InterviewFinancial System

Landlords Don’t Have to Control Security Deposits

The UK saw a dramatic change in landlord behavior once security deposits were put into the hands of a third party.

Photo by Karolina Grabowska, via Pexels

Security deposits can be a major obstacle for Americans trying to find a place to live. Security deposits can often equal to a month’s rent, which on average in the U.S. is around $1,621, and landlords often ask for higher deposits from renters with lower incomes or credit scores, or those with past evictions.

And while security deposits are supposed to be refundable, a poll of more than 1,000 renters and landlords found that 23 percent of renters believed a landlord had kept part of their deposit unfairly at some point, and 24 percent of landlords admitted that they had indeed done so.

In the U.K., there’s a government-approved security deposit holder that mediates conflicts between tenants and landlords. Could something like that work in the U.S.? I recently spoke with Steve Harriott, CEO of the Tenancy Deposit Scheme in the U.K., to find out. Joining us was Alex Williamson, a Shelterforce writer who has been a leader in covering the security deposit issue in the U.S.

Below is an excerpt of our Facebook Live conversation.

Brandon Duong: Steve, can you tell us about how security deposits work in the U.K.?

Steve Harriott of the Tenancy Deposit Scheme in the U.K.

Steve Harriott: What happens in the U.K. is that whenever a landlord takes a security deposit from a tenant, it has to be registered in a government-authorized scheme. And what that means is that the landlord has to register it with us. It’s a guarantee for the tenant that if the landlord unreasonably withholds the deposit at the end of the tenancy, we make sure they get it back. We may actually have the money in our bank account already because sometimes landlords give us the deposit to hold, or we effectively insure it. And if the deposit isn’t paid back, we will pay back the tenant, then we try and recover the money from the landlord. So the really good thing in the U.K. is our 5 million tenancies, they’re all subject to this form of protection for tenants.

The other really good thing is that we have to offer a free and binding alternative dispute resolution service. We effectively adjudicate on a claim so if a landlord is asking for 500 pounds, the tenant can raise a dispute with us. We’ll look at the claim, we’ll ask the landlord for their evidence as to why they want to make the claim, we’ll ask the tenant for their view, and then we’ll decide. We’re dealing with 31,000 disputes a year, free of charge. Doesn’t cost the tenant anything, doesn’t cost the landlord anything.

It started back in 2007. Before that, we didn’t have any of this. We had a situation where deposits were taken, there was no protection, and there was no way in which tenants could get their money back other than going to court.

Alex Williamson: It’s super interesting that politically, you guys were able to get that done, considering what I know of the landlord lobby here. It makes me question what the situation is like on the ground in the U.K., to have enough momentum to even get that through.

Harriott: When it first was introduced, there was some opposition. I remember actually going in 2013 to Belfast, because the scheme was introduced into Northern Ireland, and I remember standing in front of about 500 landlords who said, “This is never going to work, the scheme is unworkable.” And we had to say to them that it does work, we’ve seen it work elsewhere in the U.K. And within a year, the opposition that we faced in Northern Ireland from landlords went away, because, what we found was that most landlords are actually reasonable people, they’re not trying to rip off their tenants. And they realized quite quickly that if they did try to do that, the tenant could raise a dispute with us, and we would investigate it. And our basis is that, look, if the landlord’s got a justified claim, we’ll agree to it. But we’re not going to agree to claims that are not justified.

Now in the U.K., there’s not really a landlord lobby, because we have millions of landlords, many of whom are owning one or two properties. We don’t have a lot of corporate landlords in the country. Interestingly, they like the scheme because they felt it took away some of the argument and disagreement that you got [from tenants].

Now, how did we get it off the ground? Well, it got going because we have this organization in the U.K. called the Citizens Advice Bureau. It’s a consumer advocacy group whose work is very well known.

They started doing surveys of tenants to find out how many of them weren’t getting their deposit back and it came to be very high numbers. They were able to get some traction politically with the Labour Party, and they managed to tack an amendment onto a housing bill [that originally] was nothing to do with deposits, and it got through.

Williamson: You mentioned that there were a couple different ways that it plays out. Sometimes you guys will literally hold the deposit, like the full amount. And I assume that’s just a matter of like, the tenant gives it to you, or the tenant gives it to the landlord who gives it to you. And then there’s this other option where you’re not literally holding the deposit, but it’s sort of insured. How does that work?

Harriott: Yeah, so the first one, all that happens is that the tenant pays the deposit to the landlord, and then they register the deposit with us on our online platform, and they pay us the cash. Now what we do is we have to hold that cash, we can’t speculate with it. We can’t go and gamble with it, can’t invest it on the stock exchange. We actually just invest this in bank deposits. We’re not getting much money at the moment because interest rates in the U.K. are very low.

The other model is where the landlord or the letting agent is seen as a trusted person, so if a letting agent in the U.K. is a member of a professional trade body, now we have this thing called the Royal Institution of Chartered Surveyors, it’s very posh. And we have another organization called Property Mark, which is a letting agent, I think you call them Realtors. If they’re members of that they’re subject to regulation by those bodies. What we do is we allow them to keep the deposit in their bank account, they pay a fee to us to pay for the costs of registering the deposit, and paying for the cost of our insurance policy. It also pays for the cost of the free dispute resolution service. And what happens then is that in the relatively rare cases where tenants don’t get their money back and they raise a dispute, under the housing legislation, the letting agent is obliged by law to send us the disputed deposit in cash. And I would say 99 times out of 100, they do that. And then we go and look at the case and we distribute the money. In the one case out of 100 when that doesn’t happen, we then try to pursue the landlord, letting agent if necessary, to the courts. But if we can’t recover the money easily, we will claim it with our insurance. So it’s an interesting model. I think the cleanest model is where we simply hold the deposit; it makes a lot more sense. And then we look after that deposit during the tenancy.

Williamson: One of the problems with deposits aside from not getting them back is that just coming up with it in the first place is hard for many tenants, and especially if they still have a deposit that’s being held by their former landlord, and now they’re supposed to come up with another deposit on top of it. So it’s just like a whole lot of money that is locked out and difficult for them to access. But you guys are kind of pioneering a solution or trying to figure out a way to solve that problem.

Harriott: We call it a problem of double deposits. How do you move house when you’ve got to find another deposit? So interestingly, here, and this politically shows the power of the renting lobby. So the Conservative government led by Boris Johnson, in his platform, he said that the Conservative government was going to introduce a concept called lifetime deposits. They’re going to try to come up with a way of enabling tenants to move easily when they’ve got to find another deposit. Now, as ever, with politicians, we’re not yet there with a complete answer, but I think it’s likely to be a situation where tenants could access a low-cost loan, very low interest, potentially interest free, for two or three weeks or so when they’re when they’re leaving one home, and then moving into the next home, and then they get the deposit back.

So the one of the options that I think we’re looking at is the idea of a deposit loan to try and bridge that gap. Interestingly in Australia—and deposit protection actually started in Australia—they have in the state of Victoria, a tenants’ bond. The state government in Victoria actually gives a loan to tenants who then pay it back during the next tenancy. I have tried to suggest to the Prime Minister here that a Boris bond would be very popular with tenants.

Why is a conservative government interested in this? Because tenants are a very significant part of the electorate. There’s a very significant tenant part of the voting group who in the future are going to influence the outcome of elections. And I do think politically, the Conservative government has realized that you need to come up with legislation that supports tenants.

Over the last few years, we’ve had a number of changes. In 2019, the government banned all fees that tenants had to pay. In the past tenants would pay a fee for getting a property, getting a reference done, paying for an inventory, that’s all gone. Abolished. So, in the past, there was no cap on deposits. A landlord could charge three months’ rent, two months’ rent.

The cap now in England is five weeks’ rent, that’s the maximum deposit. And that’s been introduced by a Conservative government. The lifetime deposit idea is definitely something that the government [is] working hard on. And hopefully, there’ll be some solutions coming forward in the next few months that we can share with you guys.

Duong: [A question from a listener] How can we get around the standard that income has to be about three times the amount as rent?

Williamson: I don’t know, that that’s a really hard balance. And if housing was truly affordable, and pegged to people’s incomes, it would make sense, but since it’s not, and a lot of people are cost burdened, and overextended as it is, it becomes kind of an impossible standard. So my only solution that I can really offer is, if there was a sufficient supply of truly affordable housing, then that would be a great, we wouldn’t have to do away with that standard, it would just work for whatever your income was.

Harriott: What’s happened over here is that we’ve capped the deposit. So if you’re a low-income household, you can’t be asked to supply three months deposit, that’s just not allowed. Five weeks’ rent is still quite a lot. But landlords are always concerned that tenants, towards the end of the tenancy, don’t pay the last month’s rent, and they disappear. So landlords are quite attracted to the idea of allowing at least four or five weeks rent deposit, but my view at the bottom end of the market here is that for very low-income households, the deposit needs to be replaced by something else. We’re working with some local councils and municipalities to talk to them about whether they can help provide a deposit guarantee to tenants who have low income, because if you have very low income, you’re not going to find that $1,600 that you spoke about. Councils over here are quite supportive of that. And we’re getting some traction, we’re calling this thing a “fair bond.”

Williamson: I think it’s interesting how the U.K. does deposits. I imagine that it had an impact on landlord behavior. It’s not just that there’s a better mechanism for tenants to get [their deposits] back if it’s wrongfully withheld, but the problem just isn’t really coming up in the first place.

Harriott: The biggest thing that I think changed [is that] our dispute process says that it’s the landlord to prove a deduction from the deposit and they have to provide evidence to back it up. What we saw in the early days is often landlords hadn’t done an inventory at the start of the tenancy and hadn’t done an inspection report at the end, so they couldn’t actually show there’d been any damage caused because they had no evidence really to support it. We started rejecting those claims quite quickly. Now, most landlords do a check-in report, they do an inventory, they share it with a tenant to make sure the tenant’s happy with it. And at the end of the tenancy, they’ll do a checkout report, again, share that with the tenant. And if they don’t do that, they now know in the U.K., they’re not going to get a successful claim against the deposit. And I think that’s the biggest change I’ve seen. It’s made the playing field a bit more level because in the old days, the tenant would say, “Well, that wardrobe or that cabinet was already damaged when I moved in.” And the landlord says, “No, it wasn’t.” How do you prove it? So that’s been the biggest change.

Duong: Do either of you have any final words for our audience members on this topic?

Williamson: Thanks so much for including me in this discussion. It was really wonderful to hear from Steve. I think that this is a really kind of exciting idea. I don’t know what the movement would look like for exploring this in the states, but I think it would be worthwhile.

Harriott: I’m really keen to see whether there is any interest in somewhere in the U.S. because the model is eminently transferable. What we do I’m sure would work in the U.S. We just need to find some politicians who are interested in trying this.

If people want to reach out to me, we’re happy to help.

Duong: Thank you.

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