If you are thinking about renting a property or investing in a buy to let you need to understand the many and varied legal aspects of being a landlord. One of these is what happens to the money received from a tenant as a deposit. The law says if a deposit is paid, it must be protected in a government approved deposit protection scheme.

Using a tenancy deposit scheme has benefits for both the landlord and the tenants, it means that the deposit is safe and both parties have access to an independent dispute resolution service, should you need it. There are two different types of scheme to choose from and three authorised providers. There are also legal limits on how much money you can ask the tenant to put forward as a deposit.

Below are some of the most frequently asked questions on this topic to help you understand how these schemes work and what needs to be done when finding a tenant for a property.

What is a tenancy deposit scheme?

Since April 2007, the law has required landlord’s in England and Wales to safeguard their tenants deposits in one of 3 government approved schemes.

The schemes are:

• The Deposit Protection Service
• My Deposits
• The Tenancy Deposit Scheme

A tenant must be provided information regarding the scheme a landlord or agent uses within 30 days of receipt of the deposit.

Insurance V Custodial

There are 2 different types of tenancy deposit schemes – Insurance and custodial and all 3 schemes offer both services.

Custodial Deposit Schemes – protect the whole deposit during the period of the tenancy. The landlord or agent would pay the deposit once received from the tenant into the scheme. At the end of the tenancy, the deposit, or an agreed amount less any deductions is returned by the scheme to the tenant via bank transfer or cheque. The scheme has its own independent arbitration service.

Custodial schemes are free of charge for landlords or agents to use.

Insurance Deposit Schemes – the landlord or agent holds the deposit in their own bank account but pays a fee to the scheme to insure the payment. The landlord or agent should not under any circumstances use the money for any purpose during the period of the tenancy. At the end of the tenancy, the landlord or agent will return the deposit less any agreed deductions to the tenant.

As with the custodial scheme, any disputes will go to the schemes adjudicator.

The insurance element of the scheme means that if a landlord or agent fails to return the deposit, the scheme will pay the tenant and claim the money owed from the landlord or agent.

What is the Law around Deposit Schemes?

As a landlord you do not have to ask the tenant for a deposit however it is advisable as it offers protection against damage to the property by the tenant or failure to pay the rent.

Following the introduction of the Tenant Fees Act, which became law in 2019, there are limits on the amount that is requested as a deposit. In most cases, tenant deposits are caped at the equivalent of 5 weeks rent.

What a landlord or agent must do with a Tenants Deposit.

When a deposit is received from a tenant, it must be put into a government backed tenancy deposit scheme within 30 days of the tenancy agreement being signed. A tenant must also be notified which scheme their deposit will be registered in.

What are the schemes benefits for landlords and agents?

For landlord’s and agents the main benefit of the schemes is the Alternative dispute resolution service. This free and independent arbitration is beneficial if tenants disagree about deductions for damage.

Should a dispute arise, evidence must be provided to the adjudicator, this is where it is vital to have a thorough inventory from the start of the tenancy. Both the landlord and the tenant must agree with the adjudicators decision, if you cannot agree the matter would need to be decided by the courts.

Are there any Tenancy Deposit Scheme Penalties?

As a landlord or agent the law says that you must:

• Protect the tenants deposit in a government backed scheme
• Provide the tenants with the required information about the scheme
• Do these both within 30 days of receiving the deposit.

If you do not, the court may order the deposit to re paid and compensation paid to the tenant of up to 3 times the value of the deposit. It may also be more difficult to evict a tenant using a section 21 notice should you need to.

What are the tenant benefits?

Using a tenancy deposit scheme gives our tenant the reassurance that their deposit will be protected properly. The Dispute resolution service also gives them the peace of mind that any disagreements about damage to the property will be settled fairly and independently.

What are the costs to landlords?

Custodial schemes are free to join for landlords and agents. Insurance schemes have a joining fee- these start at £13.20. The amount paid depends on the size of the deposit being protected.

What can a landlord deduct from the deposit?

There are various costs to landlords, which can be deducted from a deposit at the end of the tenancy. You can only make these deductions with the agreement of the tenant, an independent adjudicator or the courts.

Landlord’s are not allowed to withhold money without having clear and legal reasons for doing so.

Reasons why you might withhold part of a deposit at the end of a tenancy may be:

• To cover unpaid rent or bills
• For missing items listed on the inventory
• For damage to the property and its contents, either deliberately or as a result of negligence
• For failure to carry out any duties set out in the tenancy agreement such as garden maintenance
• To cover the cost of removing unwanted belongings left in the property after the keys have been returned.

If you have any questions at all regarding tenancy deposit schemes or any aspect of letting a property, please do get in touch and we would be happy to help.