In residential property rentals, the Rental Housing Act states that the landlord may hold a deposit from the tenant to be used as security against damage that the tenant may cause to the property during the tenancy. Louw Liebenberg, CEO of SA’s largest rental transactions processor, PayProp, says that unfortunately many tenants are under the impression that having a deposit means that they do not have to pay their final month’s rent, and can elect to have it paid from the damage deposit held by the landlord. Although this practise is tolerated by landlords, it is not strictly legal, as the purpose of the deposit is to provide surety against damages. “The unfortunate reality is that most landlords accept this type of settlement as at the very least it protects the last month of income. What it doesn’t cover is any damage to the property, outstanding utility bills or even legal fees to attempt to recover outstanding amounts from the tenant.”
Liebenberg says that when analysing PayProp’s data on almost 60 000 active rentals in South Africa, the average damage deposit held is slightly more than a month’s rent, at just over 1.25 times rent. That means that for an average rental value of R5, 500, that there is only around R7, 000 available to cover a potential final month’s rental, any damages to the property as well as any outstanding utility charges.
“The figures show that in the case of nearly half the tenancies that terminate, the tenant receives nothing back from the damage deposit as the full deposit is used to cover as much as possible of the tenant’s outstanding obligations, leaving the landlord with the hassle to recoup any outstanding amounts from the tenant,” says Liebenberg
When analysing the distribution of deposit values, the data shows that more than 40% of all landlords will have no money to pay for damages and utility and legal costs if the tenant skips the rent in the last month and a further 40% will have less than half a month’s rent for these costs. In total, less than 5% of landlords hold more than two month’s damage deposit – which is what one would have to hold in order to provide adequate cover against the full set of costs the landlord may be exposed to.
As the largest processor of residential letting transactions in the country, PayProp has developed a unique solution to this problem. The group established PayProp Capital, an FSB registered entity and towards the end of 2012 PayProp Capital launched its DepositGuarantee product. The DepositGuarantee covers the same risks as a damage deposit, but instead of accepting an initial payment as security under a damage deposit agreement, the landlord enjoys comprehensive protection under a DepositGuarantee insurance policy, paid for by the tenant in more affordable premiums. If any of the tenant’s obligations remain outstanding at the end of the lease, the landlord claims the outstanding amount from the insurer, as opposed to deducting it from a damage deposit.
“DepositGuarantee covers 2.5 times the monthly rent’s value for any items for which the tenant is liable under the lease agreement, such as unpaid rent, the reasonable cost of repairing damage caused by the tenant, utility and legal costs,” says Liebenberg. As with the damage deposit arrangement, the landlord cannot claim for losses that are not stipulated in the lease agreement as a tenant liability, for example wear and tear.
While the benefit of increased cover to landlords is self-evident, tenants, on the other hand, are able to improve their cash flow by replacing a hefty upfront deposit with more affordable premiums. Should the tenant leave the property in good order and no claims are due on the property, the insurer will pay 40% of all premiums received back to the tenant and will issue the tenant with a good tenancy certificate.