Deposits are a way to provide landlords with financial security, protecting them in the event that a tenant damages the property or items go missing. However, deposits are legally the property of a tenant, meaning landlords can’t simply hold onto it themselves.
Landlords are obligated to put any deposits from their tenants into one of three government-backed tenancy deposit schemes. Failure to do so will result in tenants not receiving the financial security they’re owed, which could lead to a landlord facing a substantial fine.
To make sure you fully understand the laws surrounding tenant deposit schemes, we’ve created an in-depth guide to help you understand your role as a landlord when it comes to deposits.
What is a rent deposit scheme?
A rent deposit scheme, also known as a Tenancy Deposit Protection scheme, is a government-approved company that has the authority to govern a tenant’s deposit. They also oversee the process of returning deposits when a tenant moves out of a property, issuing deposit deductions and addressing disputes between tenants and landlords.
If a landlord takes a deposit from a tenant as of 6th April 2007, they are obligated to put the deposit into a government-backed Rent Deposit Scheme. Landlords have the freedom to choose which scheme they wish to use to protect each deposit, however, they must inform the tenant which is being used within a 30-day period of receiving the deposit.
It is the duty of landlords and letting agents to ensure a tenant’s deposit is protected in one of the government’s approved schemes within 30 days of receiving it. At the end of the tenancy, once both landlord and tenant have agreed on the amount that will be returned, landlords must return the deposit within 10 days.
If a tenant discovers that a landlord has not protected their deposit, they may lodge a formal complaint with their local court. A landlord may then be forced by a court to pay back the deposit or ensure it is held in a rent deposit scheme within 14 days. A court could even rule that the landlord is required to pay back up to three times the value of the deposit as compensation for the tenant.
If a landlord fails to protect a deposit in a tenancy deposit scheme, they may even find it more difficult to evict a tenant under Section 21 of the Housing act.
Benefits of the scheme
It may seem as though a rent deposit scheme is only beneficial to tenants, with landlords simply being held accountable. However, having a proper tenancy deposit scheme in place offers protection to both landlords and tenants.
1. For landlords
The major benefit for landlords making use of a rent deposit scheme is the use of an alternate dispute resolution service (ADR). Every government-backed scheme provides an impartial, independent adjudication at the end of a tenancy. The reason this is beneficial to landlords is that it helps to diffuse situations where landlords and tenants dispute over any deductions taken from deposits.
An Adjudicator will make an overall decision based on the evidence presented by both parties. For landlords, this includes a property inventory and schedule of condition — dated photography is vital to providing proof of the property’s condition at the start and end of the tenancy.
2. For tenants
For tenants moving into a new property, tenancy deposit protection schemes provide additional security and peace of mind that their money is in safe hands. Using such schemes are a cheaper, faster and fairer way of settling disputes over the return of deposits.
As well as being a useful resource for landlords, the ADR services of a rent deposit scheme are also designed to help tenants settle disputes. Tenants who have kept their property in good condition can rest easy knowing that an independent adjudicator should come to the same conclusion based on evidence provided from both parties. This protects a tenant’s deposits from being withheld by landlords on spurious grounds — a common complaint made by tenants before the introduction of deposit protection schemes.
Choosing a deposit scheme
For landlords, there are two avenues you can pursue when choosing a deposit scheme:
1. Custodial schemes
In this situation, landlords will hand over a deposit in its entirety to the scheme for the duration of the tenancy. Once a tenancy has reached its end, the administrator will then refund the full deposit — or the agreed-upon amount in the case of a dispute — to the tenant in the form of a cheque or bank transfer.
Any disagreements between landlords and tenants about deductions will be handled by the scheme’s ADR. Once a final decision has been made, the remaining deposit will be returned directly to the tenant.
The Deposit Protection Service will protect deposits in this way free of charge.
2. Insurance-based schemes
If a landlord decides to choose an insurance-based scheme, however, they will hold onto the tenant’s deposit during the duration of the tenancy. This money cannot be used to cover a landlord’s expenses as it legally belongs to the tenant.
Any disputes at the end of a tenancy results in the landlord handing over the deposit to a scheme’s administrator until the matter is resolved. Using an insurance-based scheme includes a fee for landlords, the amount varying with the scheme.
In England and Wales, there are three government-backed schemes to choose from. Landlords can register a tenant’s deposit with:
Deposit scheme penalties
Tenancy deposit protection law is designed to protect both landlords and tenants in the fairest possible way. If private landlords don’t follow these rules, they risk facing compensation claims and restricted eviction rights.
A court can order a landlord to pay their tenant compensation if they:
Fail to protect a tenant’s deposit by not using a government-backed scheme
Don’t provide tenants with the required information on the scheme in use
Take too long to protect a deposit or provide the necessary information to a tenant
If a court were to order a landlord to repay a tenant — either the amount of their deposit or additional funds in compensation — they will take into account the circumstances of the individual case. They may also impose stricter penalties on a professional landlord or letting agent as they should be fully aware of the law.
If you're a landlord, it's vital that you protect yourself and your tenants, not just with a legitimate deposit protection scheme, but also with landlord insurance. At Swinton, we can provide you with a comprehensive plan tailored to your needs. Visit our Landlord Insurance page to learn more.