The Housing Act 2004 introduced tenancy deposit protection for all assured shorthold tenancies (ASTs) in England and Wales where a deposit is taken. The Tenancy Deposit Scheme Regulations 2006 refined this law further.
The law aims to prevent a landlord or letting agent from unfairly withholding a tenant’s deposit when the tenancy ends.
Landlords must hand over the deposit to an authorised third party or to arrange for insurance cover against which a tenant may claim.
Very simply, the schemes act as stakeholder, escrow provider and mediator. They ensure that the landlord returns the tenant’s deposit if the tenant has:
- met the terms of his tenancy agreement
- not damaged the property
- paid the rent and bills, so far as they relate to the property
At the end of the tenancy, the landlord must return the deposit to the tenant within 10 days of the tenancy ending. If there is a dispute, then the deposit remains protected in the TDP until the issue is resolved.
When does a deposit need to be placed into a scheme?
Deposits for almost all assured shorthold tenancies must be placed into a scheme. Landlords may also voluntarily use a scheme, for example to give prospective lodgers under residential licences to occupy reassurance that the deposit will be safe.
There are exceptions where the deposit does not need to be protected:
a deposit is not taken
the tenancy agreement has not been renewed since before 6 April 2007 and you have not taken a deposit since then
the form of tenancy does not create an assured shorthold. This would happen in any case where one of the following applies:
the landlord lives in the same property
the rent is more than £100,000 a year
the property is let to a company
the property is student accommodation let by a university or college
The Localism Act 2011 now provides that a deposit for an AST must be protected within 30 calendar days of receipt by the landlord.
Any deposit protection scheme provider must hold a Government contract in order to operate.
The options for a landlord to comply with the scheme are:
- Deposit Protection Service (DPS)
- Tenancy Deposit Scheme (TDS)
It is very important that a landlord does not put a deposit into any scheme that is not authorised by the Government.
The scheme acts only to enforce the right of a tenant to have his deposit back fast when he is entitled to it. A landlord remains perfectly able make a deductions for damage.
In case of a dispute the third party or insurance company will act as the arbitrator and pay out money owed to tenants.
Of course, it may happen that the landlord’s costs of insurance scheme membership and the premium may be passed on indirectly to tenants by means of increased rents.
Key to the success of the scheme will be the preparation and agreement of a full and detailed inventory of the property and contents at the commencement of the tenancy.
For some schemes, a deposit must be “re-protected” when a fixed term ends and the tenancy rolls over into a statutory periodic tenancy. If the landlord fails to do so, the deposit will no longer be protected and the landlord will have broken the law. The penalties for this are severe. A court may award the tenant up to 400% of the deposit as compensation.
Landlords may be asked to update the record to show that the tenancy has continued beyond the fixed term and that no new contract has been put into place. These schemes may not issue a new certificate and will continue to protect the deposit until it is unprotected. Their request for an update is for administrative purposes only.
At the end of the tenancy
The landlord and the tenant should meet on or before the last day of the tenancy to carry out an inventory and to decide what deductions should be made from the deposit.
If the landlord has used a custodial scheme, then he or she should notify the administrator. The administrator will then pay the agreed amounts to each side within 10 days. If an insurance scheme was used, then the landlord must pay the tenant the sum agreed and notify the scheme administrator immediately.
More information can be found in our guide to ending a tenancy.
In the event of a dispute
If an agreement cannot be reached about how much of the deposit to return, the scheme administrator must be informed immediately. The administrator will refer the case to an arbitrator.
Under a custodial scheme, any undisputed sum will be paid back to the tenant at this point, leaving just the disputed sum remaining.
Under an insurance scheme, the landlord must pay any undisputed sum to the tenant, and the disputed part to the scheme insurer. Both parties must confirm their consent for the dispute to be resolved by arbitration (there is also the option of resolving the dispute in the county court, but this is slower and incurs court fees).
The landlord and the tenant must supply the arbitrator with any information he needs to make his decision. This includes:
the tenancy agreement and the inventory
a statement of your reasons for making the claim
proof of the damage or missing items: images should be dated and include a scale (e.g. a ruler in a photograph)
evidence that the sums you wish to deduct from the deposit are reasonable, for example work estimates, receipts for items, printouts of details and prices of similar items
any other supporting evidence, for example statements from independent witnesses or suitably qualified professionals (e.g. a building surveyor)
The disputed sum must (or will) be paid according to the arbitrator’s decision within 10 days of the scheme administrator being informed.
Alternatives to using a deposit scheme
If you really do not want to use the scheme, other options you might consider are:
Don't take a deposit. You could trust your tenants to look after the property. Only you can assess that risk.
Use an assured tenancy agreement (instead of an assured shorthold agreement). The most important effect of this will be that you cannot repossess the property at the end of the tenancy or by giving notice.
Increase the rent instead of taking a deposit. Of course this will make the property less attractive to prospective tenants.
Take out extra insurance. There are policies available that cover damages incurred by tenants.
Take a guarantee from a strong guarantor such as a parent.
Do not be tempted by the following:
Keeping a deposit in the form of something other than money. This is forbidden.
Taking an extra month's rent at the start of a tenancy. Money taken as rent can be used only as rent. You cannot keep that rent money unless there is a term in the agreement that rent shall be paid two months in advance. There are two problems with that. The first is that such a term would almost certainly be regarded as unfair in law, and therefore void. Secondly, it would mean the tenant would be free to pay no more money during the last two months of the term, leaving you with no redress if he left damage.
Most letting agents and many landlords dealing direct will demand a holding deposit when a tenant agrees to a letting. Any such deposit is outside the scheme.
If you are a landlord, you should agree the terms with any letting agent whose services you use. Some agents may be tempted to maximise holding deposits at the expenses of you and your tenant.
Note that the Tenant Fees Act restricts the amount that can be taken as a holding deposit, and defines a set maximum time for which it may be held.
If the landlord doesn’t use a scheme where it is compulsory, then a court may fine him or her up to three times the value of the deposit if:
the deposit is protected only after 30 days
within 30 days, the tenant in not informed as to how the deposit is protected
the deposit is not protected at all
In addition, a landlord cannot evict tenants if the legislation regarding deposit protection schemes has not been followed.
Further information and useful documents
If you are looking for a document, download one of our assured shorthold tenancy agreements. There is also the option to complete a tenancy agreement online.
You might be interested to read next about landlord responsibilities for keeping the property well maintained.