What is a tenancy deposit?
Landlords are entitled to request a deposit from tenants to cover any unforeseen costs that may occur, like damage to the property or rent arrears. The landlord can use the deposit these costs. However, it is important to note landlord’s cannot claim compensation for any damages that constitute as wear & tear, for example carpets wearing away. Bear in mind, the longer the tenant, the more natural wear will occur.
Do I have to take a deposit from my tenants?
Nope, it is not a legal requirement. So if you don’t take a deposit, the rest of the article won’t apply to you. However, if you have an assured shorthold tenancy and take a deposit from a tenant, no matter how small, you are obligated by law to protect the deposit into a tenancy deposit scheme.
How much deposit should/can I take?
Typically, most landlord’s ask for a deposit amounting to 1 months rent. For example, if you’re charging £600pcm, then the deposit is also £600. However, many landlords also ask for 6 weeks worth of rent- that’s especially common when the property is furnished, or the tenant has a pet.
Property inventory/schedule of condition
It is always important to prepare a thorough property inventory whether you take a deposit or not. An inventory is a report which records the condition of the property/items before a tenant moves in and just before a tenant leaves, so it can be made clear what damages, if any, need to be paid for out of the deposit.
Both landlord and tenant should prepare the inventory together, so the condition of the property and all items are agreed upon. Here is a more detailed article on how to prepare a property inventory.
What is a Tenancy Deposit Scheme?
If any landlord has an assured shorthold tenancy in England and Wales and receives a deposit from their tenant, they are obligated to protect it into 1 of 3 Government-backed tenancy deposit schemes:
The deposit scheme will hold the deposit and release it at the end of a tenancy.
It is ALWAYS the landlord’s responsibility to ensure the deposit is protected, even if you use a letting agent.
Why was the Tenancy Deposit Scheme introduced?
Tenancy Deposit Protection (TDP) was introduced by the Housing Act 2004 as part of a package of measures to raise standards in the private rented sector. The legislation ensures that deposits are fairly handled; so if the tenant meets the terms of the tenancy agreement, the entire amount is returned. It also allows landlords to fairly use the deposit to cover any damages or loss of rent caused by the tenant. If any disputes occur, a dispute resolution service will aim to resolve them quickly.
How does it work?
There are two types of tenancy deposit protection scheme available for landlords and letting agents, insurance-based schemes and custodial schemes.
The tenant pays the deposit to the landlord and then the landlord retains the deposit and pays a premium to the insurer.
The tenant pays the deposit to the landlord or agent and then they pay the deposit into the scheme. This option is most commonly used by landlords.
Once the deposit is protected
The deposit must be protected with in 30 days of receiving the deposit (this may not necessarily be the same date as when the tenancy starts), the tenant must also be served prescribed information within 30 days, which includes:
- Address of the rented property
- The amount taken for the deposit
- Which deposit scheme was used to protect the deposit
- The contact details of the tenancy deposit scheme used and its dispute resolution deposit
- The name and contact details of any third party that’s paid the deposit e.g. Letting Agent
- How to apply to get the deposit back
- What to do if there is a dispute over the deposit
Serving the prescribed information is NOT merely a procedure, it is a legal requirement. Securing the tenancy alone is not enough. It has also been advised by a Solicitor to get tenants to sign a document to confirm that they have actually received the information.
Here is a more detailed article on what to do after you have secured your tenants deposit & prescribed information.
Please note, the prescribed information should be RESERVED if the tenancy is renewed or if it becomes a periodic tenancy, as there is a RISK that a Court might find that you have not complied with the legislation. In addition you MAY find that you are subject to a financial penalty for not being reserved the Prescribed Information.
Who does it apply to?
The scheme applies to EVERY landlord and letting agent in England and Wales where a deposit has been taken from a tenant under an Assured Shorthold Tenancy Agreement (AST), after the introduction date, 6th April 2007. But there are a few special conditions if the deposit was taken before that date…
Deposits taken before April 2007 where the tenancy became periodic after that date
As of 30th March 2015, if the deposit was taken before April 2007 and the tenancy has become periodic, the deposit must be protected and the prescribed information must be served. Landlords have been given a period of 90 days to deal with this, which is until the 23rd June 2015.
If you protect and serve the PI (Prescribed Information) within this time, the deposit will be treated as if it had always been protected. Failing to protect the deposit in this time will mean you are in breach of the law, no excuses!
Deposits taken before April 2007 which became periodic before that date
In this case, you do NOT need to protect the deposit.
However, the deposit must be protected or the deposit returned in full to the tenant before any Section 21 notice can be served. Landlords will not be liable for any financial penalty for non-protection.
After the tenancy / disputes
If an agreement is reached about how the deposit should be returned, the scheme will return the deposit, divided in the way agreed by both parties. If there is a dispute, the scheme will hold the deposit until the dispute resolution service or courts decide what is fair.
It is important to notify the deposit scheme immediately if there are any disputes. This is where the property inventory will become extremely useful, and that’s why it is always important to prepare one.
Is securing the deposit into a tenancy deposit scheme necessary?
As long as the following is true, then yes, the deposit must legally be secured into a tenancy deposit scheme:
- The tenancy is an assured shorthold tenancy
- A deposit is paid
What if I don’t protect the deposit?
Protecting tenancy deposits is a legal requirement. Failing to protect the deposit and/or serving all the prescribed information to the tenant (as listed in the “Once the deposit is protected” section) with in 30 days of the landlord/agent receiving it can have the following consequences:
- The tenant can claim the penalty of three times the deposit amount AND the return of the deposit
- Section 215 of the Housing Act (The Localism Act) states that a valid Section 21 notice cannot be served if the deposit is not protected, unless the deposit has been returned to the tenant in full or with such deductions as are agreed between the landlord and tenant, or an application to a county court has been made under section 214(1) and has been determined by the court, withdrawn or settled by agreement between the parties.
- The tenant will have a defence to any claim made by the landlord for rent arrears – as they can ask the court to offset their penalty award against the rent arrears
Does the tenancy deposit scheme cost anything?
It depends which scheme you use. The following schemes have premium rates:
- Tenancy Deposit Solutions Ltd(TDSL) – www.mydeposits.co.uk
- The tenancy Deposit Scheme (TDS) – www.td.gb.com
However, here’s a Free Deposit Protection Service.
Here’s an in-depth overview Tenancy Deposit Protection Scheme (in pdf format) by the government.
Tenancy Deposit Scheme Legislation
Section 184 of the Localism Act 2011 covers the Tenancy Deposit Scheme Legislation, which can be read here.
When a new tenant moves into a property, it’s always a good idea to draw up an inventory form. An inventory is a detailed list of the contents and condition of the property and any items provided with it, such as furniture or equipment. Having an inventory can help resolve disputes at the end of a tenancy about whether any damage has been caused, or if any items are missing.