Nov 19, 2020

Include These in Your Tenancy Agreement to Recover Unpaid Rent or Expenses

The majority of terms in a tenancy agreement confirm the obligations of the landlord and the tenant to each other, such as when the rent is to be paid or whether the tenant may keep pets at the property.

The following are all optional, yet commonly used. They all are mechanisms of increasing the landlord’s protection against non-payment of rent or expenses to put right damage.

Deposit

There is no obligation to take a deposit. It is uncommon not to do so because of the protection it gives against the tenant leaving the property in a condition that requires repair work to be carried out.

The rules regarding deposits have been tightened in the tenant’s favour in recent years. In the past it was very difficult for a tenant to contest whether retaining it was fair, and for a tenant, it often was a significant sum of money.

Now, although taking a deposit still reduces the landlord’s risk that the tenant may leave the property damaged (beyond reasonable fair wear and tear), because the amount that can be taken is capped, the mechanism is not a single solution to the problem.

Both landlord and tenant should expect that the deposit will be returned to the tenant in full at the end of the tenancy.

Despite the requirement for the deposit (for assured shorthold tenancies) to be held by a government authorised deposit scheme, the tenancy agreement should still state the amount of the deposit, who holds it and the process for the scheme used.

The Amount of the Deposit

A deposit cannot be more than five week’s rent. It should be expressed as an amount, not as a formula.

Who Holds the Deposit

Schemes offer custodial options (where the deposit money is held by the scheme provider) and insurance options (where the money is held by the landlord but backed by insurance if the landlord does not return it).

The tenancy agreement should state who holds the money.

The Process

Deposits must be registered with a protection scheme. Not only are many tenants unaware of how the scheme used to protect their deposit works, but different schemes also work differently.

By describing some of the steps in the process of taking, registering and returning the deposit, you can set the expectations of the tenant. Most disagreements are about the value of the damage that the deposit will put right and when the deposit (or remainder) will be returned. By including these in the tenancy agreement, the tenant has a written record to which he or she can refer.

You may also describe the first step in case of dispute.

The law requires the landlord to give a detailed explanation of the deposit protection scheme to the tenant separately to the tenancy agreement.

That the Deposit is not a Substitute for Rent

It is common for tenants to see advantage in not paying the last period’s rent. It may help cash flow (effectively giving a rent holiday) when moving costs are likely to be expected shortly. It may also give some reassurance to the tenant that he or she will ‘receive the deposit back’ by not paying rent. Many tenants mistrust landlords to be fair about reasonable wear and tear. Holding back rent is one way a tenant can feel like he or she has some protection.

You may want to include a reminder that emphasises that the tenant has the obligation to pay rent for all periods and that he or she cannot deduct the amount of the deposit from the last period’s rent.

A Reminder That the Tenant Remains Liable for all Damage

Your tenancy agreement might contain a gentle reminder that despite taking a deposit, the tenant remains liable for the cost of making good all damage to the property, whether the cost of such damage can be covered by the deposit or not.

Taking a deposit does not cap the amount that a landlord can ask from the tenant for repairs.

Joint and Several Liability

If you are letting to more than one tenant, then you can include a clause in the tenancy agreement that the tenants are together liable for their joint obligations. Such liability is known as ‘joint and several’.

The main advantage is that if one tenant does not pay rent or damages the property, you can ask the others to pay.

As an example, you might rent a house to four tenants who decide between themselves to split the rent unevenly because two share a large double bedroom and the other two have differing sized bedrooms. The tenants who share a room leave the property in order to move into their own home together. They do so without paying their last month’s rent. If the tenants are joint and severally liable, the remaining two tenants are responsible for paying the rent of the two that have left.

This may seem unfair on the tenants, particularly in properties where there are three or more tenants. However, it has not only the effect of making it easier for a landlord to recover unpaid rent and money for damages, but also that of making the tenants more likely to police themselves in looking after the property, since each knows that he or she might have to pay for the damage caused by one of the others.

A downside to insisting on joint and several liability is that a guarantor (covered next) is less likely to want to support a tenant, since the guarantor also becomes jointly and severally liable for the actions of the other tenants (often people he or she doesn’t know).

Guarantor

Technically, a guarantor is someone who gives a guarantee to pay the landlord if the tenant does not meet the obligations in the tenancy agreement. In law, a guarantee is a ‘secondary obligation’ – the guarantor can only be asked to pay once it can be proved that the tenant has not acted.

Despite the name, most guarantors do not give a guarantee but rather an indemnity.

The difference with an indemnity is that the guarantor is at all times as liable for the obligations of the tenant in the same way as the tenant is (although the indemnity might be limited to some obligations only, such as paying the rent).

An indemnity increases the options for the landlord because instead of having to pursue the tenant first, the landlord can turn immediately to the guarantor. In other words, there is no need to prove that the tenant has failed to meet his or her obligations before asking the guarantor to step in.

You can add a guarantor to the tenancy agreement, or you can use a separate agreement. Bringing one in through the tenancy agreement is usually preferred because after signing the tenancy agreement, there is less motivation for both the tenant to find a guarantor and for the guarantor to join in.

If you bring a guarantor into the tenancy agreement, you should make sure that he or she gives an indemnity. Some tenancy agreements have the guarantor give both an indemnity and a guarantee, but usually an indemnity by itself is sufficient.

Changing the Terms of the Tenancy Agreement but Keeping the Indemnity in Place

To be binding, the guarantor must agree to the indemnity and to the tenancy agreement. If you change the terms of the tenancy agreement, you will need the agreement of the guarantor again. So it is a good idea to describe in the section that creates the indemnity how a change is agreed. Provided you can prove that you told the guarantor about the change, his or her inaction within a reasonable time period is sufficient to count as consent to the variation.

In Summary

These three mechanisms are all ways that provide an alternative to pursuing a tenant for unpaid rent or damage to the property.

Unless there is a very high level of trust between the landlord and the tenant, all three could be used together.