Real Estate Tip of the Week :On Charge Or On Trust? Rent Deposits Explained

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Real Estate Tip of the Week :On Charge Or On Trust? Rent Deposits Explained

Published 23 June 2021

Whilst there are many ways in which rent deposits can be held, there is no "perfect way". The two most common methods are:

  • The landlord holds the deposit money but it continues to be the tenant's money charged in the landlord's favour ("Charge") and
  • The landlord holds the deposit money on trust for the tenant ("Trust"). 

Charge structure

Main advantages to landlords

  • The money continues to belong to the tenant (so no risk of it forming part of the landlord's estate if the landlord becomes insolvent). This makes it easier to persuade a tenant to part with their money in a rent deposit.
  • If the tenant becomes insolvent, the landlord has the benefit of the charge over the deposit money and so is a secured creditor (up to the amount of the deposit money).

Main disadvantages to landlords

  • If the tenant enters administration, the landlord must obtain the administrator’s consent or the Court’s permission before making a deduction from the deposit money. Case law has established, an administrator is not obliged to top up a rent deposit once it is been drawn down because topping up is not an 'expense of the administration'.
  • On a transfer of the reversion, it may be necessary for the new landlord to take a new charge over the deposit money.

Trust structure

Main advantage to landlords

The landlord holds the legal interest in the deposit money so there is no need to take a charge over it. This means that the landlord will not require an administrator’s consent or the Court’s permission to make a deduction from the deposit money (although this generally held view has yet to be tested in Court).

Main disadvantages to landlords

  • As the tenant holds the beneficial interest in the deposit money, if it becomes insolvent, the money might form part of its insolvent estate.
  • The landlord must comply with certain fiduciary duties that it owes to the tenant, including being obliged to earn a reasonable rate of interest on the deposit money.
  • There is a potential conflict between the landlord’s role as trustee and its ability to make withdrawals from the deposit to recompense it for its losses.

In our experience, the charge structure is more commonly used, but do please get in touch if you wish to discuss which structure may be more appropriate for you.

Authors

Richard Cross

Richard Cross

Bristol

+44 (0)117 918 2033

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