Managing Tenant Deposits in Gibraltar…. Properly

The estate agent industry in Gibraltar is unregulated. There are no barriers to entry for any person at any time calling him or herself an estate agent and holding a tenant deposit. You are at the mercy of your agent’s morality, professionalism and experience when it comes to their management of tenant deposits on residential properties.

Most landlords and letting agents ask tenants for a deposit as security against damage or non-payment of rent. There are two key issues when it comes to the management of that tenant deposit by an estate agent. Firstly, where is the money held? Secondly, on what basis is it refunded?

Client Money

A tenant deposit is money belonging to the tenant. It is not the landlord’s money, it is not the agent’s money. It is the tenant’s money which secures the tenancy agreement. Therefore it should be safeguarded so that the tenant may reclaim the deposit in full at the end of the tenancy (provided the tenant has met all of his tenant obligations of course), without fear of the agent or landlord retaining the money.

In the UK, tenant deposits arising from any assured shorthold tenancies entered into since April 2007 must be held in a government backed tenant deposit protection scheme.

A UK tenancy deposit protection scheme safeguards a tenant’s deposit. This means a tenant can be sure that he will get his deposit back at the end of the tenancy, as long as he is entitled to it. For example, the landlord may be entitled to some of the deposit if there is any damage or if the tenant hasn’t paid all of his rent.

The UK scheme also provides a service to sort out disagreements about the deposit without going to court.

In Gibraltar, tenants and landlords rely on agents utilising properly ring-fenced and designated (by the bank) Client Bank Accounts for holding tenant deposits as their protection.

A Client Bank Account in this respect means an account held by the agent at a recognised bank which is specifically created by the agent for the purpose of holding client money, and most importantly segregated from any account holding money which is not client money.

Alarm bells should be ringing if your agent is using your tenant deposit for his own cashflow. Whether you are a tenant, who will want this money back one day, or, a landlord who may have lawful access to this money under the terms of the tenancy agreement, you should triple check with your chosen agent just where the tenant deposit is held during the life of the tenancy. If your agent goes bust, you should not be in a position that you (landlord or tenant) lose access to the tenant deposit.

So be careful and check where your money is held!

Refunding the Tenant Deposit

Assuming you have chosen a reputable agent, the tenant deposit will be refunded at the end of the tenancy term based upon the terms of the tenancy agreement and generally accepted principles.

It should be remembered that the tenant’s deposit is the tenant’s money until it is proven or agreed that it is not the tenant’s money. The deposit is released to the tenant when the landlord agrees albeit in a reasonable timeframe.

The landlord can make reasonable deductions (often but not always recommended by his agent) from the deposit for damage to the property (not wear and tear), missing items, cleaning and unpaid rent.

Any part of the deposit not disputed must be returned within a reasonable timeframe. A landlord should not unnecessarily hold back the refund of the undisputed sum as a negotiating tool or a ransom on the disputed sum.

Wear and tear

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

There is no legal definition of fair wear and tear. The House of Lords (UK) had an attempt once. They see fair wear and tear as: “Reasonable use of the premises by the Tenant and the ordinary operation of natural forces”, which is not hugely 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 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 one person will see far less wear and tear than a family of four.

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 would 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

The landlord cannot benefit from “betterment” in the process ie financial gain. 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 & 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 photographic inventory and schedule of condition undertaken at the start of the tenancy which is agreed by both parties. Being able to refer to such a document with photographic evidence at the end of the tenancy helps everyone know where they stand.

Ultimately, if there is no agreement, and the agent cannot achieve agreement between the parties, then the landlord and tenant enter a dispute resolution process as set out in the tenancy document, and / or lawyers get involved, which is costly.

So choosing a professional, reputable and moral agent to manage both the tenancy process and the Client Money, is the best way of navigating through the letting process in Gibraltar’s unregulated market.