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The bonds that tie tenants to landlords
Insurance insights

The bonds that tie tenants to landlords

29 Nov 2022 5 mins read

The name’s Bond. Rental Bond. And just like 007, there can be a bit of mystery surrounding these bonds. Just whose money is it? Who can access it? Under what circumstances? They’re a source of confusion for landlords and tenants alike, so here’s a rundown on what you need to know… 

Heads up: This is general information only. Landlords and tenants should refer to the applicable tenancy laws and residential tenancy authority in their state or territory for specific details on all bond matters.

Just why is a landlord insurance provider so interested in bonds, you ask?

Well, because landlord insurance is all about protecting landlords from financial losses, where possible. Bonds offer landlords a level of protection in case something goes wrong at their investment property, and they are left footing certain bills.

Also, collecting a bond is a requirement for landlord insurance cover. At EBM RentCover, we require landlords to collect a bond equivalent to four weeks’ rent at the time of signing a new lease. If you fail to do this, any claim for loss of rent or tenant damage could be reduced by the amount of the bond that should have been collected, or even refused.

Now that’s sorted, let’s start with the basics. Just what is a rental bond?

A rental bond can be thought of as a security deposit because it provides some financial security for the landlord, in case the tenant doesn’t make good on their responsibilities. It’s the payment you should ask tenants to make at the start of a tenancy, and it’s held in trust until the lease ends. It’s paid so there is a sum of money* available in case there’s a breach of the lease agreement, and it can be used to cover costs for which the tenant may be liable at the end of the tenancy – such as damage to the property, outstanding utility use charges or unpaid rent. 

*The bond is usually equivalent to four weeks’ rent, though the maximum can vary depending in the state/territory or the type of property being rented or type of lease. In some jurisdictions, landlords can request additional bonds, such as for pets, if the property is furnished, or if the tenants want to make changes to the property (‘modification bond’).

And tenants have to pay it?

Yes, the bond is usually paid by the tenant(s) named on the lease (in the case of co-tenants each one is generally responsible for paying their share of the bond) before the tenant moves into the rental. It’s separate to the weekly rent and should not be mistaken as being an ‘upfront’ rental payment. The bond cannot be in any form other than money, such as a written guarantee, although it can be paid as a lump sum or possibly in instalments, depending on the bond authority. It must be held in trust for the duration of the lease.

Heads up: Bond replacement products (such as bond guarantees or bond loans) are not legal in some states and territories. However, bond assistance may be available through a government department.

Is a bond compulsory?

The collection of a bond is not compulsory in all states and territories, but it is standard practice. And, for landlords with insurance, it may be a necessity (as mentioned above).

What happens to the money?

The tenant will usually complete a bond lodgement form and receive a receipt once they have paid the bond. When you or your Property Manager have collected the bond, you must lodge it (and the signed paperwork) with the relevant government bond authority within the legislated timeframe – or you can face fines. The bond is typically held in a joint account between you and your tenant. The authority will issue an official bond number once the monies are deposited. The bond is released at the end of the tenancy (who can apply for the release varies between jurisdictions, so check the relevant legislation).

What’s the deal if a co-tenant moves out?

If a co-tenant moves out – and they have paid a share of the bond – they will need to talk with the remaining tenant(s), and the landlord or Property Manager, to work out how they can claim their share of the bond before leaving.* This process differs from state to state, so check with the relevant authority.

* In cases of family and domestic violence, the rules may be different. Refer to your state/territory legislation for details.

Does the money belong to the tenant or the landlord?

It’s the answer to this question that can be a source of disagreement between landlords and tenants.

The bond monies being held belong to the tenant(s). And it can’t be accessed by you/your Property Manager unless you have good reason.

So the tenant gets the money back at the end of the tenancy?

That depends. The bond is paid back to the tenant when the property is vacated, provided no money is owed for rent, damages or other costs. A tenant may receive a full, partial or no refund of the bond monies. It usually takes four weeks to get the money released, but may take longer if there’s a dispute, or if the paperwork is incomplete or not submitted in a timely manner.

At the end of the tenancy, an agreement needs to be made about how the bond will be refunded.

And if there’s a disagreement?

If you and your tenant disagree on how the bond should be refunded, you’ll need to follow the procedure outlined by the relevant government office and begin the dispute resolution process.

What kinds of reasons are there for landlords to use the bond money?

A bond covers any breaches to the lease agreement caused by the tenant while the property is leased to them. At the end of the tenancy, the bond will be refunded to the tenant in full unless you make a claim against the money.

Landlords can often make a claim against the bond for:

  • rent arrears (rent that is not up-to-date)
  • damage to the property caused by the tenant or their guests (fair wear and tear excepted)
  • cleaning expenses (if the rental was not sufficiently cleaned at the end of the tenancy)
  • abandonment of the premises by the tenant
  • cost of replacing locks or other security devices if the tenant altered, removed or added these without your consent
  • reimbursement if you were forced to pay the tenant’s bills (for example, water bill)
  • loss of your goods.

You/your Property Manager can only recover an appropriate portion of the bond.

What about pets? Can landlords charge a pet bond?

In Australia, it is illegal to charge a pet bond on top of a regular bond in every state, except WA. Allowing a tenant to have a pet is typically at the discretion of the landlord, but they can’t charge you for it (except for WA, which is typically restricted to a one-off payment of $260 for rents less than $1,200 a week).

In all states, written permission is required to have a pet at your rental home. In Victoria, rental legislation was overhauled in 2020, making it easier for tenants to have pets. Tenants can’t be knocked back unless the landlord has a very good reason.

Ok, so where does landlord insurance fit in?

Landlord insurance steps in once the bond money has been exhausted (which is why it’s important to collect a bond at the start of the tenancy). Rental bonds offer landlords a level of protection if their tenants break their lease agreement – for example, damage the property or fail to pay rent. Usually, in all but minor cases, the bond is inadequate which makes landlord insurance an important investment, to cover the shortfall.

Unlike some landlord insurance providers (be sure to check the PDS), at EBM RentCover we allow policyholders to use the bond money to cover expenses that are not covered under the policy, like cleaning, rubbish removal and re-letting fees. But if the bond is not needed to cover additional losses or clean-up, we may deduct the value of the bond from the final payout (as the bond money will be available to you to cover losses up to the amount held).

At EBM RentCover we educate clients about the unknown and add value by being a voice of knowledge in times of uncertainty.

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.

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