Tenants are liable to pay landlords or letting agents a holding deposit to secure a property. This sum of money then acts as a guarantee that the tenant will abide by the terms of the tenancy agreement while they reside in the property, and is held against non-payment of rent, damage to the property or the removal of furniture. The amount chargeable to the tenant is capped by the Tenant Fees Act 2019, and is determined by the property’s annual rent. Properties with annual rent of under £50,000 are limited to five weeks’ rent, while properties with annual rent of £50,000 or higher are capped at six weeks rent. Deposits remain the property of the tenant, and as such are fully refundable at their tenancy’s end. During the tenancy, they can be held in trust by a deposit protection scheme.
Deposit protection schemes are designed to provide a level of financial security to both tenants and landlords through the security deposit process. These schemes are government-backed, and a legal requirement for all landlords with rental properties in the UK, offering reassurance to landlords that they will not lose out financially should the tenant fail to meet their obligations or cause excessive or intentional damage to the property, and reassurance to the tenant knowing their deposit is safe and will be returned to them at the end of their tenancy.
What Schemes Are Available?
There are two types of deposit protection schemes, custodial and insurance-based schemes:
- Custodial schemes involve the landlord or letting agent making a deposit payment into the scheme. The deposit is then help in a secure account until the end of the tenancy. The deposit is refunded to the tenant at the end of their tenancy, provided they have met all their obligations as a tenant, and there are no rental arrears, overdue bills, or excessive damage to the property that can be classified as beyond acceptable wear and tear.
- Insurance-based schemes work in a similar way, however the landlord or letting agent retains the deposit. Instead of placing the deposit into a secure account, they pay a premium to the scheme to insure the deposit. The scheme then holds the insurance money and pays out to the tenants if they are entitled to a refund at the end of their tenancy.
There are three government approved schemes in England and Wales. All three schemes offer both the custodial and insurance-based protection schemes. They are:
- The Deposit Protection Service (hyperlink – https://www.depositprotection.com/)
- MyDeposits (hyperlink – https://www.mydeposits.co.uk/)
- Tenancy Deposit Scheme (hyperlink – https://www.tenancydepositscheme.com/)
When a Deposit is Paid.
All deposits must be paid into one of these government-approved deposit protection schemes within thirty days of its receipt by either the landlord or lettings agent. Landlords have the option to protect the deposit through their lettings agent, who will issue both the landlord and the tenant with details of their scheme, and with confirmation the deposit has been paid in, or they can choose to protect it themselves. In this instance, it is the responsibility of the landlord to confirm payment to the lettings agent and tenant. Information supplied to the tenant should always include the scheme’s name, the contact details, and how to reclaim their deposit once the tenancy has ended.
If the landlord or letting agent fails to protect the deposit in one of these schemes, they may receive a court order to repay the deposit in full to the tenant. They may also be liable for a fine up to three times the value of the initial deposit. Tenants should also be aware that if they breach their tenancy agreement, such as by failing to pay rent or causing excessive damage to the property, the landlord or letting agent may be able to withhold some or all of the deposit as restitution.
Returning the Deposit.
Returning the deposit can be a relatively straightforward process, provided the tenant has met their obligations and left the property in good condition. If this is the case, the landlord is required to pay back the deposit in full within ten days of the tenant leaving the property. It is important the tenant and the landlord maintain thorough records throughout the tenancy, to ensure a smooth, fair return of the deposit, or transparency for any deductions made against it.
Deductions against the Deposit.
Landlords can make reasonable deductions to cover any financial losses, but it is important that they provide suitable evidence, such as a signed inventory or schedule of contents from the beginning of the tenancy, and clearly shows the costs incurred. This can help protect landlords from financial loss in the event the tenant chooses to file a formal dispute against the deductions made to their deposit. Photographing each room and item as it is when the tenancy starts is also recommended.
Landlords can make reasonable deductions for things like:
- Cleaning – One of the most common reasons for claims, it is important that all landlords and tenants understand the property need only be left at the same standard it was at the start of the tenancy, and not to a higher standard. This means if it was not cleaned to a professional standard before the tenancy, it need not be at the end of it. Deductions can only be made to return the property to the same standard, not a higher one.
- Damage – Any damage claims should allow for reasonable wear and tear, which is defined as unavoidable change over time. This could be frayed carpets, small scuffs on walls, and faded furniture or wallpaper. Tenants should report any damage to the landlord as soon as they see it, before attempting to repair it themselves. Next steps should always be mutually agreed by the landlord and the tenant.
- Redecoration – Should the property require redecorating due to any damage caused by the tenant, or changes made without the landlord’s consent, deductions can be made to return it to the same standard it was previously, allowing for fair wear and tear.
- Missing items – Any missing items should be replaced on a ‘like for like’ basis, factoring in the item’s age, its lifespan, quality, and replacement cost.
- Gardening – The tenancy agreement should set out in detail the tenant’s responsibilities for maintaining the front and back gardens, including the lawns, soil beds, and driveways. They should be left in a similar condition to when the tenant moved in, with allowances made for seasonal changes or adverse weather conditions.
- Rent arrears – Deductions can be made to cover some, or all, outstanding rent through the deposit, and minimise any future loss. However, it is important to follow the correct process when claiming rental arrears from the deposit and applying for possession of the property. Failure to do so can cause adjudicators or courts to rule against the landlord.
- Unpaid utilities – Should the tenant be responsible for any utility bills, and leave outstanding bills at the end of the tenancy, the landlord can claim these from the deposit if they are still registered in their name. It is important to provide invoices for any tenant debt the landlord has paid, as failure to do so can result in a dispute adjudicator siding with the tenant.
Top Tip: Beware betterment! Defined as a situation where any compensation will leave a landlord in a better financial or material situation at the tenant’s expense, betterment applies to both condition and cleanliness. For example, replacing a five year old carpet with a brand new one, and asking that the tenant pay the full cost, or replacing it with a better quality carpet, is considered betterment.
Deposit Disputes.
Most tenants end amicably, with the landlord and tenant agreeing on any final costs that need to be met. However, should a dispute arise over the amount due to be returned, this can be resolved by a dispute resolution service through arbitration or mediation. These service are offered by the deposit protection schemes, as well as non-profit organisations, government agencies, and some non-profit organisations. Once the landlord and the tenant have agreed on how much will be returned, or it has been decided by the dispute resolution service, the stipulated amount is due within ten days.
Top Tip: Start gathering your documents at the beginning of the tenancy. Make sure they are detailed and thorough. Have the tenant sign the check-in inventory and schedule of contents, if possible. This will help with any negotiations over the deposit amount, and deal with any issues as they arise. It will also help resolve, or avoid, any disputes over the claim, without resorting to legal action.
Deposit Use Clauses.
The deposit clause is section of the tenancy agreement that explains how the deposit can be used by the landlord. It should set out the circumstances under which the deposit can be kept, or deductions can be made against it, such as rent arrears, damages or alterations to the property, or any expenses relating to the tenant’s breach of the agreement. It will also explain how the deposit will be refunded to the tenant, including any deductions that can be made by mutual agreement, an adjudication, or a court order.
Is there an alternative to Deposit Protection Schemes?
In short, once the tenant has made the decision to pay the deposit, there is no alternative to placing the full amount in an approved deposit protection scheme. It is a legal requirement, and failure to do so can result in severe financial penalties, and a full refund of the deposit. However, there is another option for the tenant to choose, should they not wish to pay the traditional despot.
In recent years, there has been increasing interest in deposit replacement schemes as an alternative to the traditional rental deposit. The intent of these schemes is to offer tenants the option to pay a non-refundable fee in lieu of a deposit, which is held by a third-party provider. These providers may charge a renewal fee, either monthly or annually, so it is always advisable for tenants to check prior to making a commitment. These products are becoming more popular in the UK, as they provide the tenant with reduced upfront costs and increased financial flexibility, while the landlord benefits from faster turnover times, lower vacancy rates, and enjoy the same protection as a deposit.
It is important to note that it is the tenant’s choice alone whether they pay the deposit, or they opt for a deposit replacement scheme. Landlords cannot instruct their tenants to choose to purchase a deposit replacement product because it benefits them. Both options must be offered together, with no prejudice for one over the other.
