Why Buy-To-Let Landlords Must Beware Tenancy Deposit Passporting

This New Government Policy May Need to Be Fought

The government is considering introducing a tenancy deposit passporting scheme, with the objective of making it easier for tenants to move from one property to another. The concept has gone to a period of consultation until 5th September 2019. In this article, we examine this proposal in more detail and look at the potential issues it seeks to resolve and those it may create.

What Is Deposit Passporting?

Simply put, deposit passporting is the electronic movement of a security deposit from one landlord’s benefit to another.

Why Is Deposit Passporting Being Considered?

Currently, when a tenant leaves a rental property the deposit is locked in the tenancy deposit scheme until the landlord confirms its release. This must be done in a timely fashion, and usually within 10 days. This gives the landlord time to inspect the property, and request deductions for damages or unpaid rent.

However, this process also means that tenants who are moving from one buy-to-let property to another must find the deposit for their new home before their first deposit is returned. For many tenants, this means they must either use savings or borrow the money for the new deposit. Not ideal by any stretch of the imagination. Short-term loans can be expensive, and using savings may negate preferential interest on those savings.

Passporting removes the need to find a second deposit. This should stop tenants from being ‘trapped’ in their current home and make it easier for them to move by eliminating the struggle to find a second deposit (albeit, only until the original deposit has been returned).

The Disadvantage of Deposit Passporting

While it sounds like a good idea, there is a glaring problem with deposit passporting. The reason that landlords take a deposit is to protect themselves from a tenant causing damage to a property or not paying rent before they move.

Passporting the deposit to another landlord directly means that the original landlord no longer has a call on that money. A system that allows this to happen would reassure the second landlord that they would get their deposit, but remove the security provided by a deposit – in other words, negate the value of a deposit.

In addition, what if the original landlord discovers damage, or there is unpaid rent that must be made good?

The government has suggested that the first landlord should be able to make a claim on the deposit, and the tenant makes good the deposit amount to the new landlord later. Would this satisfy the new landlord? We don’t think so. Effectively, the deposit is not concrete – it becomes a deposit in name only, until the previous landlord confirms that they will make no claim on it.

Another Policy Not Fully Considered

This smacks of yet another ill-considered sound-bite policy aimed at making life easier for tenants (not a bad objective), but producing a new regulation that will add a ream of red tape, and make life more difficult and costly for buy-to-let landlords.

The announcement was part of a wide-ranging announcement about the UK housing market made by Housing Secretary James Brokenshire. The statement released included the following:

More than four million people live in the private rented sector, yet when moving home, some tenants can find it a struggle to provide a second deposit to their new landlord – risking falling into debt or becoming trapped in their current home. Ministers want to understand the scale of this problem.

Ministers are inviting proposals to make it easier for renters to transfer deposits directly between landlords when moving from one property to the next. Freeing up deposits and allowing a renter’s hard-earned cash to follow them from property to property – as they move to take that perfect job, to move nearer to family, or find a place that suits their changing needs – will create a fairer housing market that works for all.

Brokenshire added:

I am committed to making the process for tenants getting their deposit back much smoother. I want to understand whether there should be a deadline for landlords returning deposits. I also want to look at whether existing initiatives are meeting tenants’ needs and whether the market can offer improved products. Alongside this, I want to look more widely at whether innovative approaches to helping tenants move more easily, including allowing tenants to passport their deposit between tenancies.

The government has now called for evidence from agents and others to develop an ‘innovative solution’.

Here’s a suggestion to the RT Hon James Brokenshire: if you wish to introduce tenancy deposit passporting, then back all tenancy deposits with free government insurance. This would, perhaps, allow deposits to be passported, making it easier for tenants to move and also meet Brokenshire’s other stated objective when he said:

It is important that good landlords have the confidence to let out their properties safe in the knowledge that a deposit will provide them with reasonable protection from damages to their property. Any improvements to the way deposits are returned at the end of a tenancy will need to ensure that deposits still serve this purpose and that deposit protection continues to work well for both tenants and landlords.

The final sentence of this statement contains some telling words: “…continues to work well for both tenants and landlords. Sounds to me like an admission that the tenancy deposit scheme isn’t broken. Why is the government trying to fix something that it says isn’t broken?

And as for making the system fairer for all – what about the stamp duty that homebuyers and property investors must find on top of the purchase price before buying? I would hazard a guess that this extra expense has stopped many from purchasing a property – as admitted when the government removed stamp duty for first-time buyers.

Tenancy deposit passporting has merit, but must only be introduced with a cast-iron guarantee that landlords will not be disadvantaged. Will, the government provide such a guarantee? If it cannot, then the buy-to-let community should fight this policy.

We want to know what you think, so we can represent all landlords during the consultation period. To let us know, contact Ezytrac today +44 0 1522 503 717.

Live with passion

Brett Alegre-Wood

By |2019-07-22T10:16:48+01:00August 1st, 2019|Landlord lessons, Property Management|0 Comments

About the Author:

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Ezytrac. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids. Brett holds both the Level 3 Property Mark Qualifications for Property Sales and Property Lettings and Management.