UK: Structuring Rent Deposits

Last Updated: 29 November 2016
Article by Rosie Gibb and Rebecca Thomas

Rent deposits are a popular form of security for landlords as they provide immediate access to funds in the event that the tenant is in breach of the lease: the tenant provides an agreed sum of money and the landlord is able to draw on this in specified circumstances.

A rent deposit can be structured in various different ways: there is no "right" way which works for both parties, and there are advantages and disadvantages to all approaches, so always consider what's going to be most appropriate in any given situation. The landlord and tenant will usually have conflicting interests, and while we would always advise a landlord to maintain control of the money, this wouldn't necessarily be in the interests of a tenant.

PICKING THE RIGHT STRUCTURE

The main concern for a landlord is that he has ready access to the deposit money throughout the term, while the main concern for a tenant is that that he gets the money back at the end of the term or when the lease is assigned to a third party (or by an earlier agreed release test). In addition, both parties are concerned that, in the event of the other's insolvency, the money is safe from an insolvency practitioner (ie the insolvency practitioner cannot access it or demand its return and use it to pay off creditors). There is also a concern that money held in a bank account cannot be used by the bank to set-off a credit balance on another account held by the same party. The key is striking the right balance between these concerns, while keeping administration and cost to a minimum.

HELD AND OWNED BY THE LANDLORD IN HIS GENERAL ACCOUNT

From the landlord's perspective, this is generally the best option. He has ready access to the funds and it keeps administration to a minimum. However, tenants will want to resist this structure for two reasons: if the landlord becomes insolvent, the money is indistinguishable and can be used to meet the claims of the landlord's creditors; and if the landlord owes money to the bank, the deposit money can be set-off against the credit balance. This will only ever be acceptable for small deposits held by very reliable landlords.

HELD AND OWNED BY THE LANDLORD IN A SEPARATE ACCOUNT

This brings with it essentially the same issues for the tenant as if the money were held in a general account, but is administratively more difficult for the landlord. If the account is in the name of both the landlord and the tenant it is arguable that the bank is on notice of the tenant's interest and can't exercise its right of set-off, but this is questionable if the deposit deed makes it clear that the money is owned by the landlord. Again, the structure will only be acceptable for small deposits held by very reliable landlords.

HELD BY LANDLORD IN A SEPARATE ACCOUNT BUT OWNED BY THE TENANT AND CHARGED TO LANDLORD

This structure leaves the money in the ownership of the tenant but gives the landlord control over it. He has sole rights to operate the account, combined with a charge over the account.

From the tenant's perspective, this structure should keep the money safe in the event of the landlord's insolvency, provided that it is clear that the money is still owned by the tenant (this should be express in the deposit deed, and also in the naming of the account). Provided that the bank has notice of the tenant's ownership of the money, it will be unable to exercise its right of set-off.

From the landlord's perspective, provided that the charge is valid and enforceable, the money will be safe from the tenant's insolvency practitioners and they will be unable to demand its immediate return. However, as the tenant has no control over the money it is not clear what asset the landlord is charging, so it's not certain that he has a valid, enforceable charge. Prior to 6 April 2013, when it was still possible to register such charges, registration in itself gave the landlord some comfort that it would be enforceable. Without this it is possible, though unlikely, that this structure is open to challenge by the tenant's insolvency practitioners.

HELD AND OWNED BY THE TENANT IN A SEPARATE ACCOUNT AND CHARGED TO LANDLORD

Landlords are usually uncomfortable with money being held by the tenant as they fear that there is a risk they will lose the deposit if the tenant becomes insolvent. With proper controls in place this is not necessarily the case, but a landlord should always be cautious in agreeing to this.

From a landlord's perspective, he will still have control over the account if he is given a mandate for this. Provided that the bank has notice of the landlord's interest (which is reinforced if the account name refers to the landlord) it will not be able to exercise set-off. The tenant's insolvency practitioners will not have any right to use the deposit money to pay off the tenant's creditors: however, as the charge is no longer registrable it is important that some other steps are taken to put the insolvency practitioner on notice of this (for example, within the name of the account), otherwise they may use the money without realising it is charged to the landlord, leaving the landlord with a valid claim, but the time and expense of pursuing it.

From a tenant's perspective this structure keeps the money in the tenant's own bank; even if the tenant gives the landlord a mandate for sole control off the account there is still some influence and involvement by the tenant. The money will be completely safe in the event of the landlord's insolvency. In addition, any interest earned on the account can be paid directly to the tenant.

HELD BY THE LANDLORD ON AN EXPRESS TRUST FOR THE TENANT

The landlord is legal owner of the money, but can only use it in accordance with the terms of the trust: the tenant remains beneficial owner of it. The landlord will have sole control, but will owe certain duties to the tenant.

From the tenant's perspective, provided that the money is placed in a separate designated account, it is safe from a landlord's insolvency practitioner as he is bound by the terms of the trust. However, if the money is placed into the landlord's general account it will be available to meet the claims of the landlord's creditors. There is also a risk that even if the money is placed in a separate account which is in the landlord's sole name an insolvency practitioner will be unaware of the trust and use the money in breach of this; the tenant should therefore insist that he is named on the account, to avoid this situation arising. However, if the money is wrongfully used for other purposes the tenant is able to trace it into any physical asset purchased with it, which means it will be easier to get it back. The bank will not be able to exercise its right of set-off provided that they have notice of the tenant's interest.

From the landlord's perspective, there's no need for a charge, he'll have control over the account, and there are some associated tax advantages as compared to him owning the money outright. However, he will be subject to enhanced trustee duties in respect of the money, which he may prefer to avoid. There is also a risk that the tenant's insolvency practitioner would be able to demand the immediate return of the money, on the basis that beneficial ownership lies with the tenant.

HELD BY A THIRD PARTY STAKEHOLDER

The money is held in a separate account by an independent third party (such a solicitor or managing agent) who acts as agent for both parties. It keeps the money safe from insolvency practitioners and neither party can access the money without input from the third party. However, this structure requires the third party to take on the administrative burden and there is likely to be a fee to pay. In addition, there is a risk that the tenant's insolvency practitioner could disclaim the rent deposit deed as an onerous contract, or argue that the landlord has been given a preference, and demand the immediate return of the money; it's not clear whether this would be successful but it increases the risk of this structure from the landlord's perspective.

CONCLUSION

Whenever it agreed that a rent deposit will be given, both parties need to consider what structure will be most appropriate. Where the money is held by either the landlord or the tenant (rather than a third party) it should be placed in a separate account and the name of the account should reflect the interest of the other party. This gives notice to both the bank and any insolvency practitioner and reduces the risk of the money being wrongly taken for other purposes. Whatever structure is agreed upon, this should be made explicit in the deed, including who owns the money, the requirement for a separate account and the name that will appear on the account. The deed should also impose an obligation to provide evidence that the account has in fact been set up, and the money paid in, as required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.