I gave a speech yesterday about Rent Deposits – Risks & Benefits and now I’m going to write down a summary of what I said. I did manage to record the whole speech but it’s an hour long.
I’m really grateful for the invitation from Durham REI I had never been there and did not know what to expect but it was more of an informal group which was nice, friendly, no one selling stuff. If I were to describe it I would describe it more as a learning class for landlords; specialists were invited to speak and people asked questions.
Reasons To Take Rental Deposits
The primary reason to take rental deposits is to get a commitment from the potential tenant during the application process. I have learned that tenants can be very complimentary and tell you what you want to hear, until that crucial moment when you ask them to put their money down. So by asking for a deposit you immediately discover if they want the apartment seriously or not.
The secondary reason you take rental deposits with an application is so you don’t waste your time and money processing an application and then the tenant has found some other apartment. Tenants stop shopping once they give a deposit but not always when they give an application. In fact the tenant who has filled out just an application may shop around even more “to make sure they made the right choice”.
The tertiary reason to take a deposit is to mitigate your losses should the tenant change their mind. If your policy was to only accept first and last upon the lease signing and the tenant came early in the month and you stopped renting the place then changed their mind, you would lose a month’s rent because you mistakenly assumed you had a tenant and you would be unable to find a new tenant a few days before the end of the month.
Partial Deposits – Why you should take them
The best tenants are conscientious and careful. Tenants who value their housing want to get their housing as early in the process as possible. Some tenants will even want to find a place before they give their notice. They don’t want to take a chance that they won’t be able to find a place. Such tenants are generally superior than last minute tenants. The worst of the worst of these potential tenants being the people who come with cash in hand on moving day.
The problem for these tenants is that even though they want to get a a place as soon as possible, they are still paying rent at their old location. They may have the entire first and last available or they might not. They may need to wait for their next paycheck before making a commitment to your place. This is time that they will be looking at other places and possibly renting them instead of you getting a great tenant. I will take a partial deposit with the application, the amount is not as important as the psychological commitment. Then I’ll get more money from them as they have it, when their pay comes in.
The Tenancy Agreement
The tenancy agreement begins when there is acceptance on both the landlord & tenant’s side that the tenant will move in. An oral agreement is enough, a lease does not have to be signed and possession does not have to be given or turned over. Once agreement is reached by both sides, a future tenancy is created.
Accepting the Application Quickly
I try to process applications as quickly as possible generally within 24 hours because it is only once the application is accepted that the future and binding tenancy is created. Once you have approved the application and accepted that tenant if they change their mind, you get to keep the deposit. You are only allowed to keep the deposit once this agreement is in place.
Keeping The Rental Deposit
If the tenant changes their mind once the agreement is place, the landlord gets to keep the deposit. It’s that simple.
Divisional Court Law
The Landlord & Tenant Board is a quasi judicial tribunal, what this means is that the adjudicator has broad powers to interpret the Residential Tenancies Act. Except where…Divisional Court has made rulings. In this case it the adjudicator has no leeway and must adhere to what the higher court has ruled.
Opara v Cook
In this case the tenant decided after he had given the deposit and his application had been accepted that he did not like area. His friends had told him the area was not secure. The judge ruled that the landlord got to keep the deposit and that the future tenancy had been created. The rent was applied to the first month of the tenancy even thought the tenant had never taken possession.
Benedetto V Dineen
In this case the prospective tenants were students, the landlord took their deposit and application then told them they needed a guarantor. They did not have a guarantor and the landlord kept their deposit. In this case the judge ruled that no future tenancy agreement was created and so their deposit was ordered to be returned.
Honesty During Application Deposit Process
I am a big believer in honest, straightforward, clear instructions. I tell prospective tenants that I will not return their deposit if they change their mind but that the deposit is fully refundable if their application is not accepted. On my part I no longer show the apartment until their application is either accepted or denied. There is commitment for both parties until the application in front of me is dealt with. I no longer keep shopping for a better tenant while keeping the tenant from shopping and delaying acceptance of the tenancy. That’s dishonest in my opinion, it’s not fair and I don’t do business that way.
So far, I have never been sued for keeping a deposit and I enacted this policy in a 400 unit building. Every month there were a few lost deposits. I get some now too, less because I don’t have this number of units to rent, however, people understand before they give the deposit that if they cancel they don’t get their deposit back. I am very clear about it and they understand the terms when they give me the deposit.
Most people, including prospective tenants, do get very upset if they feel that they have been taken advantage of or have been urged into a situation that they didn’t understand. It is pretty common practice by many major corporations to have service agreements that are incomprehensible, written in 9 point type by lawyers and dozens of pages long. Personally I think that people should understand their leases and important documents without have to obtain independent legal advice before getting a cell phone or buying software. I can’t do anything about their actions but I can control mine so I explain the terms as clearly as I can.
I urge all landlords to consider taking deposits for all the important reasons listed above, it’s just good business.