Protecting your tenant’s deposit

Tenant deposits are an essential safeguard for landlords. They can significantly alleviate potential issues that may arise during a tenancy. If everything goes smoothly, the deposit is returned to the tenant. Should complications occur, landlords can utilise this money to offset their expenses.

Deposits can cover various expenses, from missed rent payments to repair costs for property damage, easing the financial burden on landlords. Typically, tenants pay up to five weeks’ rent as a deposit, which must be protected by a tenancy deposit protection scheme, as per the Tenants Fees Act 2019.

UNDERSTANDING TENANCY DEPOSIT SCHEMES

Landlords must use a tenancy deposit scheme if they have tenants on an assured shorthold tenancy. This requirement, introduced in the UK Housing Act 2004, has been in place since 2007.

ENSURING FAIR PLAY WITH DEPOSIT PROTECTION

These schemes protect tenants’ deposits from dishonest landlords and ensure the return of the deposit, provided tenants abide by their tenancy agreement. If tenants breach the agreement, for instance, by damaging the property or failing to pay rent, landlords can claim their costs from the deposit.

CONSEQUENCES OF NOT PROTECTING TENANT DEPOSITS

Suppose a landlord neglects to protect a deposit using one of the three government approved tenancy deposit schemes. In that case, the tenant can seek a court order for the landlord to repay up to three times the deposit amount. Moreover, landlords cannot evict their tenants using a Section 21 no-fault eviction if they fail to protect the deposit.

TIMELY PROTECTION OF TENANT DEPOSITS

Landlords must protect a tenant’s deposit within 30 days of receipt. Failure to do so should result in the deposit being returned to the tenant.

EXPLORING TYPES OF TENANCY DEPOSIT SCHEMES

There are two types of tenancy deposit schemes – custodial and insured. In a custodial scheme, the scheme provider holds the deposit, while in an insured scheme, the landlord retains it. Both types of tenancy deposit schemes offer unique benefits.

CUSTODIAL SCHEMES

First, let’s delve into the first type of tenancy deposit scheme – the custodial scheme. This form of scheme is free to use, making it highly popular amongst landlords and tenants alike. A custodial scheme securely holds onto the deposit throughout the duration of the tenancy.

Once the tenancy concludes, the scheme releases the agreed-upon funds to both parties, either after a mutual agreement on its division or resolving any disputes.

However, one potential downside is that, in the event of a dispute, landlords won’t receive any funds until its resolution, potentially leaving them to cover the cost of any necessary repairs themselves.

INSURED SCHEMES

Switching gears, we explore the other type of deposit protection – insured schemes. Here, the landlord retains the deposit whilst paying insurance to safeguard it throughout the tenancy. Unlike custodial schemes, providers do charge for this service. However, they ensure that tenants will always receive the money they’re entitled to.

Insured schemes offer a unique advantage to landlords as they can accrue interest on the deposit during the tenancy. This becomes particularly attractive for those with large property portfolios or high-value properties, as the accrued interest can offset registration costs. Moreover, landlords can directly negotiate deposit returns with their tenants without involving the scheme provider.

FREE DISPUTE RESOLUTION SERVICE

When landlords and tenants disagree on the deposit division, all tenancy deposit providers offer a free dispute resolution service. This option is often quicker and simpler than pursuing a claim through the courts, with claims usually being resolved within 28 days.

Both tenants and landlords can initiate the dispute process. However, the burden of proof rests with the landlord, requiring them to substantiate their claim on the deposit with evidence. Conversely, tenants only need to provide evidence in response to the landlord’s claims. This evidence can range from tenancy agreements, bank statements, utility and council tax bills, inventory reports, correspondence, cleaning charges and photographs, to witness statements.

Once all evidence is collated, the case is forwarded to an impartial adjudicator at the deposit scheme who decides on the deposit division. In rare circumstances, including cases involving police, an adjudicator may deem it necessary to resolve the dispute through a formal court process. Landlords must pay the disputed amount to the tenancy deposit scheme in disputes involving insured schemes.

TENANCY DEPOSIT SCHEMES

When it comes to tenancy deposit schemes in England, there are three providers: the Deposit Protection Service, My Deposits and the Tenancy Deposit Scheme. Each provider is propelled by a unique parent company, offering numerous services with nuanced differences.

DEPOSIT PROTECTION SERVICE (DPS)

The Deposit Protection Service (DPS) is the largest scheme of the three. Landlords must create an online account to initiate a tenant’s deposit protection with DPS. The creation process involves providing an email address, creating a password and answering security questions for identity verification.

For the Custodial Scheme, landlords first create a free custodial account with the DPS. They can then add properties and tenants to the account. Following receiving a deposit, landlords transfer it to the DPS, preferably via bank transfer. It’s worth noting that landlords can set up the deposit scheme even before the tenant pays their deposit.

To add a tenant, landlords will need their name, title, contact details, the start and end dates of the tenancy, the rent amount and the deposit amount. Landlords must create an account for the insured scheme and pay the required fees. Furthermore, landlords must have Client Money Protection in place to use the DPS insured scheme. The DPS is ideal for larger corporate landlords, offering a discount for landlords with over 100 deposits.

MY DEPOSITS

My Deposits is another deposit protection scheme. It’s the only scheme endorsed by the National Residential Landlords Association (NRLA), offering members a discount on their insured deposit schemes. It was founded in 2007 to give landlords, agents and tenants an alternative to the other two schemes. The scheme gives choice by offering both of the two types of deposit protection, insured and custodial.

TENANCY DEPOSIT SCHEME

The Tenancy Deposit Scheme is the oldest deposit protection scheme. It’s the only UK-owned and not-for-profit option amongst the schemes. The Tenancy Deposit Scheme offers both insured and custodial deposit protection services. The custodial service is free, with discounts available for NRLA members.

CHOOSING THE RIGHT TENANCY DEPOSIT SCHEME

Ultimately, the choice of tenancy deposit scheme is at the landlord’s discretion, with both custodial and insured variants offering distinct advantages. Insured schemes are often more suitable for larger landlords, offering quicker access to deposit funds. On the other hand, custodial schemes are free and require less work from the landlord, albeit at the potential cost of any interest the deposit could have earned.

The key to choosing the right tenancy deposit scheme lies in understanding each provider’s unique benefits and costs. By carefully weighing these factors, you can select a scheme that perfectly fits your specific situation.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.