Handling Tenant Deposits: What Landlords Need to Know

Managing tenant deposits is a key aspect of renting out property for landlords. Whether you are a first-time landlord letting out a single flat or an experienced landlord managing a portfolio of rental properties, understanding how to handle deposits properly is key for compliance with the law and building a professional relationship with your tenants.  

Deposit-related disputes are among the most common issues brought before letting agents, deposit schemes and small claims courts. These often result from miscommunication, poor documentation or failure to comply with statutory requirements. This article explores what landlords need to know about tenancy deposit schemes in order to stay compliant, avoid potentially costly mistakes and maintain smooth tenancies.

Two Different Types of Deposits

Landlords typically use two deposit categories: holding deposits and tenancy or security deposits.

1. Holding Deposit

A holding deposit is a sum of money paid by a prospective tenant to reserve a rental property before signing a tenancy agreement. This deposit is capped at one week's rent. Landlords should refund holding deposits if prospective tenants decide not to proceed with a tenancy and deduct the amount from the first month’s rent if they do decide to proceed with the tenancy.

2. Tenancy Deposit

Also known as a security deposit, this is a refundable amount paid by the tenant at the start of the tenancy to cover costs such as damage to the property caused by the tenant or unpaid rent or other similar breaches of the terms of the tenancy agreement. The Tenant Fees Act 2019 stipulates that for tenancies with an annual rent of less than £50,000, the maximum security deposit that a landlord can request is five weeks' rent. For properties where the annual rent exceeds £50,000, this maximum increases to six weeks' rent. Landlords must ensure that the security deposit is placed in a government-approved tenancy deposit scheme within 30 days of receiving it. Failure to meet this requirement can result in financial penalties and complications when trying to regain possession of the property.

Legal Obligations of Landlords

1. Tenancy Deposit Protection

Landlords in England and Wales are legally required to protect tenants' security deposits in a government-approved tenant deposit scheme within 30 days of receiving the deposit. The three authorised schemes are:

• Deposit Protection Service (DPS)

• Tenancy Deposit Scheme (TDS)

• MyDeposits

These schemes ensure that tenants receive their deposits back at the end of the tenancy, provided that they have met the terms of the tenancy agreement, have not damage the property and paid their rent and bills.

2. Providing Prescribed Information

Within the same 30-day timeframe of submitting the deposit to a deposit protection service, landlords must furnish tenants with specific details about the scheme used. This includes:

• The address of the rented property

• The amount of the deposit

• Information on how the deposit is protected

• The name and contact details of the tenancy deposit scheme

• Procedures for returning the deposit

• Steps to follow in case of a dispute

Failing to provide this information can lead to penalties and restrict landlords from serving a Section 21 notice to regain possession of their property.

Types of Tenancy Deposit Scheme

Tenancy deposit schemes typically offer landlords two options with their deposit scheme:  

1. Custodial Scheme

In a custodial scheme, the landlord transfers the deposit to the scheme, which holds it in a designated account. This service is free. At the end of the tenancy, the scheme returns the deposit to the tenant, subject to any agreed-upon deductions.

2. Insured Scheme

With an insured scheme, the landlord retains the deposit but pays a fee to the scheme to insure it. The landlord is responsible for returning the deposit at the end of the tenancy. If disputes arise, the scheme provides a resolution service.

How To Manage Tenant Deposits Effectively

1. Documentation

Maintaining thorough records is crucial. This includes:

• Detailed inventory reports at the start and end of the tenancy

• Photographic evidence of the property's condition

• Records of communications with the tenant regarding the deposit

2. Timely Actions

Ensure that deposits are protected and prescribed information is provided to tenants within the stipulated 30-day period. Delays can result in legal complications and financial penalties.

3. Dispute Resolution

In the case of disagreements over deposit deductions, landlords and tenants can utilise the dispute resolution services offered by the deposit protection scheme. These services are impartial and aim to resolve issues without the need for court proceedings.

Returning the Deposit

At the end of a tenancy, landlords are legally required to return the tenant’s deposit within 10 days of reaching an agreement on how much will be returned. This rule applies to all deposits protected under a government-approved tenancy deposit scheme, ensuring that tenants are not left waiting for extended periods to recover what is owed to them. If the landlord has used an insured TDP scheme, they are responsible for transferring the deposit back to the tenant. If the deposit is with a custodial scheme, the tenant can request the deposit directly from the scheme.  

If there are no disputes over rent arrears, damages or breaches of the tenancy agreement, the full amount should be refunded within the 10-day timeframe. If the landlord intends to make deductions, they must clearly communicate this to the tenant and support it with documented evidence, such as photos or check-in and check-out inventory reports.  

If the tenant disagrees with any proposed deductions, the disputed amount must remain protected in the scheme until the issue is resolved through its dispute resolution process. Failing to return the deposit within the ten-day window or not initiating the resolution process when required can result in complaints or legal action and may undermine the landlord’s position.

Conclusion

Managing tenant deposits correctly is a legal obligation that protects both landlords and tenants. By understanding the requirements of tenancy deposit schemes, handling holding and security deposits appropriately, and utilising the services of a deposit protection service, landlords can ensure legal compliance, foster positive tenant relationships and build a reputation for reliability in the rental market.

FAQs

Q. What happens if I do not protect the tenant's deposit?

A. Failing to protect a tenant's deposit within 30 days can lead to legal penalties, including being ordered to pay the tenant up to three times the deposit amount. Additionally, landlords lose the right to serve a Section 21 notice to terminate the tenancy.

Q. Can I make deductions from the deposit?

A. Yes, landlords can make reasonable deductions for unpaid rent, damage beyond normal wear and tear or breach of other tenancy agreement terms. However, these deductions must be justified with evidence and agreed with the tenant or with the tenancy deposit scheme via its dispute resolution process.

Q. Are holding deposits refundable?

A. Generally, holding deposits are refundable if a tenancy does not proceed because the landlord decides not to rent out the property to the tenant. However, landlords can retain the holding deposit if the tenant provides false information, fails a right-to-rent check or withdraws from the tenancy having committed to it.

Q. Are there different rules in Scotland and Northern Ireland?

A. Yes. While the principles are similar, Scotland and Northern Ireland have their own tenancy deposit schemes and regulations. Landlords should consult the respective government websites for detailed information on these regions.