Who owns the tenant’s deposit on a residential apartment? What happens when there’s a dispute? What role does the agent play?

After much lobbying, I was pleased that the Gibraltar Office of Fair Trading introduced an Estate Agents’ Code of Conduct in October 2015 implementing a series of measures to improve the standards in a hitherto unregulated estate agency industry.

If you are a residential tenant and your tenant deposit is held by a Gibraltar estate agent, then that deposit must now be held in a properly segregated Client Account at the agent’s bank. You should seek confirmation from your agent that this is the case if you are in any doubt. This protection ensures that your deposit is not used to assist the cashflow of that estate agency or is not lost should the estate agent have financial difficulties. The deposit should be ring-fenced with your name on it. Check it. If it is not in a Client Account, your estate agent is in breach of the Fair Trading Act 2015.

The terms by which an agent holds the tenant’s deposit should be set out in a Tenancy Agreement between landlord and tenant. The estate agent should provide this. The mechanism by which the deposit is released back to the tenant should be clear. Do not accept a tenancy agreement which avoids the issue as this is sure to create problems at the end of the tenancy.

It should be remembered that the tenant’s deposit is the tenant’s money until it is proven otherwise by the landlord or agreed by the tenant that it is not the tenant’s money. The deposit must be released to the tenant in a reasonable timeframe following the end of the tenancy.

The landlord can legitimately make reasonable deductions (often but not always recommended by his agent) from the deposit for four different reasons: damage to the property (unless it is fair wear and tear); missing items from the original inventory; cleaning; and unpaid rent.

Wear and tear

Unlike commercial leases which can require tenants to leave the property as they found it, residential tenancies must allow for fair wear and tear.

There is no legal definition of fair wear and tear although the House of Lords (UK) defined fair wear and tear as: “Reasonable use of the premises by the Tenant and the ordinary operation of natural forces”, which is only averagely helpful.

There are however some obvious considerations when considering what is wear and tear and what is damage. For example, the longer the tenancy, the more natural wear and tear to be expected. Furthermore, the more occupants there are, the higher the wear and tear in all the communal areas, such as the lounge, hall, bathrooms and kitchen. And a property occupied by children or pets will undoubtedly encounter more wear and tear than from an absent tenant. The landlord must accept this additional wear and tear if he consents to children and pets.

When considering a particular fixture or fitting, the original condition, age and quality must be taken into account along with the expected useful life of each item.

In terms of what is damage and the decision as to what is wear and tear must be made taking into account the above considerations.

Very light marks on the carpet might have to be viewed as unavoidable ie “the operation of natural forces”. However, damage such as nail varnish spills on the floor or iron burns that have occurred due to negligence would see the tenant liable for repair. The landlord has to consider whether the item which has been damaged has worn out through natural use or from sheer negligence.

Fair wear and tear does not apply to cleanliness though. A standard tenancy agreement should ensure that the property is returned in its original state of cleanliness (not better than its original state). If it’s not, the landlord can use the tenant deposit to fund such a clean.

Betterment

According to the UK’s Association of Independent Inventory Clerks (“AIIC”), landlords are still pushing for ‘betterment’, or ‘new for old’ at the end of tenancies and many have unrealistic expectations of what they can claim against tenant deposits. Whilst the tenant has a duty of care to return the property in the same condition at the end of the tenancy as found at the start (allowing for wear and tear) as listed on the inventory report, the law does not allow landlords to claim ‘betterment’ or ‘new for old’ from the tenant’s deposit. The tenant deposit is absolutely not a “new for old” insurance policy.

To avoid “betterment”, there is a technique called apportionment. Apportionment is the process of breaking down the costs of ‘fair wear and tear’ into measurable chunks and thereby allowing a landlord to fairly assign a monetary value to items in a very subjective process.

So if the tenant starts a tenancy with a 3 year old sofa, expected to last 8 years in total, and at the end of the tenant’s 2 year tenancy the sofa is damaged beyond repair not through wear and tear, the landlord has suffered the loss of the remaining 3 year expected 8 year life of the sofa. So the tenant must pay three eighths of the replacement cost of a like for like sofa.

Avoiding conflict

The worst disputes arise when there is no inventory or schedule of condition undertaken at the start of the tenancy which is agreed by both parties. Photographic evidence is hugely advantageous. Being able to refer to such a document with photographic evidence at the end of the tenancy helps everyone know where they stand. Landlords and tenants should insist on one as it protects them both.

Landlords beware

If you do not have the evidence to support your claim to any or all of the tenant deposit, your claim against the tenant deposit will fail. Your estate agent should keep comprehensive records on your behalf.

The moral of this story for tenants is twofold: firstly, not to allow your landlord to hold your deposit personally. Secondly, tenants should choose a properly licensed estate agent, who knows the rules, uses a comprehensive tenancy agreement, adopts a thorough inventory process at check-in and check-out and who explains the rules to both landlord and tenant prior to the possibility of any misunderstanding arising.

Don’t risk your tenant deposit.