A guide to deposit protection schemes

Whether you are a tenant or a landlord, read this guide to understand how these compulsory schemes operate

Few things have caused more ill feeling between landlords and tenants over the years than deposits. In the bad old days, some landlords would demand a hefty deposit from tenants, then return only a fraction of the deposit at the expiration of the tenancy, citing ‘wear and tear’ to the property. And the tenants, in many cases, would just have to grin and bear it. Bang went most of their deposit and they would have to scramble around for money to put down as a deposit for a new home.

Now, thanks to compulsory deposit schemes introduced by the government (www.gov.uk/deposit-protection-schemes-and-landlords/overview), the system is far more transparent and equitable to both parties. Whether you are a landlord or a tenant, you will need to familiarise yourself with these schemes. Here are 12 points to understand or consider.

1. Deposits are paid at the outset of a tenancy and are typically equivalent to one month’s rent – occasionally more. They are designed to cover such things as damage to a property, cleaning and unpaid utility bills.

2. Landlords are now legally required to safeguard their tenants’ deposits with one of three government-backed deposit protection schemes: Deposit Protection Service (www.depositprotection.com), MyDeposits (www.mydeposits.co.uk) and Tenancy Deposit Scheme (www.tenancydepositscheme.com). This legislation applies to all properties let on an assured shorthold tenancy after 6 April, 2007.

TDS has recently launched a Code of Recommended Practice. This Code of Practice sets out the recommended requirements which letting agents and landlords should meet as members of the Tenancy Deposit Scheme.

3. Letting agents are empowered to act on behalf of landlords, and often do.

4. Deposit protection schemes are not applicable to any deposits paid before the signing of a rental agreement – although such preliminary deposits are later incorporated into the scheme. Protection schemes are also not required when landlords are living in the same property as the tenant.

5. There are two basic types of deposit protection scheme. These are custodial and insurance. Under the first, the landlord lodges the deposit for the duration of the tenancy. The money is then released to the tenant when the landlord and tenant have agreed how much of the original deposit should be repaid. Under the second, the landlord pays a fee to have the deposit protected, then repays the tenant at the end of the tenancy. If he fails to do so, the insurer will pay the tenant directly, then try to recoup the money from the landlord.

6. Inventories – perhaps surprisingly – are not a formal requirement under deposit protection schemes. But it is obviously beneficial to both landlords and tenants to have an agreed record of the state of a property, and of its contents, at the start of a tenancy.

7. It is also worth noting that, even if a deposit is paid by a third party (perhaps the tenant’s parents), a full deposit protection scheme is still required by law.

8. The onus of putting a tenant’s deposit in a protection scheme falls squarely on landlords, or their agents. It must be done within 30 days of the signature of a rental agreement, and landlords are required to inform tenants which protection scheme they are using. They are also required to supply further information, such as the circumstances in which they would propose not to return some or all of the deposit.

9. At the end of a tenancy, tenants can expect to get their full deposits back, provided they have paid all outstanding bills and stuck to the terms of the tenancy agreement, and provided there has been no damage to the property or its contents. The question of damage can be a matter of dispute between landlords and tenants. It is not incumbent on the tenants to return the property to exactly the same state it was in when they first moved in.

10. Should the landlord and tenant remain unable to agree how much of the deposit the landlord should retain at the end of the tenancy, such issues can be ironed out via the protection scheme’s resolution service. A tenant also has the protection of the law, in the form of the county court, if they suspect that the landlord has defaulted on their duty to lodge a deposit in a deposit protection scheme.

11. Landlords in Scotland must transfer their tenant’s deposit to one of the three schemes – SafeDeposits Scotland, mydeposits Scotland or the Letting Protection Service Scotland – and provide their tenant with key information within 30 working days of the tenancy start date.

12. The regulations in Scotland are retrospective, which means deposits taken before July 2012 must also be protected. As the schemes in Scotland are custodial only, the scheme will hold the money during the tenancy, then the landlord and tenant must log into the appropriate website to release the deposit after the tenancy ends. While the regulations in Scotland apply to landlords as the person requiring the deposit, in a recent landmark case, a letting agent was fined for failing to protect deposits on behalf of their client.

Compulsory deposit protection schemes are a huge improvement on the haphazard system that preceded them. The schemes enable both landlords and tenants to sign a tenancy agreement with confidence, which must be good news for the rental sector.

Content provided by OnTheMarket.com is for information purposes only. Independent and professional advice should be taken before buying, selling, letting or renting property, or buying financial products.

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