What Landlords Need to Know: Deposits and Tenancy Deposit Schemes

Unravel the complexities of tenancy deposit schemes with our comprehensive guide. 

Investment Strategy

Unravel the complexities of tenancy deposit schemes with our comprehensive guide. 

Navigating the legal requirements for tenancy deposits can be a challenge for landlords and tenants alike. Changes to the Tenant Fees Act have only added to the confusion. In this article, get clarity on the key aspects of deposit protection schemes. What are deposit limits? What expenses can you deduct from the deposit at the end of the tenancy? What do you need to know about tenancy deposit schemes? And how can you put an end to deposit disputes?

How much can landlords charge for a deposit?

The Tenant Fees Act of 2019 imposes a maximum deposit limit in England and Wales, set at five weeks' rent for properties with annual rent below £50,000 and six weeks for those above.

In Scotland, deposits are capped at two months' rent, aimed at safeguarding tenants from excessive rental expenses.

Are landlords required to collect a deposit?

While landlords are not required to ask for a deposit from their tenants, it is generally advised. The deposit serves as a safety net in case of damages or missed rent payments. However, landlords who engage the services of an agent or property company may be obligated to collect a deposit.

If you do collect a deposit it is essential to ensure you understand the rules and regulations around the returning of the deposit and the treatment of it during your tenant’s occupancy.

Tenancy deposit vs a holding deposit?

Holding deposits and tenancy deposits serve distinct purposes. The former, equivalent to one week's rent, is paid by the tenant to secure the rental property during the application process. It is typically deducted from the first month's rent.

In contrast, the tenancy deposit, equivalent to five weeks' rent, is safeguarded through a deposit protection scheme and returned to the tenant at the conclusion of the tenancy. Should the tenant breach the tenancy agreement, cause damages, or fail to pay rent or bills, the landlord may recover the expense by deducting the cost from the tenancy deposit.

When should the landlord collect the deposit?

Deposits are usually paid after the tenancy agreement is signed and prior to the tenant's move-in. Landlords or agents have 30 days from receiving the deposit to enroll it in a government-approved tenancy deposit scheme.

About tenancy deposit schemes?

A tenancy deposit, also known as a security deposit, is a payment made by a tenant prior to occupying a rental property. This deposit, which should not exceed the equivalent of five weeks' rent, is usually paid along with the first month's rent after the tenancy agreement is signed.

In England, Scotland, and Wales, all deposits must be enrolled in a deposit protection scheme for secure safeguarding during the tenancy period. Upon the tenant's departure, the deposit will be returned. In the case of any damages or rent owed by the tenant, the deposit may be used to cover the associated costs.

Do you need to use a tenancy deposit scheme?

Deposits for properties under an Assured Shorthold Tenancy (AST) starting after 6 April 2007 must be enrolled in a government-sanctioned deposit protection scheme.

These schemes safeguard the deposit during the tenancy and provide impartial resolution in the event of a dispute.

Registering a tenant’s deposit is a legal requirement. Any landlord that doesn’t protect their tenant’s deposit could be fined up to three months rent and may not be able to issue a correct Section 21 notice.

Once registered, landlords must provide tenants with prescribed information within 30 working days. This is simply written information on where the deposit is being kept, including:

  • The deposit amount
  • The property address
  • The name, address and contact details of the tenancy deposit scheme
  • The name, address and contact details of the landlord, tenants and any third parties who have contributed to the deposit

On a custodial deposit protection scheme, the Custodial Terms and Conditions must also be included in the prescribed information.

What are the government tenancy deposit schemes?

Landlords in England, Scotland and Wales must register their tenancy deposit with a government-approved deposit protection scheme.

In England, these are:

In Scotland, these are:

Tenancy deposits must be registered within 30 working days of receiving funds from the tenant. The tenant must be told where their deposit is being stored, otherwise known as prescribed information.

When do landlords need to return the tenant’s deposit?

Tenants cannot receive their deposit until the tenancy ends. After any agreed-upon deductions, the deposit must be returned within ten days.

Landlords holding the deposit (on an insured scheme) should return it within ten days of the tenant's request or sooner. Landlords do not need to wait for a request.

For deposits kept in a custodial scheme (held by the scheme, not the landlord), tenants can request it directly from the scheme. The scheme information was provided to the tenant at deposit registration. The custodial scheme will communicate with the landlord or agent to approve the deposit return request.

What costs can be deducted from the tenant’s deposit?

Sometimes landlords may need to deduct money from a tenancy deposit. This can occur if the tenant caused damage to the property, left it in an unclean state, or didn't pay rent/bills. Examples of common deductions include:

  • Property damage
  • Indirect damage from tenant's negligence
  • Missing or damaged furnishings
  • Uncleanliness at the end of the tenancy
  • Unclaimed belongings
  • Outstanding rent/bills.

However, it is the landlord's sole responsibility to ensure the property is well maintained and any costs for the maintenance of the property cannot be deducted from the deposit. These costs might include property structure repairs, replacing or repairing old appliances, repainting walls, etc. These kinds of expenses come under fair wear and tear.

While, tenants must treat the property with care and report any issues to the landlord - unless the repair cost is solely due to the tenant’s negligence the cost for repair is the responsibility of the landlord.

If deducting costs from the deposit it is best practice to give your tenant an itemised receipt of all deductions.

How to deal with and prevent tenancy deposit disputes 

If a landlord wants to make deductions from a deposit, they must inform the tenant first and provide written confirmation of the deductions and the reason behind them. If the landlord and tenant cannot agree on the deductions, they can use the dispute resolution service provided by the deposit protection scheme.

The scheme's adjudicator will consider the evidence from both parties, such as property photos and videos, communications, and inventory/check-out reports, to reach a final decision. If either party is unhappy with the outcome, they may choose to take the case to court.

To avoid deposit disputes, it's crucial to have proper records of the property's condition. This should include a thorough inventory made before move-in, mid-term inspections, and a check-out inventory. In order for your claim to be accepted, these documents need to prove that the damage is real and entirely the fault of the tenant. Without these official records, the chances of a deposit scheme siding with the landlord are low. A professional inventory and schedule of condition are essential to ensure a fair outcome in case of any damage-related disputes. In the case of rent arrears, having an accurate report of all income collected is vital. This can be easily managed with a system like Landlord Studio.