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 (AST) that started after 6th April 2007.
There are three schemes in England and Wales:
Separate tenancy deposit protection schemes exist for Scotland and Northern Ireland. These rules and regulations and the role and necessity of tenants' deposits can confuse 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, not taking 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?
Following the introduction of the Tenants Fee Act, tenancy deposits are now limited to the equivalent of 5 weeks rent, except where the annual rent amount exceeds £50,000, the deposit can be up to 6 weeks rent.
You are no longer permitted to charge higher than this set amount, even in circumstances where you may have previously done so - for example, a higher deposit to cover any potential damage caused by a tenant's pet, if agreed.
What is a tenancy deposit scheme?
Under current UK law, any landlord letting property under an AST in England or Wales must place any deposit they receive in one of the three Government-backed tenancy deposit schemes listed above. These are:
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 measures envisioned to raise standards in the private rented sector under the Act. The intention was to ensure that deposits were handled fairly and consistently 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 tenancy. As a final measure, the TDP created 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 AST, 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 the tenancy is an AST, the agreement was formed on or after the 6th April 2007 (or a renewal took place after this date) and a deposit has been paid, then yes.
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.
Where a scheme is insurance-based, tenants pay their deposit to the landlord, who retains the money but pays a premium to their insurer.
The majority of landlords favour custodial schemes. 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 compensation 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 make a successful application to a county court under Section 214(1).
Your tenant will also 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 tenants with 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 and what steps they can take if there is a dispute over the deposit.
Once the deposit is secured, it is good 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 the required information, and if it doesn't, you must be prepared to supplement it with any further necessary data.
Informing the tenants of this information is imperative: it's not 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?
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:
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.
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, you may deduct a sum of money from their security deposit equal to purchasing a replacement. If you plan to do so and the tenant/s request it, you must present a receipt or estimate for items to your tenant/s if they request it before making any deductions. Items broken or damaged due to normal wear or tear will be your responsibility to replace, so they 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.
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 also apply to damaged items.
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.