationagencyengagedbythelandlord(Clark,HillandRedman’sLawofLandlordand

Tenant(2015),para.469.3).IfatenantfailstheverificationprocessandtheHDAiscancelled,

(2015)19L.&T.Rev.,Issue4©2015ThomsonReuters(Professional)UKLimitedandContributors

the tenant may not insist on performance of the lease. They will, however, ordinarily still be

entitled to a full or partial refund of the holding deposit.

Upon satisfying the landlord of their reference background and any other conditions, the second

obligation on tenants is to enter the lease as agreed. If a tenant fails to enter into the lease, the

landlord is entitled to deduct from the deposit compensation for the reasonable costs incurred:

see, The Property Ombudsman, Code of Practice for Residential Letting Agents (August 2014),

para.9k. Accordingly, at any one time a tenant should only pay one holding deposit in respect

of one property, and should decline other proposals to let in the interim.

The primary benefit for tenants of entering into a HDA is the assurance that, subject to specified

conditions, they have secured a home in which to live. The HDA gives the tenant a conditional

right to sign the lease. (Note: a right will not arise where it is explicitly excluded by the terms of

the HDA. However, such one-sided drafting would neither be in the applicant’s interests to sign,

nor necessary from the landlord’s perspective.) A subsequent attempt by the landlord to vary

the terms agreed in the HDA or to decline to enter into the lease arrangement would be a

repudiation of contract. An incoming tenant in that position would be entitled to a remedy for the

breach. As a matter of law, the tenant could elect either to insist on specific performance of the

HDA by entering into the lease as envisaged; or to accept the landlord’s repudiation and to

recover—in addition to a refund of the holding deposit—compensatory damages (Clark, Hill and

Redman’s Law of Landlord and Tenant (2015), para.601). Potentially, such damages could

extend to the reasonable additional cost of temporary accommodation as well as the difference

in value between the lost rental arrangement and the tenant’s subsequent alternative lease

arrangement. As a matter of common practice, however, with no practical avenue to enforce

their rights promptly in the courts, such tenants often simply find themselves either acquiescing

to the landlord’s demands or back house-hunting, poorer and frustrated.

Landlords’ obligations and rights

The primary advantage to landlords of HDAs is the right of cancellation where applicants fail to

meet the pre-tenancy conditions. Landlords who insist on payment of a holding deposit are,

though, subject to a number of obligations. First, prior to any payment, the landlord should provide

the prospective tenant with a draft copy of the full lease document (The Property Ombudsman,

Code of Practice for Residential Letting Agents (2014), para.9e). Both parties should know

precisely the conditional arrangement to which they are agreeing. Doing so should also serve

to highlight to the parties the legal significance of the HDA.

Secondly, landlords must accept only one holding deposit for one property. A landlord who

accepts multiple applications, with a view to a competitive tenant “vetting process”, is in breach

of contract with each applicant. Landlords should also ordinarily direct their agent(s) to remove

all advertisements of the property upon acceptance of a holding deposit.

Once accepted, the landlord is bound by the terms of the HDA. At this point, landlords will

often engage an external agency to check the incoming tenant’s employment and tenancy

background. In addition to verifying the tenant’s veracity, agency reports will usually recommend

to landlords whether to accept a prospective tenant based on an income/expense and credit

rating calculation. The relevance of this agency recommendation is frequently misunderstood.

Provided that at the outset the applicant has made honest representations to the landlord about

their income and ability to pay rent, a landlord may not cancel the agreement on the basis that

a third party agency considers that the tenancy would not be prudent (unless this condition has

been agreed beforehand). An agency recommendation can only validly be relied upon to cancel

Holding Deposit Agreements: Pre-tenancy Obligations and Rights 145

the agreement where the report reveals that the applicant has misled the landlord in a material

manner.

Once the landlord is satisfied of the incoming tenant’s reference background, the landlord is

obliged to enter into the lease. The contractually binding nature of HDAs is confirmed in guidance

on holding deposits from the Citizens Advice Bureaux’s online service AdviserNet at para.85,

which states that:

“Acceptance of a holding deposit by the prospective landlord is also a binding contract on

her/his part, subject to conditions, for example, taking up of the prospective tenant’s

references.”

The landlord may not subsequently purport to revoke the offer of tenancy or to change the terms

that were agreed. Attempts to do so will be repudiation of the HDA, entitling the tenant to

contractual remedies.

Market failures

In practice, HDAs are not operating as they should. Landlords frequently treat HDAs as a

one-sided protection of their interests—a valid justification for retaining the holding deposits of

unreliable tenancy applicants. The obligations that HDAs impose on landlords—namely, to enter

into the lease on the agreed terms—are often ignored. Frequently, HDAs are treated as a mere

starting point for “negotiating” the final terms of the lease. Landlords may believe that their liability

for repudiating a HDA extends only to returning the deposit. This belief is mistaken.

The agreement of a HDA signifies the conclusion of negotiations over the tenancy key terms.

In law, an incoming tenant faced with a landlord repudiating their agreement is entitled to the

full remedies contract law provides, including compensatory damages and injunctive relief. Even

if a tenant accepts and signs the landlord’s variations to the lease, the new terms contrary to

the HDA may not be enforceable for lack of consideration. A tenant gains nothing from agreeing

to a less favourable lease in circumstances approaching duress.

The problem is that tenants in this situation are between Scylla and Charybdis: forced to

choose between a lease on less-favourable terms (for example, higher rent) or walking away

and reinitiating their house search from scratch. Running to the courts when time is constrained

is not practicable, even if the tenant has the wherewithal to navigate that complex avenue. A

judgment many months or years later is of no practical use to a tenant who needs a home within

a week. Landlords are thus able to run roughshod over HDAs because of their significant practical

advantage—that they hold the keys. Some tenants may even try to mitigate this situation by

placing multiple holding deposits and accepting the likelihood of their forfeiture as a necessary

risk. This is both wasteful and impractical.

Remedial steps

How, then, can this situation be rebalanced? Several points are worth considering:

• The legal significance of a HDA needs to be emphasised to landlords and tenants.

Rental agents should be informing both parties at the outset that payment of a

holding deposit creates a legally binding contract. Tenancy applicants should be

provided a draft copy of the lease document before any HDA is agreed or holding

deposit is paid. Agents should advise landlords that, if the referencing process and

conditions are satisfied, they cannot “renegotiate” the key terms of the lease after

a HDA has been agreed, and agents should not assist landlords to do so. They

146 Landlord & Tenant Review

should also advise that, once a holding deposit is accepted, advertisements for the

property should be removed and other applications to let should be declined.

• Formal complaint to a registered letting agents association or to the Property

Ombudsman could be made if an agent facilitates the repudiation of a HDA. It is

appropriate that agents who assist landlords to breach contract are held to account.

• Local councils who provide complaints procedures and dispute resolution services,

and other advice providers, ought to be advising landlords and prospective tenants

of the legal and practical options available in the face of a repudiated HDA. Clear

and published guidance can be a useful tool for correcting aberrant market behaviour;

in this case, rectifying confusion over HDAs.

Ultimately, if either party to a HDA persists in disregarding their obligations under the pre-tenancy

agreement, it remains open to the other to pursue their lawful remedies in the courts.

Conclusion

Whilst aggrieved tenants are not without legal remedies when presented with a lease document

that disregards the HDA terms, practical vindication of their rights will invariably be a difficult

road. In a demand-driven rental market, prospective tenants can too easily be taken advantage

of and forced into unreasonable compromises. It is hoped that clarity over the legal position of

the pre-tenancy period will help also to improve the position in practice.

The law is stated as at June 20, 2015.

Holding Deposit Agreements: Pre-tenancy Obligations and Rights 147