Rent Deposit Deeds - On Charge or On Trust?
Rent deposits are a type of security taken by landlords to protect against the risk of a tenant failing to pay rent or breaching other covenants in a lease. The two most common ways in which rent deposits can be held are by a charge or a trust.
This article assesses the advantages and disadvantages of each method for landlords and tenants.
Charge Method
Ownership
Under the charge method, the deposit belongs to the tenant but is held by the landlord. The tenant grants a fixed legal charge over the deposit in favour of the landlord, so the landlord becomes a secured creditor. The charge expires at the end of the term of the lease and the deposit is repaid to the tenant.
Advantages to the landlord
The money continues to belong to the tenant, so there is 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.
However, 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).
Disadvantages to the landlord
The landlord must obtain the administrator's consent or the court's permission to make a deduction from the deposit money if the tenant is a corporate entity and enters administration.
Trust Method
Ownership
Under the trust method, the landlord is the legal owner of the deposit and holds the deposit on trust for the tenant, who retains the beneficial interest. The landlord is under a strict duty to manage the deposit in accordance with the terms of the trust.
Advantages to the tenant
The deposit is protected from the landlord's insolvency because the tenant retains a beneficial interest. Moreover, if the deposit is misappropriated, the creation of the trust better enables the tenant to trace and recover it.
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.
Disadvantages to the tenant
Where the deposit is mixed with other money, it is unidentifiable and so the trust is ineffective. The tenant must therefore ensure that the landlord holds the deposit in a separate account and that the deposit is easily identifiable. This creates an additional burden on the tenant, but these are terms which can be incorporated into a rent deposit deed.
Conclusion
The circumstances of the parties will dictate the appropriate form of rent deposit deed. However, the trust method may be seen as more tenant-friendly, as it confers greater obligations upon the landlord, while the charge method allows the landlord to quickly and easily withdraw from the account in the event of a tenant breach, making it a more attractive method for the landlord.