Disputes relating to a landlord's rights with regard to the return of a tenant's deposit on termination of a residential lease agreement reach our offices with increased frequency. Most of these could have been avoided had the parties appreciated how critical it is to follow the prescripts of the Rental Housing Act with regards to the keeping of a deposit and the ingoing and outgoing inspections. In the note that follows, we provide a guideline of the applicable principles.
1. Is a deposit obligatory?
No, our law does not stipulate that in order to be valid, a lease agreement must provide for a deposit. However, it is practice to make provision for a deposit as it safeguards the landlord to a great extent.
The Rental Housing Act does determine, where a deposit is called for in a lease, that the amount thereof must be disclosed in the agreement or be agreed to between the parties before the tenant moves into the premises.
2. Amount and purpose of the deposit
Tenants often query the reasonableness of the deposit required by the landlord. In law there is no limit on the amount that the landlord may prescribe (provided it does not constitute an attempt to discriminate against potential tenants on the basis of their sex, race, religion, nationality, age and other prohibited grounds of discrimination).
The deposit is essentially a tool with which the landlord covers the risk of loss on termination of the lease. The risks generally lie in collection of money owing, incurring expenses to repair damage caused by the tenant and recovery of outstanding arrear rentals. Related to the last-mentioned, tenants often think that the deposit may be used to pay the last month's rental or to cover a month's skipped rental. But this is generally nor allowed and unless the agreement makes provision therefor, a tenant cannot apply the deposit in this way – understandably, as the landlord then loses the availability of the funds for their safeguarding purpose.
The deposit is usually equal to one or two months' rental, but in high-end rentals it can be much more so as to be aligned to the increased cost of repairing the designer finishings and fittings of such premises.
3. Landlord's obligation to invest the deposit
The Rental Housing Act requires the landlord to issue a receipt and then to invest the deposit in an interest bearing account for the benefit of the tenant. The interest may not be less than the rate applicable to a savings account with the financial institution where the deposit is banked. The interest accrues for the benefit of the tenant and the landlord must account to the tenant. The landlord is obliged to provide written proof of the accrued interest to the tenant upon request.
There is an exception where the deposit is kept by the landlord's estate agent. In such instances, and in accordance with the Estate Agency Affairs Act, the default position is that interest accrues to the Estate Agents Fidelity Fund and not to the tenant. This is however negotiable and it is therefore important for a tenant to discuss this aspect and arrange that the interest accrues for the tenant's benefit, before concluding the lease.
4. Return of the deposit and importance of ingoing and outgoing inspection
In terms of the Rental Housing Act, a landlord (and/or his appointed agent - which is usually the case where an estate agent manages the lease) and tenant must do a joint ingoing inspection of the premises before the tenant takes occupation.
The purpose of the joint investigation is to record (in writing) all visible defects and/or existing damages in the premises, both on the inside and the outside. The ingoing inspection forms part of the lease agreement and should be annexed to the lease, signed and dated by both parties. (Ideally, the parties can also choose to photograph the premises beforehand, as additional record. With modern cellphone technology, this is quite feasible.) The ingoing inspection must be done thoroughly and accurately as it forms the basis of determining damages caused to the premises by the tenant during his/her tenure.
The outgoing inspection is equally important as it is at this time that the damage to the premises that are for the tenant's account and which the landlord is entitled to claim from the tenant's deposit, if any, is determined. In essence, the condition of the premises on termination is compared with the condition on commencement, using the ingoing inspection report as a basis to identify damages for which the tenant is responsible.
But landlords, beware: the Rental Housing Act provides that should the landlord fail to inspect the premises jointly with the tenant within 3 days prior to termination, then it is deemed to be an acknowledgement by the owner-landlord that the premises are in a good and proper state of repair. The landlord will then have no further claim against the tenant and the full deposit and interest must be returned to the tenant.
5. When must the deposit (and interest) be refunded?
The Act sets out specific time periods within which the deposit must be refunded. The length of time is dependent on the repairs necessary, as follows:
• 7 days after expiration of the lease if no repairs are required;
• where repairs are necessary, 14 days after the repairs have been effected.
Note that if a tenant refuses to carry out a joint inspection of the premises before the lease expires, the landlord has 7 days in which to complete an inspection of his own. The landlord must thereafter attend to any repairs that may be required and refund the balance of the deposit, if any, to the tenant within 21 days of the expiration of the lease.
The landlord must keep a record of all receipts as proof of the repairs carried out as the tenant is entitled to inspect what amounts have been deducted from the deposit.
The importance of properly and thoroughly executing the ingoing and outgoing inspections cannot be over-emphasised in avoiding disputes in respect of a landlord's claim against a tenant's deposit.
For assistance with all your property-related queries, contact Martin Sheard at MartinS@stbb.co.za or at 021 673 4700. STBB Claremont