Tenants’ Deposits: How and Why You Should Secure Them

Today, landlords are obliged, by law, to put deposits received from tenants in a tenancy deposit protection scheme if their property is let under an assured shorthold tenancy that started after 6th April 2007.

There are three schemes in England and Wales:

Deposit Protection Service (Custodial and Insured)
Tenancy Deposit Scheme

Separate tenancy deposit protection schemes exist for Scotland and Northern Ireland.

These rules and regulations, along with the role and necessity of tenants’ deposits, can be confusing for many landlords.

With that in mind, we’ve put some helpful answers together that help with commonly asked questions.

What is a Tenancy Deposit?

As a landlord, you’re entitled to request a depository sum from your tenant/s to cover any unforeseen costs that may arise from the tenancy, like damage to the property caused by your tenant/s or rent arrears that they may run up.

Do I Have to Take a Deposit?

Taking a deposit is not a legal requirement. However, we’d always advise that you request one, because failing to take a deposit means you run the risk of operating at a loss if your tenant/s cause damage to your property or accrue rent arrears that they can’t pay.

How Much Deposit Should I Take?

A typical deposit will be equivalent to 1 months’ rent. For example, if you’re charging £1,000pcm then you may wish to request a £1,000 deposit.

Equally, it’s not uncommon to ask for up to 6 weeks’ worth. This can be a more reliable sum if the property you’re letting is furnished or if your tenant has a pet, as these factors could potentially increase the risk of damage to the property – damage that you may find yourself liable for.

What is a Tenancy Deposit Scheme?

Under current UK law, any landlord letting property under an assured shorthold tenancy in England or Wales must place any deposit they receive in one of the three Government-backed tenancy deposit schemes listed above. These are:

Deposit Protection Service (Custodial and Insured)
Tenancy Deposit Scheme

It is solely the landlord’s responsibility to ensure that this is done, irrespective of whether or not you use a letting agent.

Why was the Tenancy Deposit Scheme Introduced?

Tenancy Deposit Protection (TDP) was rolled out as part of the Housing Act 2004. It was a fundamental part of the package of measures envisioned to raise standards in the private rented sector under the Act. The intention was to ensure that deposits were fairly and consistently handled, so that tenants who met the terms of their agreement would always receive their money back at the end of the rental term. It also meant that landlords could fairly use the deposit to cover any damages or losses of rent incurred during the course of the tenancy. As a final measure, the TDP put in place a dispute resolution service to quickly resolve any disagreements and reach a satisfactory resolution for the parties involved.

Who Does the TDP Apply To?

The rules imposed by the Act apply to every landlord and letting agent in England and Wales who has taken a deposit from a tenant under an assured shorthold tenancy, except those agreed before the 6th April 2007. The rules also apply to tenancies started before but renewed after this date.

Is Securing the Deposit into a Tenancy Deposit Scheme Really Necessary?
Provided that all three of the following applies, then yes:

• The tenancy is an assured shorthold tenancy
• The agreement was formed on or after the 6th April 2007 (or a renewal took place after this date)
• A deposit has been paid

Should you fail to comply, you will be acting in contravention of the law.

How Does It Work?

Two types of TDP schemes are available for landlords and letting agents: insurance-based and custodial.

Insurance-based Schemes

Where a scheme is insurance-based, tenant/s pay their deposit to the landlord, who retains the money but pays a premium to their insurer.

Custodial Schemes

Custodial schemes are favoured by the majority of landlords. The tenant pays their deposit to the landlord or his agent, who then pays it directly into the scheme.

What if I Don’t Protect the Deposit?

As a landlord, you have a legal obligation to protect deposits falling within the criteria outlined above. If you fail to do so within 30 days, you could find yourself vulnerable to the following consequences:

• Your tenant could claim three times the deposit amount plus the return of the deposit as recompense for your failings.
• You may also find that you cannot serve a valid Section 21 notice under Section 215 of the Housing Act 2004. The only way to resolve this is to return the deposit to the tenant in full or with such deductions as you agree between you, or to make a successful application to a county court under Section 214(1).
• Your tenant will have a defence to any claim made by you for rent arrears.

What Do I Need to Do Once the Deposit is Protected?

The deposit you receive must be paid into your chosen TDP scheme within 30 days. Within the same timeframe, you should serve your tenant/s with the following information:

• The address of the rental property
• The sum of the deposit
• The deposit scheme you’ve used to protect it
• Contact details for your chosen TDP scheme and its dispute resolution deposit
• The name and contact details of any third party responsible for paying the deposit, such as the letting agent
• Instructions on how to apply to get the deposit back
• Steps to take if there is a dispute over the deposit

Once the deposit is secured, it is a very good idea to ensure that your tenant has copies of any leaflets provided by the scheme, as these will usually contain relevant material regarding how it works. You must check that this has all of the required information, and if it doesn't then you need to be prepared to supplement it with any further necessary data.

Informing the tenant/s of this information is imperative: it it’s merely a procedure but a legal requirement. Failing to comply with it could lead to prosecution, so it’s advised that you have your tenant/s sign a document confirming that they received the information.

Does the Tenancy Deposit Scheme Cost Anything?

This is dependent upon the policy you choose. The following schemes have premium rates attached:

Tenancy Deposit Solutions Ltd (TDSL)
The Tenancy Deposit Scheme (TDS)

However, free deposit protection schemes are also available.

For an in-depth overview, take a look at the guidance produced by the Government.

When Can I Take Money Out of the Deposit?

Deductions from the deposit may be made where the tenant fails to uphold their duties, as agreed within the tenancy agreement. For example:

Cleaning Deductions

If the tenant has agreed to clean the property before they move out, but fails to do so, then you could deduct money for doing it for them.

Damaged Property

If your property or its contents suffer damage, then it’s the tenant’s responsibility to repair or replace the affected item/area. The tenant/s must replace it like for like. If they fail to do so, then you may deduct a sum of money from their security deposit equal to the cost of purchasing a replacement. If you plan to do so and the tenant/s request it, then you must present a receipt or estimate for items to your tenant/s if they request it before you can make any deductions. Items broken or damaged as a result of normal wear or tear will be your responsibility to replace, so cannot be deducted from your tenant’s deposit.

Outstanding or Unpaid Rent

If your tenant leaves whilst owing you rent or maintenance costs, then you’re within your rights to deduct any unpaid monies from your security deposit. If your former renter owes an amount in excess of the security deposit you hold, then you can begin court proceedings to recoup the remainder.

Missing Items

If you have reason to believe that an item has gone missing, then you can deduct money for it from your deposit to replace it. The same rules apply with missing items as with damaged ones.

What Happens to the Deposit After the Tenancy?

If an agreement is reached about how the deposit ought to be returned, the scheme will return it for you, divided in the way agreed by both parties.

In the event of a dispute, be sure to notify your deposit scheme immediately, the scheme will hold the deposit until either their dispute resolution service or the courts decide what’s fair.