Repayment of rental deposits

In the event of any change of ownership or lease termination, returning the tenants’ deposit can often be a bone of contention. However, landlords and property managers should never forget that if no damages are claimed, the deposit belongs to the tenant.

“There must be a clear understanding that the deposit is held in trust for any damage claim the landlord might have,” says Michelle Dickens, managing director of TPN, South Africa’s only specialist property credit bureau and developer of the industry’s first rental payment profile of its kind.

“Also there are further implications of sitting on your former tenants’ deposit. The landlord is legally obliged, in terms of the Rental Housing Act, to pay interest on the deposit at the minimum average savings rate which varies in accordance with the amount. However, if the estate agency is holding the deposit, it must be held in the agency’s trust account and the interest is determined according to the Estate Agents Affairs Act,” she says.

If the property is sold while there is a tenant in place the transfer of ownership means that the buyer of the property becomes the new landlord to the existing terms and conditions of the lease. New property owners have to ensure that they get the tenants’ deposit from the previous owner so they can fully refund the tenants without running into any losses themselves. The best way to recover the deposit from the seller is to deduct the cost of the future refund of the deposit from the sale price, says Dickens.

Another threat to the tenants’ deposit is when it is held in trust by the estate agency, which may go broke. However, the good news is that tenants have the right to claim against the Estate Agents Affairs Board fidelity fund insurance, but only if the agency is registered with the Estate Agency Affairs Board.

“If the estate agent is not registered with the Estate Agents Affairs Board as required by law, the tenants’ deposit is not covered by the Estate Agents Affair’s Board fidelity fund insurance. This means that the landlord is now legally responsible to refund the tenants their deposit when the lease expires, even though the estate agent was holding the deposit.

“It’s advisable for landlords to ensure they hand their rental properties over to registered estate agents. It is even more important that tenants do not hand over any money to unregistered estate agents,” says Dickens.