One simple way to avoid breaching Rule 3.3 when dealing with commercial rent deposits

On the 25th November 2019 the Solicitors Regulation Authority (SRA) launched a reduced set of rules (52 Rules reduced to 13 Rules). The new rules, which are designed to offer greater flexibility to law firms, continue to centre around client protection and guarding against the improper use of a firm’s client account. 

So widespread is the lack of awareness among firms of what constitutes acting as a bank, the SRA felt compelled to retain specific instructions in the form of SRA Rule 3.3 which warns solicitors that they ‘must not provide banking facilities to clients or anyone else’. 

One key area causing firms to breach this guideline centres around the holding of Commercial Rent Deposits. 

The view of the SRA is clearly defined;

“The receipt and holding of commercial rent deposits in client account would not, in itself, breach rule 3.3. This is providing that the deposit properly relates to the delivery of regulated services by the firm, such as advising the landlord, preparing and completing the lease or drafting any rent deposit deed. We expect firms to promptly release the deposit once the work has been completed. This is, of course, a requirement in the SRA Accounts Rules.”

This is in direct contrast to scenarios where firms are holding rent deposits indefinitely, and where there is no reason for the money to be held in the client account, other than for the client’s convenience. Firms may say that this is within the terms of the rent deed but that doesn’t help to change this from being a breach of rule 3.3.

Account Rules expert Janet Taylor, Director PKF Francis Clark Chartered accountants & business advisers comments:

“I am increasingly seeing law firms who are beginning to recognise that the risk of providing banking facilities through the client account as something of a ‘risk too far’. Where this in is connection with the holding of commercial rent deposits the use of TPMAs allows for the firm to remove the risk and still ensure they can assist their client’.

How does a Third Party Managed Account (TPMA) help?

An independent third party, acts as agent for both the landlord and tenant. This provides a triple-weight solution to the issue. It releases solicitors from the responsibility of holding tenant's money, prevents the tenant’s money from being mingled with the landlord’s own funds, and potentially protects against loss to the tenant if the landlord becomes insolvent

Full reconciliation statements are provided allowing funds to be included within financial accounting considerations, and to ensure compliance with the relevant Accounts Rule.

A growing number of law firms view this service as an easy way to service client needs whilst remaining fully in control of the arrangement and more importantly, compliant with the Accounts Rules.

Paul McCluskey is Consultant at Shieldpay, a leading provider of Third-Party Managed Accounts which specialises in managing Commercial Rent Deposits.