Discharge bonus – an alternative to deposits?

Discharge bonus v. tenancy deposit

There is an interesting post over on the Pain Smith blog which raises a new alternative to tenancy deposits.  A discharge bonus.

A discharge bonus is where the tenant pays no deposit (and so the landlord does not have to mess about with tedious tenancy deposit scheme administration) but if the tenant leaves the property in good order, the landlord will make a bonus payment.  A discharge bonus.  If the property is left in a mess, he won’t.

Court of Appeal authority

The authority for this suggestion comes from a recent Court of Appeal decision, UK Housing Alliance (North West) Ltd v Francis, which was about a sale and leaseback arrangement. To quote Pain Smith:

Mr Francis had sold his property to UK Housing and then taken a 10 year AST. He was paid a sum of £87,500 initially and would receive the remaining figure of £37,500 at the end of the 10 year term. If he breached the tenancy such that it was terminated by UK Housing then he would receive none of the final sum.

Mr Frances failed to pay his rent and possession proceedings were issued against him. He claimed however that he was nevertheless still entitled to the £37,000. One of his reasons was that this was a deposit within the meaning of the Housing Act.  The Court of Appeal however rejected this argument as, for it to be a deposit, it would have had to be money physically paid over by him to the landlord.  Which had not happened in his case, and (for this and other reasons) he lost his appeal.

But, suggest Pain Smith, we are left with a possible Court of Appeal authority for the discharge bonus.

Some practical issues

So does this mean that the offer a discharge bonus can now be used by landlords as a carrot to persuade tenants to pay their rent and leave the property nice and tidy?

Technically I suppose there is no reason why not.  But I can see a few problems:

• As it is an ‘all or nothing’ situation, it will be unfair on tenants who leave the property in a good condition but fall down on just one or two minor issues
• As the landlord will be paying it out of his own funds, there will be a temptation for him to find fault with the property at the end of the tenancy, so as to avoid paying the bonus
• Tenants may suspect that the landlord will be doing this any and may thus have little incentive to look after the property, believing that the bonus will not be paid.  Particularly as the bonus will be just that, a bonus, and not the return of their own money
• If the tenants anticipate the bonus by failing to pay their last months rent, the landlord will not have any deposit to offset this against.

I can also see hotly contested arguments about whether the bonus should or should not be paid.  The relevant tenancy agreement clauses would have to be carefully drafted.  In order to comply with the Unfair Terms in Consumer Contracts Regulations, I suspect that the final decision would have to be left to someone independent, like an inventory clerk.  If the decision was wholly down to the landlord the clause would be vulnerable to being found unfair under the regulations.

What do you think?  Do you think it is a good idea or do you think the disadvantages outweigh the apparent advantages?  Does anyone have any experience of this being used?