Estate agents and property managers need not be reminded of the legal specification that trust funds need to be held separately from business funds. The reason for this is to ensure that third-party funds are only used for the intended purposes. The upside is that this imposes a strict duty on property professionals to keep such funds safe and separate.
Jan Davel from PayProp believes that even complying with Section 32 of the Estate Agency Affairs Act is not necessarily enough to have truly segregated trust funds that keep tenants, landlords and agents safe. “Levelling up when it comes to the detailed segregation of funds will make a lot of business sense for agents wanting to position themselves as trusted custodians of tenant and landlord funds,” says Davel.
All agents are required to have a separate trust account into which tenant funds are paid. Additionally, they must keep an accounting record which may include a system of reconciliation to match the rent payments received to tenants on the incoming side as well as landlords and other beneficiaries on the outgoing side.
Some property management systems can automate the settlement of these amounts by pulling funds from a trust account and putting them into a settlement account and then pushing all payments out. This sounds simple but the risk becomes evident when you imagine your trust account without next-level fund separation as a bucket full of water.
“All tenant funds flow into the bucket, and each month funds are scooped out and distributed. The trouble is you no longer know which money belongs to which property – it’s all water. You could be paying property A’s expenses with property B’s money!” says Davel.
It can easily happen when a cheque bounces or a debit order fails – you think you have the money and you pay, but the money is never there. Worse still, you end up paying the landlord or supplier who is making the most noise – hoping that when the tenant eventually pays, the imbalance will sort itself out. In the long run, these little exceptions create a trust account that is almost impossible to reconcile down to each property.
It is becoming increasingly common for some ‘water to be left over in the bucket’ at the end of the month. Retaining some of the landlord’s money (with their permission) in the trust to cover approved property expenses is a healthy practice and this helps when there is a problem with the property. If a fixture breaks or maintenance to the property is required, the landlord is responsible for fixing it and the money must be available to do so. When a landlord’s money has not been retained and the landlord fails or neglects to make these funds available, agents may feel compelled to use the security deposit.
“But as we all know, the damage deposit belongs to the tenant. It is not the agent or the landlord’s money. Using the tenant’s deposit to pay for repairs or maintenance that are for the landlord’s account, even by accident, can ruin an agent’s relationship with the tenant and landlord – especially when the deposit money is needed at the end of the lease term to pay for damage to the property or to refund the tenant,” says Davel.
Davel says that by using such a platform, it ensures that there is separation of funds. “Imagine that within your trust account bucket, there is a little bucket for every property into which only funds that belong to that property can go. Each little bucket is further subdivided, with space for funds held for the landlord and funds held for the tenant”.
Next is the issue of the funds being there. “Through our platform’s unique integration with the banking system, we can guarantee that beneficiaries are only paid once funds are actually received and cleared, that a property’s expenses are only paid with money meant for that property, and that any money retained is separately ‘tagged’, stored and accounted for. We also ensure that outgoing payments do not exceed the amount received in respect of a particular property, and we ensure that each agent’s trust account is reconciled to the last cent daily.”
Davel says that all accounting, banking and property management tasks related to these funds are automated, leaving no room for human error, while a proper audit trail remains available for every user and every action they take.
“Unfortunately, many estate agencies struggle to achieve detailed segregation of funds. As a result, their business and their clients may be exposed to significant risk of misuse of funds – often in error. Efficient use of PropTech can solve this problem, while helping with agency compliance.”