Focus on Real Estate: Rental Bonds

Striking a balance in affording statutory protections to both landlords and tenants can be a thorny affair for real estate regulators. In most jurisdictions, the laws tend to shield tenants more than landlords due to the perceived unequal bargaining power between the parties. Certain market-driven measures, such as rent control restrictions and severe constraints on eviction of tenants, often are directed against and work to the disadvantage of the landlords.

Further, in a less regulated market, the breach of a tenancy agreement or loss or damage caused to the leased premises by the tenants can leave the landlords with little legal recourse. This article seeks to shed light on the ‘rental bond’ or ‘rental deposit’ practice used in some jurisdictions to protect landlords against a potential breach of the tenancy agreement by tenants.

A rental bond is the money paid by a tenant as security deposit which the landlord can claim in the event that the tenant causes damage or loss to the premises or otherwise violates the terms of the lease. The legally stipulated value of the rental bond seldom exceeds one month’s rent. A rental bond is not the same as the payment of rent in advance. It is typically lodged with a rental authority when the landlord and the tenant sign the tenancy agreement. At the end of the tenancy, the rental authority inspects the premises to determine whether any amount from the deposit can be claimed by the landlord as compensation for any loss or damage caused by the tenant. A tenant also can transfer the bond from previous tenancy to a new tenancy with the relevant authority holding the bond money until the expiry of the new tenancy.

In the absence of specific regulations governing rental bonds (such as in Oman), the landlord and the tenant may agree in a lease agreement to place the rental deposit in an escrow account. The account may be interest-bearing with the tenant named as the beneficiary for the interest from the deposit. The agreement could provide for the landlord to return the security deposit to the tenant at the end of the lease if no violation of the lease terms has occurred. The landlord, however, may seek to be reimbursed from the deposit for any loss or damage caused to the premises by the tenant as may be assessed by an independent assessor upon expiry of the lease.

The furnishing of rental bonds can ensure proper upkeep of the leased premises. Although there is no specific legislation addressing this area in Oman, the practice of seeking rental bonds is becoming increasingly common among landlords. An appropriate legislative framework for rental bonds can aid in minimising the potential for arbitrary behavior and in streamlining the real estate rental market.