Tenancy deposit schemes – a guide for landlords
Paul Shamplina, the landlord’s friend and founder of Landlord Action, outlines what landlords need to know about the tenancy deposit scheme.
Watch this video to find out what landlords need to know about letting agents, or click here to read about it.
- What is the deposit protection scheme for landlords?
- What is the landlord deposit scheme law?
- What are the scheme’s benefits for landlords?
- And the tenant benefits?
- Are there reputable deposit scheme services I can use?
- What are the costs to a landlord?
- Are there any deposit scheme penalties?
- Can a landlord deduct from the security deposit?
- Landlord deposit scheme summary
What is the deposit protection scheme for landlords?
Tenancy Deposit Protection (TDP) schemes are companies approved by the government. They have the authority to govern tenancy deposits and oversee the process of deposit returns, deductions and disputes.
Many landlords believe it is okay to let a property to a tenant and not take a deposit. Though in some circumstances it’s okay, it’s not advised. The deposit gives landlords a financial safety net in case the tenant causes damage to the property or steals/loses any of the landlord’s possessions. Deposits are typically equivalent to 4-6 weeks rent, but should be no more than two months’ rent.
If a landlord does take a deposit for an Assured Shorthold Tenancy agreement, as of 6th April 2007, the landlord MUST put the deposit in a government-backed tenancy deposit scheme. Landlords can choose which scheme they wish to use to safeguard each deposit. They must also inform the tenant which scheme has been used within 30 days of receiving the deposit.
In England and Wales deposits can be registered with:
What is the landlord deposit scheme law?
Landlords or letting agents must protect a tenant’s deposit in one of the approved schemes within 30 days of receiving it. At the end of the tenancy, landlords must return the deposit within 10 days of both landlord and tenant agreeing how much will be returned.
Should a tenant find out that a landlord hasn’t protected their deposit, he or she may lodge a complaint with their local court. At this point, a court may order the landlord to repay it to the tenant or place the deposit into a protection scheme within 14 days. They may also rule that the landlord pay up to three times the value of the deposit to the tenant as compensation.
Failing to protect a deposit could also make it more difficult to evict a tenant under Section 21 of the Housing Act.
What are the scheme’s benefits for landlords?
Although it may seem that deposit protection is designed with a tenant’s best interests in mind, the system has potential benefits for landlords too.
One of the major benefits of TDP schemes is the alternative dispute resolution service (ADR). Each of the government-backed schemes offers free, independent adjudication at the end of the tenancy. This is particularly advantageous where landlords and tenants disagree over what deductions should be taken from the deposit.
The adjudicator makes a decision based on the evidence presented by both the landlord and the tenant. This is where a landlord’s inventory and schedule of condition is vital. Landlords should provide dated photographs to document the property’s condition both at the start and end of the tenancy.
Adjudicators will only consider evidence pertinent to the disputed charges. In order to use the ADR service, both the landlord and the tenant must agree and any decision is final. Should landlords wish to challenge the adjudicator’s verdict, they’ll need to raise the matter in court.
And the tenant benefits?
Tenancy deposit protection schemes provide tenants with added security and peace of mind. The schemes offer a faster, cheaper and fairer way of settling any disputes over the return of deposits.
As well as safeguarding money, the schemes offer independent adjudication in the event of any dispute. Tenants who have kept their rented property in good condition can be confident that they will not have all or part of their deposit withheld on spurious grounds. This was a common complaint made by tenants before deposit protection become mandatory.
Having an alternative dispute resolution service (ADR)in place also encourages tenants and landlords to have, from the outset, clear agreements on the condition of the property through use of inventories, and agreements on the condition of the property. This means both tenants and landlords are protected.
Are there reputable deposit scheme services I can use?
Deposit protection schemes fall into two categories – custodial or insurance-based.
Landlords hand over the entire deposit to the scheme for ‘safe keeping’ for the duration of the tenancy. At the end of the tenancy, the administrator refunds the full deposit or an agreed amount, to the tenant via cheque or bank transfer.
If there are any disagreements about deductions, the scheme’s dispute resolution service will decide on the amount to be returned to the tenant. If the parties don’t want to use the service, they can use the courts.
The Deposit Protection Service allows deposits to be protected in this way free of charge.
Under this type of scheme, a landlord holds on to the deposit during the tenancy. But they can't use this money to cover their own expenses as the funds legally belong to the tenant.
If there is a dispute at the end of the tenancy, landlords should hand over the disputed amount to the protection scheme.
Landlords have to pay a fee to use an insurance-backed scheme. The amount of this fee varies depending on the scheme.
Landlords can choose whether to protect their tenant’s deposit in a custodial or insurance-based scheme.
In England and Wales deposits can be registered with:
- Deposit Protection Service (Custodial and Insured)
- MyDeposits (Insured)
- Tenancy Deposit Scheme (Insured).
In April 2016, Tenancy Deposit Scheme and MyDeposits launched new custodial deposit protection schemes for England and Wales which have been approved by the Department for Communities and Local Government.
What are the costs to a landlord?
Deposit Protection Service – This is free
MyDeposits - There's a one-off joining fee to become a member of mydeposits and then an individual deposit protection fee to legally protect each deposit. All fees include VAT and are tax deductable.
It is £20 for landlords to join or £5 for NLA members and LRS accredited landlords*.
MyDeposits deposit protection fees apply as follows:
Standard Pay-as-you-go fee
NLA members and LRS accredited landlords*
Up to £500
Tenancy Deposit Scheme – Is free to join.
Individual deposit protection fees apply as follows:
TDS for Landlords
DepositGuard RLA or LLAS
Up to £500
Are there any deposit scheme penalties?
Private landlords face compensation claims and restricted eviction rights if they don't follow tenancy deposit protection law for assured shorthold tenants.
A court can order a tenant’s landlord to pay them compensation if they:
- fail to protect a tenant’s deposit in a government-backed scheme
- do not give tenants the required information about the scheme being used
- take too long to protect a deposit or give tenants the required information.
A court can also order a landlord to repay a tenant’s deposit or protect it in a government-approved tenancy deposit scheme.
The amount of compensation can be up to 3 times the value of the deposit.
A court decides how much a landlord should pay by taking into account the circumstances of each individual case. They may also impose stricter penalties on a professional landlord or if the landlord uses a letting agent who should be aware of the law.
Can a landlord deduct from the security deposit?
When a tenancy ends, tenants must request their deposit back from the landlord. The landlord must reply and state if they wish to deduct something from the deposit. They should attach a list of deductions with reasoning for each one.
Here are the three ways that a deduction can be legitimised.
- When the tenant agrees
- When there has been a dispute resolution
- When there is a court order
Landlords cannot simply retain a deposit or any part of it without giving explicit and clear written reasons for doing so.
There are many reasons why a landlord may need to make deductions from a tenant’s deposit. This is where the importance of a thorough inventory comes into its own, as a check-out report can be compared against the inventory and schedule of condition.
Below are the potential reasons for deductions.
- Unpaid rent at the end of the tenancy
- Unpaid bills at the end of the tenancy
- Stolen or missing belongings
- Direct damage to the property and its contents
- Indirect damage due to negligence and lack of maintenance
- Lack of sufficient hygiene
- Lack of maintenance of key facilities – e.g. the garden, depending on the contract
- Unwanted belongings left after keys are returned
Landlord deposit scheme summary
The deposit is there to give landlords financial security in case a tenant damages the property or items go missing. However, landlords MUST protect any deposit taken in one of the three government approved schemes.
Failure to do so can cause landlords serious problems. If reported by a tenant, a landlord could face the prospect of substantial fine. Their position is also considerably weakened if a dispute with a tenant does arise, whether it is over damage to the property or over rent arrears.
Landlords should also bear in mind, it’s possible that a judge may not grant a landlord a possession order when trying to evict a tenant if their deposit is not protected.