How to handle a tenant’s deposit

Imagine you’ve acquired a property you don’t intend to live in. You may consider renting it out so that you can gain an additional income. Similarly, you may sublet a second bedroom in an apartment you’re renting from your own landlords.

In either case, you’re likely to put your tenant through a thorough vetting process, and use the tenant’s deposit as insurance that your contract will be abided by. However, are you aware of the legal requirements regarding a deposit?

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What are the legal requirements?

According to Tanya Haffern, who trains students on property investing in South Africa for Rich Dad Education, the Rental Housing Act 50 of 1999 states that tenants are not legally obliged to pay a deposit. However, the landlord is legally allowed to ask for a deposit.

“The actual amount is not specified by law and is agreed upon between the parties. Often it’s a full month’s rent. Some landlords ask for two months’ deposit to safeguard themselves against damages and tenants leaving before the end of the lease,” says Haffern.

She explains that if the lease states that a deposit is required, then the act imposes certain conditions. The deposit must be held in an interest-bearing account as the landlord's security for any damage the tenant may cause to the property, or for rental arrears or any other relevant amount owing.

“The deposit is regulated through what the act refers to as ‘deemed’ provisions. In other words, even if the landlord fails to invest the deposit in an interest-bearing account with a financial institution, it is deemed, or treated, as if it had been correctly invested and had earned interest while it was being held by the landlord,” says Haffern.

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Where should the deposit be kept?

Grant Smee, managing director of Only Realty and the founder of a variety of other innovative property solutions start-ups, points out that a tenant has the right to request, at any time during the lease period, written confirmation of the interest accrued on the deposit. 

“I would advise landlords to make use of a separate bank account for a tenant’s deposit, but further to this, to ensure their bookkeeping is kept up to date so that accurate records are kept of the deposit and the interest accrued to it,” says Smee.

“The deposit can be invested in any type of account that is interest bearing. However, the landlord must pay the tenant interest at a rate that is no less than a rate applicable to a savings account with the same financial institution,” he explains.

Linda Segal, rental consultant at Jawitz Properties Atlantic Seaboard, adds that a simple savings account provides flexibility in that there are no penalties for early withdrawal of funds. 

“Funds locked into an investment account often attract penalties if withdrawn early – penalties which may exceed the interest accrued. It can be costly to close an investment account ahead of the time,” says Segal.

She explains that this might happen if an owner and tenant agree to an early cancellation of a lease. This can be for various reasons, such as if a tenant receives a promotion to a new job in another city or country. 

Steps to follow…

So then how should you go about handling a deposit? Haffern recommends the following steps when receiving a deposit:

1. Give your tenant a receipt detailing:

• Tenant’s name, address for which deposit is paid, the type of dwelling (e.g. flat, apartment, house, room, garage or cottage etc).
• The date the deposit was paid.
• Amount paid
• Reason for payment (deposit)
• Landlord’s signature

2. Invest the deposit with a bank in an interest-bearing account.
3. Provide the tenant with written proof of accrued interest when the tenant makes such a request.

Henno Bothma, attorney at Abrahams & Gross, points out that it’s vital that the parties do a joint in-going inspection and reduce the findings to writing.

“At the end of the lease, another inspection must be done within three days before the tenant vacates, to inspect for any damage to the unit. Failure to do these inspections may affect the landlord’s right to use the deposit to remedy any damage caused to the property,” says Bothma.

Timeframes to be aware of

According to Dylan Gordon, sales director at Landsdowne Property Group, it’s important that landlords familiarise themselves with the Rental Housing Act.

“It outlines the timeframe in which the deposit needs to be paid back to the tenant after the lease has expired,” says Gordon.

He outlines the following timeframes to keep in mind regarding rental deposits:

• Within 7 days if there are no damages.
• Within 14 days if there are damages and repairs need to be done.
• Within 21 days when a tenant refuses joint inspection.

“It’s also important to note that the deposit should not be used in lieu of rental. This could cause issues if there are damages at the end of the lease period,” he adds.

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