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Deposits and Tenancy Deposit Schemes

3.3 Deposits and Tenancy Deposit Schemes

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, in the Housing Act 2004, introduced a statutory
deposit protection scheme. This safeguards all deposits taken under an
Assured Shorthold Tenancy after 6th April 2007. Deposits taken on other
types of tenancies are not covered.

3.3.1 Requiring a Deposit

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, particularly in shared tenancies, to
ensure that the property is properly cleaned and cleared at the end of the
tenancy. Deposits can also 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 carrying in letting out the property. Large deposits, however, can deter
future tenants and there is considerable judgement to be exercised in
setting a market friendly, but practical, deposit level.

3.3.2 Withholding Part of the Deposit

Deposits can cover:

• damaged items;

• outstanding debts attached to the property;

• failure of the tenant to carry out obligations set out in the
tenancy agreement such as cleaning;

• non-payment of rent;

• other breaches of the tenancy.

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.

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. It
should also state under which deposit protection scheme it will be held.
This will indicate whether the scheme holds the money or whether the
landlord/agent holds the money and it is insured by the scheme.

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 promptly send the balance of the deposit to the tenant.

3.3.3 Tenancy Deposit Protection (TDP) Schemes

The Housing Act 2004 introduced specific requirements that affect AST
deposits taken after 6th April 2007. The requirements are likely to apply
where a deposit was held before that date if a renewal tenancy agreement
is given to the tenant after 7th April 2007. The requirements are that:

• a deposit must be dealt with in accordance with an authorised
scheme from the moment of receipt;

• landlords must comply with the scheme’s initial requirements
within 14 days of receiving the deposit;

• landlords must give prescribed information within 14 days of
receiving the deposit.

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).

The custodial scheme is open to all landlords and letting agents and is
free to use (because it is funded from the interest the scheme operator
makes on the deposits they hold). This scheme tends to be used by smaller
landlords. Landlords and companies who are resident or registered abroad
can only use this scheme.

Under the insurance schemes the deposit continues to be held by the
landlord or agent but the money is insured, so that if the correct amount is
not repaid by the landlord, the scheme can repay the money to the tenant
and will recover it from the landlord. Landlords pay an insurance premium
to join these schemes. If there are no deductions, tenants can often
receive their deposits back more quickly under these schemes because the
landlord/agent can simply pay it back (rather than waiting for the custodial
scheme to refund the money).

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 provide to tenants, not less than
14 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, although the use of this is not compulsory and
both landlords and tenants still have the option of going to Court (but they
cannot do both).

If a landlord or agent takes a deposit but does not protect it in one of the
statutory schemes, the tenant may seek an order from the court requiring
the landlord either to pay the money into one of the schemes or to return
it. At the same time, the court will order that the landlord pay the tenant a
penalty of three times the amount of the deposit.

Landlords will not be able to use the section 21 procedure for obtaining
possession of the property if the prescribed information has not be given
or the deposit has not been protected.

3.3.4 TDP Scheme Providers

There are three schemes:

The custodial service is the Deposit Protection Service (Further details from
www.depositprotection.com or telephone 0844 4727 000)

There are two insurance based schemes. The largest scheme is run by
The Dispute Service (further details from www.thedisputeservice.co.uk
or telephone 0845 226 7837). The scheme run by The Dispute Service is
aimed principally at agents and now only accepts members of specified
professional bodies.

The other scheme, called mydeposits, is a partnership between the
National Landlords Association and Hamilton Fraser Insurance (further
details from www.mydeposits.co.uk or telephone 0844 980 0290) My
deposits is aimed principally at private landlords.

3.3.5 Relevant Person

Where a third party provides the deposit, i.e. money changes hands as
opposed to the guarantee schemes listed below, then under the Housing
Act 2004 that person is a Relevant Person and needs to have 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 get a copy of the tenancy agreement since if they do not know
why their money may be withheld any such agreement may be unlawful.

3.3.6 Lead Tenant

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 joint tenants, parents of
students or local authorities providing an actual 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.

If a local authority had provided the deposit, the Lead Tenant may not be a
tenant at all but the local authority whose money it remains.