Spotlight On: Rental Deposits

I was motivated to write this article in response to the following post in the Property Practitioners Facebook Group:

if a client’s lease has ended and moves out without paying their W&E bill from the municipality, how can the landlord get them to pay?

Also, he also didn’t pay his last month’s rent, so we agreed I’d keep the deposit for that.

Any legal action or other recourse i can take?

II’m not going to discuss the legal recourses for recovering the water and electricity costs, but this post highlights the importance of rental agents understanding all of the do’s and don’ts of damage deposits. These requirements are set out very clearly in the Rental Housing Act.

In Summary – Deposits and the RHA

For those of you not wanting to read the detail, here’s a summary of what the RHA stipulates with respect to tenant deposits:

  • A deposit is not a requirement for a valid lease agreement.
  • There is no prescribed maximum or minimum deposit amount.
  • The full deposit amount must be invested with a financial institution in an interest-bearing account. This account must earn interest at least equivalent to the interest earned on a savings account.
  • If the landlord is an estate agent (or uses the services of an estate agent to manage the property and lease) then the deposit and the interest can be dealt with as per the Estate Agent Affairs Act (EAAA). (We won’t go into this option in detail as it’s normal practice for agencies to pay the interest to the tenant.)
  • Some agencies retain a portion of the interest accrued on the tenant deposit and this is permissible under the EAAA. In this case, the agency needs to pay 50% of the retained interest to the Estate Agents Affairs Board (EAAB).
  • The tenant must be provided proof of interest accrued on request.
  • The deposit may only be used at the end of the lease. The deposit, nor the interest, can be used for any purpose whatsoever during the course of the lease. This holds whether the landlord and the tenant agree to such use, or not.
  • The deposit may only be used to pay tenant arrears, the cost of repairing damage to the dwelling and the cost of replacing lost keys. Tenant arrears is limited to amounts the tenant is liable for under the lease.
  • There is no leeway for the payment of any other amounts out of the deposit, or interest. So, for example, any reasonable cancellation penalty due for early cancellation of the lease, may not be paid out of the deposit and interest.
  • Where there are damages to the premises, the deposit must be finalised and disbursed within 14 days after the repairs have been completed. This is the timeline when the outgoing inspection was carried out jointly with the tenant and the landlord.
  • If the cost of damage to the premises is deducted from the deposit, then the tenant is entitled to see copies of the receipt of the actual expenses. This implies that only the cost of actual repairs carried out and paid for may be deducted from the deposit – not the estimated cost of repairs or an amount ‘in lieu’ of repairs.
  • If the tenant has no arrears, and there are is no damage to the premises, the deposit and interest must be refunded to the tenant in full within 7 days of the end of the lease. This holds true if there was a joint outgoing inspection of the property.
  • If an outgoing inspection is not carried out by the landlord, then the landlord has no right to deduct the cost of any damage to the premises from the tenant’s deposit. Only arrears due at the end of the lease would be able to be deducted in this case.
  • Although not specifically mentioned in the RHA (except to require one) if there was no ingoing inspection done, or there is no record of the ingoing inspection, then the landlord would similarly not be entitled to deduct the cost of the repair of any damage to the property from the deposit. There is no proof of damage without either an ingoing or an outgoing inspection report.
  • If the tenant does not respond to the landlord’s request for an outgoing inspection, the landlord must inspect the dwelling within 7 days of the end of the lease. The landlord is then be entitled to claim the cost of repair of any damage to the premises from the tenant’s deposit and interest.
  • As long as the landlord carries out and documents the outgoing inspection within 7 days after the expiry of the lease, if the tenant did not respond to the request for an outgoing inspection, the landlord may deduct the cost of repairing damage to the property and the cost of lost keys from the tenants deposit and interest, in addition to any tenant arrears.
  • If the tenant does not attend the outgoing inspection, then the landlord has 21 days from the end of the lease to disburse the deposit. Note that this is not after completing repairs, but from the end of the lease, so all repairs must be completed and the balance of the deposit disbursed within 21 days from the end of the lease.
  • Even if the tenant did not attend the outgoing inspection, they must be shown proof of actual expenditure to repair any damage to the property on request. This implies clearly that only the cost of actual repair of damage to the property may be deducted from the tenants deposit, not the estimated cost of repairs, or monetary compensation in lieu of repairing damage.
  • The tenant/s and landlord/s cannot agree to anything that is not permissible in terms of the RHA. For example, even if the tenant and landlord agree, the RHA very clearly prohibits any part or amount of the deposit or interest being used during the course of the lease, e.g. for the last month’s rent.

If you’re a more detailed person and would like to see the ‘proof’ of the above summary all the clauses of the RHA pertaining to rental deposits are listed and commented on below.

The RHA and Deposits in Detail

Is the payment of a deposit by a tenant a requirement of a valid lease agreement?

RHA 5(3)(c):

the landlord may require a tenant. before moving into the dwelling, to pay a deposit which. at the time, may not exceed an amount equivalent to an amount specified in the agreement or otherwise agreed to between the parties;

  • The use of the word ‘may’ in the above clause clearly indicates that a deposit is not a legal requirement of a lease agreement.
  • There is no prescribed maximum or minimum deposit amount. I believe firmly that rentals best practice suggests a minimum 2 month deposit. I explain why in a previous article.
How must the deposit be managed?

RHA 5(3) (d):

the deposit contemplated in paragraph (c) must be invested by the landlord in an interest-bearing account with a financial institution and the landlord must subject to paragraph (g) pay the tenant interest at the rate applicable to such account which may not be less than the rate applicable to a savings account with a financial institution, and the tenant may during the period of the Iease request the landlord to provide him or her with written proof in respect of interest accrued on such deposit, and the landlord must provide such proof on request; Provided that where the landlord is a registered estate agent as provided for in the Estate Agency Affairs Act, 1976 (Act No. 112 of 1976), the deposit and any interest thereon shall be dealt with in accordance with the provisions of that Act;

  • The full deposit amount must be invested with a financial institution in an interest-bearing account. This account must earn interest at least equivalent to the interest earned on a savings account.
  • If the landlord is an estate agent (or, I assume, using the services of an estate agent of manage the property on his/her behalf) then the deposit and the interest can be dealt with differently as per the Estate Agent Affairs Act. We won’t go into this option in any more detail as I believe it’s normal practice for most agencies to pay the interest to the tenant.
  • I know that some agencies retain a portion of the interest accrued on the tenant deposit and this is permissible under the EAAA. If this is the case, the agency needs to pay 50% of the retained interest to the Estate Agents Affairs Board (EAAB).
  • The tenant must be provided proof of interest accrued when requested to do so.
When can the deposit be used and what can it be used for?

RHA 5(3) (g):

on the expiration of the lease, the landlord may apply such deposit and interest towards the payment of all amounts for which the tenant is liable under the said lease, including the reasonable cost of repairing damage to the dwelling during the lease period and the cost of replacing lost keys and the balance of the deposit and interest, if any, must then be refunded to the tenant by the landlord not later than 14 days of restoration of the dwelling to the landlord;

  • The deposit may only be used at the end of the lease. Neither the deposit, not the interest, can be used for any purpose whatsoever during the course of the lease.
  • The deposit may only be used to pay tenant arrears, the cost of repairing damage to the dwelling and the cost of replacing lost keys. Tenant arrears is clearly limited to amounts the tenant is liable for under the lease.
  • There is no leeway for the payment of any other amounts out of the deposit, or interest. So, for example, any reasonable cancellation penalty due for early cancellation of the lease, may not be paid out of the deposit and interest.
  • Where there are damages to the premises, the deposit must be finalised and disbursed within 14 days after the repairs have been completed. This applies if the landlord and the tenant did a joint outgoing inspection.

RHA 5(3) (h):

the relevant receipts which indicate the costs which the landlord incurred, as contemplated in paragraph (g), must be available to the tenant for inspection as proof of such costs incurred by the landlord;

  • If the cost of damage to the premises is deducted from the deposit, then the tenant is entitled to see copies of the receipt of the actual expenses. This implies that only the cost of actual repairs carried out and paid for may be deducted from the deposit – not the estimated cost of repairs or an amount ‘in lieu’ of repairs.

RHA 5(3)(i):

should no amounts be due and owing to the landlord in terms of the lease, the deposit, together with the accrued interest in respect thereof, must be refunded by the landlord to the tenant, without any deduction or set-off, within seven days of expiration of the lease;

  • If the tenant has no arrears, and there are is no damage to the premises, the deposit and interest must be refunded to the tenant in full within 7 days of the end of the lease.
  • ‘Without any deduction or set-off’ may possibly prohibit the charging of any ‘deposit administration fee’ or other similar charges.

RHA 5(3)(j):

Failure by the landlord to inspect the dwelling in the presence of the tenant as contemplated in paragraphs (e) or (f) is deemed to be an acknowledgement by the landlord that the dwelling is in a good and proper state of repair, and the landlord will have no further claim against the tenant who must then be refunded, in terms of this subsection, the full deposit plus interest by the landlord;

  • If an outgoing inspection is not carried out by the landlord, then the landlord has no right to deduct the cost of any damage to the premises from the tenant’s deposit.
  • It’s important to note that, although not specifically mentioned here, if there was no ingoing inspection done, or there is no record of the ingoing inspection, then the landlord would similarly not be entitled to deduct the cost of the repair of any damage to the property from the deposit as there would be no proof of damage without either an ingoing or an outgoing inspection report.
  • This clause only relates to the cost of repair of damage to the property. The landlord would still be entitled to claim the cost of any tenant arrears or balances owing at the end of the lease.

RHA 5(3)(k):

should the tenant fail to respond to the landlords request for an inspection as contemplated in paragraph (f), the landlord must, on expiration of the lease, inspect the dwelling within seven days from such expiration in order to assess any damages or loss which occurred during the tenancy;

  • Even if the tenant does not respond to the landlord’s request for an outgoing inspection, the landlord must inspect the dwelling within 7 days of the end of the lease if he/she wants to be able to claim the cost of repair of any damage to the premises from the tenant’s deposit and interest.

RHA 5(3)(l):

the landlord may in the circumstances contemplated in paragraph (k), without detracting from any other right or remedy of the landlord, deduct from the tenants deposit and interest the reasonable cost of repairing damage to the dwelling and the cost of replacing lost keys;

  • As long as the landlord carries out and documents the outgoing inspection within 7 days after the expiry of the lease, if the tenant did not respond to the request for an outgoing inspection, the landlord may deduct the cost of repairing damage to the property and the cost of lost keys from the tenants deposit and interest, in addition to any tenant arrears.

RHA 5(3)(m):

the balance of the deposit and interest, if any, after deduction of the amounts contemplated in paragraph (l), must be refunded to the tenant by the landlord not later than 21 days after expiration of the lease:

  • If the tenant does not attend the outgoing inspection, then the landlord has 21 days from the end of the lease to disburse the deposit.
  • Please note that this is not after completing repairs, but from the end of the lease, so all repairs must be completed and the balance of the deposit disbursed within 21 days from the end of the lease.

RHA 5(3)(n):

the relevant receipts which indicate the costs which the landlord incurred, as contemplated in paragraph (l), must be available to the tenant for inspection as proof of such costs incurred by the landlord; and

  • Even if the tenant did not attend the outgoing inspection, they must be shown proof of actual expenditure to repair any damage to the property on request
  • This implies clearly that only the cost of actual repair of damage to the property may be deducted from the tenants deposit, not the estimated cost of repairs, or monetary compensation in lieu of repairing damage.
Can the landlord and tenant agree to waive any of the deposit requirements prescribed in the RHA?

RHA 5(4):

The standard provisions referred to in subsection (3) may not be waived by the tenant or the landlord.

  • This clause allows for no misunderstanding in this regard – the answer to the above question is clearly ‘No’.
  • The tenant/s and landlord/s cannot agree to anything that is not permissible in terms of the RHA.
  • For example, even if the tenant and landlord agree, the RHA very clearly prohibits any part or amount of the deposit or interest, in being used during the course of the lease, e.g. for the last month’s rent.

The last point is worth highlighting because all too often agents believe that if the tenant and the landlord agree that the deposit can be used during the course of the lease, then they have to follow their instructions.

I asked award-winning rental property attorney Marlon Shevelew for his comment on this matter . . .

A deposit cannot be used during the lease period, in a residential lease, even if the parties agree to it.

Why?

Section 5(3)(d) of the Rental Housing Act specifically states that the tenant’s deposit must be invested in an interest bearing account.

Section 5(4) of the Rental Housing Act specifically states that the standard provisions referred to in Section 5(3) may not be waived by the tenant or the landlord.

So, the deposit must remain invested, even if the parties to the lease agree otherwise.

– Marlon Shevelew – https://www.marlonshevelew.co.za/

If you’re wondering how much deposit is enough, you can also take a look at my video and article: How much damage deposit should you take?

In the next article we’ll be looking at best practices regarding tenant deposits. Make sure to subscribe to my newsletter below to make sure you don’t miss this article.

I hope and trust you found this information useful. Please feel free to post any questions you have below and please feel free to share this post if you know of anyone else that might also find it useful – or share on Facebook or Twitter by clicking on the share links below.

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The post Spotlight On: Rental Deposits appeared first on Shaun Luyt | Residential Property Rental Training & Advice.