Avoid a downer when dealing with a rental deposit
Whether you are a seasoned landlord or new property owner, renting out your precious asset can be a nerve-wracking experience. And if you are a potential tenant, you also want to know your rights before signing on the dotted line and booking a moving service.
Doing your homework so you understand the rules and regulations about leases ‒ particularly deposits ‒ can give both parties peace of mind, says Justmoney Commercial Manager Sarah Nicholson.
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“As a property owner, a robust rental deposit improves the likelihood that your tenant will abide by the contract, and you also have the reassurance that you are covered if there are damages. Finding a good, reliable tenant is more important than ever in these tough economic times. You are more likely to attract and retain such a lessee if, in turn, they know that their deposit is being properly invested and generating interest,” says Nicholson.
What does the law say about managing a tenant’s deposit?
According to the Rental Housing Act 50 of 1999, tenants are not legally obliged to pay a deposit. A landlord, however, is legally allowed to ask for one.
The law does not specify the amount of the deposit, so it is agreed upon by both parties. Generally, it is a full month’s rent, although some landlords ask for two months’ worth. This safeguards them against damages and tenants leaving before the end of the lease.
Importantly, the deposit must be held in an interest-bearing account with a financial institution; and even if the landlord fails to invest the deposit in this way, it is legally treated as if it had been correctly invested and had earned interest while it was being held by the landlord.
At any time during the lease period, a tenant may ask for written confirmation of the interest accrued on the deposit.
“An easy and efficient way to handle this is to open a separate savings account for a tenant’s deposit. Check that it offers a competitive interest rate while being flexible. There should not be stiff penalties that would wipe out the interest should you have to withdraw the funds earlier than you expect – for example if your tenant gets a new job in another city and you both agree to an early cancellation of the lease.”
To summarise, here are simple steps to ensure you are covered:
- Provide your tenant with a receipt that has the following information:
- Their name, address for which the deposit is paid, the type of dwelling (e.g. flat, house, room, or cottage).
- The date the deposit was paid.
- Amount paid
- Reason for payment (deposit)
- Landlord’s signature.
- Invest the deposit in an interest-bearing bank account.
- Provide the tenant with written proof of accrued interest when he or she requests it.
To ensure that the deposit is not compromised, at the start of the lease the owner and the tenant must do a joint inspection of the property and put the findings in writing.
At the end of the lease, inspect for any damage during the final three days of the tenant’s occupation. Failure to do this might affect the landlord’s right to use the deposit to fix any damage to the property.
The Rental Housing Act outlines the time periods within which the deposit needs to be paid back to the tenant after the lease has expired:
- Within seven days if there are no damages;
- Within 14 days if there are damages and repairs need to be done; and
- Within 21 days if a tenant refuses a joint inspection.
“Keep in mind that you should not use the deposit as rent for the final one or two months,” says Nicholson. “When the lease ends and you do an inspection, this could cause problems if you discover there are damages.”