Rental Deposits - What and when can they be used for?
Rental deposits have always been an item within the property industry that has separated opinion, as well as being the cause of many hurdles within rental negotiations.
The legislation around rental deposits also varies from residential to commercial. In residential property, a rental deposit must be held in an interest bearing trust account, and the interest must accrue and be paid back to the tenant when the deposit is returned. In commercial property, the rental deposit must still be held in a trust account, but there is no legal requirement for the interest to be accrued to the tenant. A tenant can negotiate to have the interest accrued to them, but that is normally on a case by case basis.
The legislation also does not mandate that a deposit must be made, however a Landlord can make it a requirement and not sign a lease without one.
In South Africa, the industry norm with commercial sector is to take 2 months rental deposit from a tenant. This amount can be calculated at current rental, or can be calculated as 2 months of exit rental (i.e the rental charged in the last year of the lease, with escalation added).
With that information in mind, back to the question. What can and can’t be done with a deposit?
A rental deposit is there to act as surety and/or a safety for a Landlord that a tenant will look after the property that is rented, on the understanding that if it isn’t, the deposit will be used to correct or fix any damages with the balance of the retnal deposit being refunded.
A deposit can potentially also be forfeited by a tenant if they abscond, in order to cover any financial losses potentially faced by the landlord. It is important to note that this varies lease to lease.
In most cases, a rental deposit isn't meant to be used in lieu of rental. It isn’t an option for a tenant to not pay a month of rental, and tell the landlord to use the deposit for rent. Nor is it an option for the landlord to simply use the deposit to replace rent if a tenant is late. This would leave the landlord and/or the tenant in a situation where they no longer have a deposit. This is why failure to pay rental is considered a breach of contract. Simply using a deposit as rental is not the intent of a deposit.
I am sure you are now asking yourself, what about Covid-19 and deposits? You may have heard of landlords and tenants agreeing to use a rental deposit as rental over this period?
If both a landlord and tenant agree to this, this may be an option, BUT, the landlord will likely require that the deposit be paid back after the lockdown ends. They would still want that safety net.
We would suggest that rather than using the deposit in this way - which doesn't really solve the underlying issue - that an agreement is made between tenant and landlord regarding rental over this period.
For any assistance, please contact ANVIL Property Smith