Investing the tenant’s deposit

After endless weekends searching for that perfect property, the tenant finally heaves a sigh of relief. Found it! And it’s perfect! The forms are signed, the deposit and first month’s deposit is paid, the removal van is booked. Let the settling in begin.

But have you ever wondered what the landlord is planning on doing with that deposit? Here’s the thing: the deposit doesn’t belong to the landlord. It is held by the landlord as a form of security, in case the tenant damages the property or fails to pay their rent or electricity. But unless or until such time as the tenant steps out of line, the landlord has no right to the money. This is generally not really thought about until the lease ends. Which is when the tenant starts clamouring for their money back. And this is when the landlord often scurries to find another tenant, so that they can use the new tenant’s deposit to pay back the old tenant’s deposit. Because the old tenant’s deposit was spent within days after it was paid over.

Does that sound familiar? It probably does. But is it the correct approach? Absolutely not.

According to the Rental Housing Act, the landlord is required to protect the tenant’s deposit by paying it into a bank account – where the money must remain until such time as it is either repaid to the tenant or used by the landlord to pay for damages caused by the tenant.

As if that’s not enough, here’s the clanger that most landlords are unaware of. The bank account must be an interest-bearing account. And the interest must accrue to the tenant.

This means that at the end of the lease, the landlord must pay the tenant the deposit plus interest earned on the money.

Read it for yourself. Section 5(3)(d) of the Act states that “the deposit must be invested by the landlord in an interest-bearing account with a financial institution and the landlord must pay the tenant interest at the rate applicable to such account which may not be less than the rate applicable to a savings account with a financial institution.”

Plus, the Act doesn’t leave the landlord with much room to hide. Because a tenant is entitled to ask the landlord to provide written proof that this has indeed been done.

So as a landlord, you should probably consider including the deposit requirements in your Lease Agreement. And a good habit would be to open a separate savings account that you ring-fence specifically for payment of the deposit.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.