What do tenants need to know about deposits? A guide to tenancy deposits

The deposit is refundable and designed to provide the landlord with a financial commitment that you're going to uphold the terms of your tenancy agreement.

A refundable tenancy deposit capped at no more than 5 weeks’ rent where the total annual rent is less than £50,000, or 6 weeks’ rent where the total annual rent is £50,000 or above.

In most cases, once your application to rent a property has been accepted and you have passed your tenant referencing checks, you'll need to pay the deposit and first month's rent upfront before you can move in.

It’s important to remember that throughout your tenancy, the deposit remains your property and is just being held by your landlord or letting agent.

Provided your tenancy runs smoothly and you leave the property in the condition you found it, you will receive your deposit back in full when you move out. However, the landlord is entitled to make deposit deductions for missing items, damage or breaches to the terms set out in the tenancy agreement. You can either accept these deductions, come to a mutual agreement with the landlord or formally dispute them.

Deposits are an extremely important part of the tenancy process, so it's vital that you know your rights and how the system works to make sure you're not left out of pocket at a later date.

Below, we've covered everything you need to know from deposit protection and holding deposits to formal disputes and deposit-free renting.

Since 2007, it's been a legal requirement for any deposit paid by a tenant to be placed with a Government-approved tenancy deposit protection scheme.

When a landlord or letting agent receives your security deposit, they are obliged to protect it with one of three schemes within 30 days and provide you with the relevant confirmation once this has been done. In total, it’s estimated that £3.6 billion of tenants’ money is held by deposit protection schemes across the UK.

There are three schemes which can be used to protect your deposit: The Deposit Protection Service (DPS), The Tenancy Deposit Scheme (TDS) and My Deposits.

All three offer both custodial and insurance-backed protection options. A custodial scheme physically holds your deposit on behalf of the landlord, while insurance-backed schemes allow landlords or agents to keep hold of the funds but pay a monthly insurance fee to protect them.

What's more, all three schemes provide their own free and impartial resolution services in the event of a dispute between renters and their landlords.

Here's a little more information about the three schemes;

The DPS was the original custodial deposit protection scheme in England and Wales and now also operates an insurance-backed scheme which holds over 25,000 deposits.

To date, The DPS has protected over five million deposits and repaid over £3 billion back to renters.

The TDS, which was set up by ARLA Propertymark and has been supported by various bodies such as the Royal Institution of Chartered Surveyors (RICS), originally provided an insurance-backed scheme but has been offering a custodial service since 2016.

The not-for-profit organisation reportedly protects over one million deposits.

My Deposits was launched by the National Landlords Association in partnership with insurance firm Hamilton Fraser. Much like the TDS, My Deposits was originally solely an insurance-backed option but launched a custodial service in 2016.

To date, the organisation has over 150,000 members, has protected over 1.6 million deposits and resolved in excess of 20,000 disputes.

When your tenancy comes to an end, your landlord will be obliged to return your deposit. However, they are able to claim for deductions if they feel you have breached your tenancy agreement or there is damage or missing items which don’t constitute ‘fair wear and tear’.

In this instance, you may agree with the landlord’s proposed deductions and accept back the remainder of your deposit. If you don’t agree, in the first instance it is advised that you try to come to a mutual agreement with your landlord.

If this is not possible, then a formal deposit dispute will need to be opened. All three deposit protection schemes have their own resolution services known as Alternative Dispute Resolution (ADR). These are intended to provide an alternative route to going to court to settle a deposit dispute which can be time-consuming, costly and often unnecessary.

ADR is an evidence-based process where the outcome of the case is decided by an impartial adjudicator. As the tenant, you are not required to prove your argument as the money remains your property, it is up to the landlord to prove that their deductions are fair and justified.

As part of the dispute, you may be required to submit evidence within a certain time period. Evidence could include copies of unpaid bills, the tenancy agreement, the inventory report or time-stamped photos of specific disputed issues within the property.

Once the adjudicator has assessed all the evidence, they will decide on whether to uphold the landlord's deductions. This decision is legally binding and can only be challenged through the courts.

All three schemes have a slightly different system, so you'll need to check with them directly how it works before opening a formal dispute against your landlord.

Effective from June 1 2019, the Tenant Fees Act means that the deposits you pay are now capped. Security deposits are capped at five weeks' rent for properties with an annual rent below £50,000 and six weeks for those above £50,000. Meanwhile, holding deposits are capped at equivalent to one week's rent.

There are also additional new rules relating to holding deposits. When you pay a holding deposit, landlords and agents are only allowed to keep your money for 15 days, unless you agree an alternative date in writing. Once this deadline has expired, the holding deposit must be repaid to you within seven days.

You can see our comprehensive guide to the Tenant Fees Act and the deposit caps here.

The rise of deposit-free renting

While the majority of tenants still pay a traditional security deposit, in recent years a number of alternative products known as ‘deposit-free’, ‘deposit replacement’ or ‘no-deposit’ renting have been launched.

These insurance-style products are aimed at lowering the costs of moving between rental properties for tenants, while still providing landlords with the protection they require. The proponents of these alternatives argue that when moving many tenants have to raise the money for a new deposit while still waiting for their existing deposit to be returned.

These alternatives provide tenants with the opportunity to pay a smaller upfront fee (usually non-refundable) in order to secure their property. The fee either acts as a warranty or an underwritten insurance payment.

In the event of damage or a breach of the tenancy agreement, landlords can claim compensation from the deposit replacement scheme. After compensating the landlord, the deposit replacement scheme will then recover the costs from the tenant directly.