It's a sensible idea for landlords to take a deposit from their tenants at the start of a tenancy to protect the property against damage.

But recent changes to the law mean landlords could lose out financially if they don’t follow the rules regarding those deposits.

So we’ve compiled a simple guide to help you bypass the pitfalls.

What is a tenancy deposit scheme?

Under the United Kingdom Housing Act 2004, every landlord or letting agent that takes a deposit for an assured shorthold tenancy in England and Wales must protect that money in a government-backed tenancy deposit scheme.

In England and Wales deposits can be registered with:

Within these three approved schemes, there are two types: custodial and insurance.

Custodial schemes

Here, the deposit is held in a bank account by the scheme operator and can’t be accessed by the landlord or the tenant.

The funds are released to the appropriate party at the end of the tenancy once any disputes have been settled.

Insurance schemes

Here, the landlord or their agent holds on to the tenant's deposit but pays a fee to insure it against being kept unfairly at the end of the tenancy.

If there is a dispute at the end of the tenancy, the insurer will settle with the tenant and then pursue the landlord for the money.

What must the landlord do?

The tenant pays over the deposit (usually one month's rent) when the tenancy agreement is signed.

Once the landlord has received the deposit, they have 30 days to register with a TDP.

And they have 30 days to issue their tenants with ‘Prescribed information’’, a copy of this would typically be provided by the chosen protection scheme and contains 10 key pieces of information:

  • the address of the rented property
  • how much deposit they have paid
  • how the deposit is protected
  • the name and contact details of the tenancy deposit protection (TDP) scheme and its dispute resolution service
  • the landlord's (or the letting agency's) name and contact details
  • the name and contact details of any third party that's paid the deposit
  • why they would keep some or all of the deposit
  • how to apply to get the deposit back
  • what to do if you can't get hold of the landlord at the end of the tenancy
  • what to do if there's a dispute over the deposit

It's worth getting the tenant to sign a copy to confirm their agreement to its contents. It doesn’t matter if they refuse, providing you have given them the opportunity.

Landlords must also give a copy of the relevant scheme leaflet to the tenant.

If someone else has paid towards the deposit, you must give that person the prescribed information (together with a copy of the relevant schemes leaflet), and the opportunity of signing a copy to confirm the information on the form.

Penalties

If a landlord or letting agent fails to protect a tenant's deposit and provide the tenant with the prescribed information within 30 days they are prevented from regaining possession of the property under a Section 21 notice under the Housing Act 1988, unless the deposit is first repaid or proceedings for a penalty against the landlord, or its agent, have been initiated and settled.

If the tenant applies to court for the deposit to be protected and it is shown the landlord hasn’t complied with the scheme, the court must order the landlord to pay the tenant between one and three times the deposit amount within 14 days.

Inventories

Although TDP schemes don’t require an inventory - a record of the condition of the property at the start of the tenancy - to be produced, it can be helpful to have one.

They are particularly useful if there is a dispute at the end of a tenancy.

At the end of a tenancy

Once a tenancy ends the landlord must tell the protection scheme they're using how much - if not all - of the deposit to return to the tenant.

Tenants should be told how much deposit to expect within 10 days of the end of the tenancy.

The landlord might choose to withhold a portion of the deposit to cover the cost of repairs or breakages during the tenancy.

Any part of the deposit that’s withheld will remain protected in the scheme until the tenants agree to the decision, or, until the dispute is settled through a dispute resolution service or the courts.

Disputes

If there is no dispute at the end of the tenancy the deposit will be returned as agreed.

But if the landlord and the tenant can’t agree on how much deposit should be returned, they have the right to use a dispute resolution service (DRS), provided by the deposit protection scheme.

Each party makes their case to the DRS which will consider each side's argument and make a final decision.

This decision is binding, unless one party decides to take the matter to court.

Alternatives

There are also a number of ‘no deposit’ or ‘zero deposit’ schemes in operation that are provided by insurance companies, which offer landlords protection without having to take a deposit.

And emerging PropTech companies have been moving in to the market too like ‘Reposit’ a tenancy deposit alternative. Instead of tenants paying out six weeks on a deposit upfront, which often they can’t afford, they pay just one week. Reposit provide assurances to the landlord for up to 6 weeks rent and if something does go wrong or something breaks, tenants can pay online at the end of the tenancy. Reposit promise to pay out to landlords in less than 28 days. Helping landlords find tenants faster.