Security deposits: what can be deducted, and how to prove it

A tenancy in this region opens with the manager holding several thousand dirhams, riyals or pounds of somebody else's money, and closes with a conversation about how much of it comes back. Five per cent of the annual rent is the common figure for an unfurnished unit and ten for a furnished one, though it is a market convention rather than a statutory rate, and it varies.

The deposit is not the landlord's money while it is held. It is a security, taken against a specific set of risks, returnable except to the extent those risks materialise. Almost everything that goes wrong at move-out follows from a landlord, an agent, or a piece of software treating it as though it were already earned.

Deposit rules differ between markets and, within the UAE, between emirates and between the rental dispute bodies that hear these cases. This is a description of common practice and of what evidence tends to decide a dispute, not legal advice.

The line: damage against fair wear and tear

Nearly every market draws the same distinction, and nearly every dispute is about which side of it something falls. Fair wear and tear is the deterioration a unit suffers from being lived in normally for the length of the tenancy. Damage is deterioration beyond that. The tenant is answerable for the second and not the first.

The distinction is easier to apply with two questions than with a list. Would this have happened anyway, to a careful tenant, over this many years? And is the unit being restored to the condition it was let in, or improved beyond it?

• Paint dulled and marked after three years of occupation: wear.
• A wall drilled for a television mount and left with open holes: damage.
• Grout discoloured in a shower used daily: wear.
• A cracked basin, a burnt worktop, a door off its hinges: damage.
• A carpet with traffic paths worn into it: wear, and increasingly so the longer the tenancy.
• A carpet with a burn or a stain through to the backing: damage.

Age matters, and deducting the full cost of a replacement rarely survives scrutiny. If a five-year-old carpet is ruined in year four of a tenancy, the landlord has lost one year of its remaining life, not a new carpet. Adjudicators across the region tend to apportion.

What else a deposit legitimately covers

Damage is the contested category. The uncontested ones are usually simpler, and they are where most deductions actually come from:

• Unpaid rent, including the final part-month where the tenancy ends mid-period.
• Utility bills left unsettled in the tenant's name, where the landlord ends up liable.
• Service or community charges the contract puts on the tenant and which remain unpaid.
• Cleaning to return the unit to the condition it was let in — not to a better one.
• Missing items from an inventory that was signed at the start.
• Contractual charges the tenancy actually provides for, such as an agreed early-termination fee.

That last one is the trap. A deduction has to rest on either a real loss or a clause the tenant signed. "Administration fee" appearing for the first time on a move-out statement is the single most common deduction to be reversed.

The evidence that decides it

A deposit dispute is decided on documents, and the documents either exist from the start of the tenancy or they do not exist at all. Nothing can be created at move-out that establishes what the unit looked like at move-in.

The complete file is short and almost nobody has it:

• A check-in report, dated, with photographs, signed or acknowledged by the tenant.
• An inventory of what was in the unit, if it was let furnished.
• Meter readings at handover, both ways.
• A check-out report in the same format as the check-in, so the two can be compared line by line.
• For each deduction: a quotation or an invoice from a third party, not a round number.
• A written statement to the tenant setting out each deduction, its amount, and its reason.

Photographs with a visible date, taken at check-in, are worth more than every other item on this list combined. They are also the cheapest, and the one most often skipped because the unit is being handed over in a hurry.

Every deduction needs a reason attached to it

A number without a reason is not a deduction; it is an assertion. "AED 500" is worth nothing in a dispute and "AED 500, repainting the hall wall where the television bracket was removed, quotation attached" is worth the 500.

This sounds like advice about tone. It is not — it is a requirement about where the reason is stored. A reason typed into an email and then forgotten is not on the file. A reason recorded against the deduction itself, at the moment it was made, is still there a year later when somebody asks, and it is the same record whether the person who made it still works there.

The practical test: if the colleague who handled this move-out left the company tomorrow, could you still explain each figure to the tenant? If not, the reasons are in someone's head rather than on the file.

Where the money sits in the accounts

This is the part that software gets wrong, and it is the most consequential thing in this post.

A deposit received is a liability, not income. The organisation is holding money it expects to return. It belongs in a "security deposits held" account on the balance sheet, and it stays there — untouched by the profit and loss account — until the tenancy ends and it is settled.

Booking a deposit as income is the most common bookkeeping error in small property firms. It overstates revenue in the year it is taken, understates it in the year it is returned, and makes the accounts useless in exactly the dispute the deposit exists for, because the books no longer say what is held on whose behalf.

At settlement the liability is discharged in two directions: the part returned to the resident leaves the bank, and the part kept becomes income at that moment — because that is the moment it was justified. A deduction is the landlord keeping the tenant's money, and it should land in an account somebody can be asked about, rather than quietly reducing a liability to nothing.

• On receipt: debit bank, credit security deposits held. Nothing touches income.
• On settlement: debit security deposits held for everything released.
• Credit bank for what goes back to the resident.
• Credit income for what is kept, with the reason on the entry.

A consequence worth designing for: what is held is what the books say was received, not what the contract says should have been. A tenancy taken over from a previous agent has a contracted deposit and, until somebody records the money, no recorded deposit at all. That is uncomfortable and it is true, and a system that pretends otherwise will one day return money it never had.

When the tenancy is renewed rather than ended

A renewal is not a move-out. The resident does not get the deposit back on renewal day and hand it over again — the same money simply carries on securing the same tenancy under a new contract.

That is obvious to everyone in the office and surprisingly often wrong in the system, because the deposit is attached to the contract rather than to the tenancy. The result appears a year later: the new contract shows a deposit of nothing, the manager is told to record it, and the books end up holding two deposits for money that arrived once.