Many landlords take a deposit from tenants to hold for the duration of the tenancy. When the tenant moves out this is returned to the tenant less any deductions permitted: normally for damage (in excess of fair wear and tear), additional cleaning and to cover any outstanding rent. Note that a deposit (or part of it) can only be withheld if it is stipulated within the contract what the deposit is being held against.
Because a small minority of landlords wrongly withheld or did not return deposits the Government introduced in the Housing Act 2004 a statutory deposit protection scheme. This safeguards all deposits taken under an assured shorthold tenancy after 6 April 2007 or assured shorthold tenancies that have been renewed since that date. In certain circumstances, since amendments made by the Deregulation Act 2015, some deposits taken before 6 April 2007 will have to be protected. Deposits relating to other types of tenancies are not covered.
A landlord may require a deposit from a tenant before they move into the property. Landlords often feel that holding a deposit means a tenant is less likely to abandon a property and instead terminate the tenancy correctly. A deposit can also act as an incentive to ensure that the property is properly cleaned and cleared at the end of the tenancy. Deposits can also help to protect landlords against any unpaid rent at the end of the tenancy. The amount of the deposit to be levied is part of negotiating a contract or agreement with the tenant. The amount of the deposit can vary significantly and depends on how much ‘risk’ the landlord perceives they are taking by letting the property to that tenant. Large deposits, however, can deter prospective tenants and there is considerable judgement to be exercised in setting a market-friendly, but practical, deposit level.
Deposits can cover:
In assessing any damage, allowance must be made for fair wear and tear, the cost of which is not deductible from the deposit. Fair wear and tear is paid for in the rent charged. Wear and tear arises from normal living in a property. Landlords should not expect to receive a property back in the same condition it was let at the start of the tenancy. Tenants should be expected to return the property in a clean and tidy condition. But after, say, a tenancy of two years’ normal living, a landlord will just have to accept that paintwork might be looking tired and carpets might be looking worn.
The tenancy agreement should state clearly the circumstances under which part or all of the deposit may be withheld at the end of the tenancy.
If the tenant cannot afford the deposit, the local authority’s housing department or housing advice centre may operate a rent or deposit guarantee scheme in the area, which would guarantee rent or the costs of damage for a specified period.
At the end of the tenancy the inventory should be checked and an assessment made of the condition of the property – the landlord should take into account reasonable wear and tear.
If a claim is going to be made from the deposit the landlord should account for this with invoices or receipts and try to reach agreement with the tenant about the proposed deposit deductions. The landlord should promptly send any unclaimed balance of the deposit to the tenant. The landlord should not keep the full deposit as a way of getting the tenant to agree to deductions about part of the deposit.
The Housing Act 2004 introduced specific requirements relating to deposit protection which commenced on 6 April 2007. The Act has subsequently been amended by the Localism Act 2011 (the changes came in on 6 April 2012) and the legislation surrounding deposits was further amended from 26 March 2015 by the Deregulation Act 2015.
Under the Housing Act 2004 –
a deposit must be dealt with in accordance with an authorised tenancy deposit scheme from the moment of receipt landlords must comply with their chosen scheme’s initial requirements within 30 days of receiving the deposit landlords must give prescribed information to the tenant, and to anyone who paid the deposit on the tenant’s behalf, within 30 days of receiving the deposit
The legislation uses the term to comply with the initial requirements of a scheme but this is commonly referred to as ‘protecting the deposit’.
Precisely how to protect a deposit depends on the individual scheme of choice but essentially they all require a landlord or agent to – register with the scheme enter details about the property enter details about the tenancy and deposit enter details about the tenant(s) either send the deposit to the scheme or make payment if an insured based scheme (some agents will use a system where they pay per office rather than per deposit).
The deposit must be protected within 30 days of it being received ‘in connection with an assured shorthold tenancy’. This means the time when the 30 days starts might be before the date the tenancy ‘commences’. For example a student might sign and date a tenancy agreement in January and pay the deposit at the same time. But, the tenancy might not start until the following September. In this example, the 30 days would start from the date in January when the deposit was paid and not in September when the tenancy commences.
A renewal tenancy on or after 6 April 2007 is the same as receiving a new deposit in connection with a tenancy and would trigger deposit protection. Assuming a deposit was correctly protected when initially received (and prescribed information given), any renewals after that time do not require re-protection as long as the deposit remains in the same scheme and the renewal is between the same landlord, tenant and property as originally completed.
If a landlord fails to protect a deposit within 30 days of receiving the deposit in connection with a tenancy, a penalty of between 1 and 3 times the deposit is payable if a tenant or person who paid the deposit on their behalf makes an application to the court. This is usually in addition to an order requiring protection of the deposit or returning the deposit depending on the circumstances. The amount of the penalty is at the discretion of the court.
In addition to the financial penalty, where a deposit was not protected within 30 days, the section 21 notice (two months no fault notice) cannot be served unless the deposit is returned in full ‘before’ service of the notice or if there has been ‘agreed deductions’ before service. For example if there are rent arrears, both landlord and tenant can agree to reduce the arrears by using the deposit. For this to work it must be ‘agreed’ by both parties and the court will want to see a written agreement to that effect. In a recent High Court case, a cheque representing an amount equivalent to the deposit was sent to the tenant by the landlord but the tenant returned the cheque without presenting it. Nevertheless, that cheque was held to be sufficient for the returning of the deposit in full.
Even if a deposit has been protected after 30 days, that is not good enough for serving a section 21 notice and the deposit (despite being protected) would have to be returned in full (or agreed deductions) before service of the notice.
If there was a deposit received prior to 6 April 2007 and the tenancy became a statutory periodic tenancy on or after 6 April 2007 and the tenant remains in occupation under that statutory periodic tenancy, the deposit had to be protected within 90 days of the Deregulation Act 2015 being passed (the Act was passed 26 March 2015). If such a deposit wasn’t protected within 90 days, the same penalties as described earlier apply (no section 21 until returned plus financial penalty).
Where a deposit was received prior to 6 April 2007 and the tenancy went periodic before 6 April 2007 and the same tenant is in occupation under that periodic tenancy, no penalty can be sought for any failure to protect. However, if a section 21 notice is to be served at any time, the deposit must be first protected, returned in full or agreed deductions.
A tenant or person who paid the deposit on behalf of the tenant can make a claim for the financial penalty both during a tenancy and after they have left the property for up to 6 years.
Just as important as protecting a deposit is giving the prescribed information within 30 days of receipt.
The information is quite lengthy and must include the following:
The landlord must sign the prescribed information or it can be signed by a landlord’s agent. All tenant’s and relevant persons (see later) must be given the opportunity to sign the information.
Schemes are not allowed to supply the information. It must be given (and signed as accurate) by the landlord or agent.
All the information must be present. A link to the scheme rules on their website for example is not enough. The appropriate rules or information must be physically given to the tenant(s) and relevant person(s).
Where it asks for the landlord details, this may be the agent details if there is one (at the discretion of the landlord).
If the deposit was protected within 30 days but prescribed information was given after 30 days, a section 21 notice can be served (as long as the prescribed information was given ‘before’ service) but the penalty of between 1 and 3 times deposit would still be payable if applied for.
Where a tenancy is renewed and as long as the deposit was correctly protected and prescribed information given at the time of receipt, no further prescribed information is required to be given as it is deemed complied with. This is as long as the deposit remains in the same scheme and the renewal is between the same landlord, tenant and property as originally completed.
The schemes are of two types:
custodial (where the scheme administrators hold the deposit and which is free of charge) or insurance (where the landlord holds the deposit but has to pay an insurance premium).
At the time of writing, there are three schemes authorised under the Housing Act 2004.
The custodial scheme operated by the Deposit Protection Service is open to all landlords and letting agents and is free to use. The landlord or agent must pay the deposit to the scheme administrator within 30 days of receipt. The scheme is funded from the interest the scheme operator makes on the deposits they hold.
Landlords and/or agents pay a fee to join insurance schemes. Insurance schemes operate on the basis that the deposit continues to be held by the landlord or agent during the tenancy. If there is a dispute about the deposit at the end of the tenancy, the deposit-holder must pay the disputed amount to the scheme. The scheme will make an award either based on the decision of the scheme’s adjudicator, or an order by the court, or if the parties are subsequently able to reach agreement. The deposit money is insured, so that if the landlord or the agent does not pay the correct amount to the scheme when requested, the scheme can claim on the insurance and pay the tenant’s award, and then try to recover the tenant’s award from the landlord or agent. If there is no dispute about the proposed deductions from the deposit, tenants can often receive their deposits (or the balance due to the tenant) more quickly under these schemes because the landlord/agent can simply pay it back (rather than wait for the custodial scheme to refund the money). The custodial scheme operator also provides an insurance based scheme.
It is for the landlord to decide under which scheme the deposit will be held, either the custodial or an insurance-based scheme. The prescribed information that landlords are required to give to tenants, not more than 30 days after the taking of the deposit, includes giving the tenant (and anyone who paid the deposit on the tenant’s behalf) details of the scheme under which the deposit will be held.
To avoid disputes about deposits having to go to court, all the schemes have an alternative dispute resolution (ADR) service which seeks to resolve disputes that have arisen about deposits. Use of a deposit protection scheme’s ADR service is not compulsory. Both landlords and tenants still have the option of going to court but they cannot do both. In some cases, landlords who took their case to court were ordered by the judge to use the ADR service. There is a general obligation in the Civil Procedure Rules (the court rules) to try other means of resolving disputes before going to court – because court proceedings are often time-consuming and expensive all round.
3.10.7 Authorised Tenancy Deposit Protection Scheme Providers
There are three authorised schemes:
The custodial scheme is run by the Deposit Protection Service (further details from www.depositprotection.com) and they also operate an insurance-based scheme.
There are two other insurance-based schemes, the Dispute Service (further details from www.thedisputeservice.co.uk) and Mydeposits, (further details from www.mydeposits.co.uk).
Different membership options are available through the schemes. For example, managing agents may pay a membership fee which then covers that agent for all deposits they receive. Alternatively a landlord with only one or two properties who does not use an agent may be able to pay a flat fee per deposit, and this may be more cost-effective.
Landlords or their agents should familiarise themselves with the rules of their chosen scheme. The rules may direct landlords and agents to include special clauses in their standard tenancy agreements, for example. If tenancy agreements or other documents are not in the form required by the scheme, or if timescales are ignored, the adjudicator may award the full deposit to the tenant by default – whatever the merits of the landlord’s claim.
Where a third party provides the deposit, i.e. money changes hands as opposed to the guarantee schemes listed below, then that person is a ‘Relevant Person’ and needs to be provided with a copy of the prescribed information. This is very common in student letting where parents often provide the deposit and some local authorities will provide a physical monetary deposit rather than a guarantee. The Relevant Person should also be provided with a copy of the tenancy agreement, as it could help to avoid or resolve disputes later if they are told up front what the deposit might be used for. Just like tenants, Relevant Persons can claim against landlords or agents if they are not given prescribed information or if the landlord/agent fails to comply with the chosen deposit protection scheme’s initial requirements.
The custodial scheme (DPS) and the Mydeposits insured scheme both use a ‘Lead Tenant’ system. This applies in any situation where more than one person has an interest in the deposit. This could be where there are joint tenants, parents of students or local authorities providing the deposit. In setting up the Lead Tenant all parties with an interest in the deposit need to agree who that will be and then only that person will have authority to deal with the deposit at the end of the tenancy. This may cause problems with students signing a joint tenancy trying to get six parents who have not met to agree which of them will be the only one with the right to argue about this at the move-out, or if they choose a Lead Tenant who leaves the property before the end of the tenancy.
If a local authority had provided the deposit, the Lead Tenant may not be a tenant at all but the local authority which paid a deposit on behalf of the tenant.