Zero Deposit Schemes

It isn’t a regular occurrence, but there are circumstances when a landlord might not want to take a deposit from a tenant for whatever reason. Often this can be because the tenant is not in a position to pay the full deposit. As a compromise, they might take out what is in essence an insurance policy, typically costing around 1 week’s rent which gives them cover for the full amount of the deposit which would normally be charged. This does make it significantly cheaper for a tenant to move into a new property and also gives the landlord piece of mind that there is a scheme in place to recover any losses from, but what are these schemes and how do they work within the framework of the tenant fees rules?

House model with question mark.

Zero Deposit Schemes

Zero deposit schemes are an insurance policy. The tenant pays a much smaller sum to a third party provider who then covers them for the 5 or 6 week’s deposit. The fee that is paid is typically around 1 week’s rent. So, the upfront outlay is significantly less for a prospective tenant and the landlord is covered. There are, however, some significant downsides to a zero deposit scheme which anyone looking to take advantage of the lower upfront costs should consider:

  • Quite often these schemes have either monthly or annual charges for renewal. This means that, over time, the amount a tenant pays increases
  • The fees that are paid are non-refundable, just like any other insurance policy
  • The tenant is still liable at the end of the tenancy to pay for any damages or unpaid rent. The insurance cover will assist with any disputes and will settle, in the first instance, any claims by the landlord, but ultimately the provider will look for repayment directly from the tenant. Typically, this would come out of the security deposit.

Whilst a Zero Deposit Scheme significantly reduces the upfront costs of moving it is important to understand that there might be further fees as time goes on and that the tenant is still personally liable to pay for any damage or unpaid rent.

What about the tenant fees ban?

Under the tenant fees rules a landlord cannot insist on a payment to a 3rd party as a pre-condition for a tenancy to be granted. How, then does, a tenant paying a fee to a 3rd party zero deposit insurance provider work as this type of fee seems to be legally banned.

It is quite simple, as long as the tenant has the choice of either paying a full deposit or taking out the insurance and it isn’t forced upon them by a landlord or their agent, then the fee payment is perfectly acceptable.

Zero deposit schemes can be very advantageous to help tenants find a suitable rental property whilst not requiring them to find a larger security deposits. There are some downsides though and tenants should make themselves aware of this and a Landlord who offers this as part of the tenancy has to be aware that, to avoid falling foul of the tenant fees act, they need to make it a choice rather than a requirement of the tenancy.