The deposit is separate from the rent and is fully refundable to the tenant at the end of tenancy (minus the cost of any rent arrears and/or damage to the property). In assessing the cost of any damage, the landlord has to take into account fair wear and tear before they can make a deduction from a deposit. It is unlikely that the landlord will receive the property back in the same condition as it was at the beginning of the tenancy and is unrealistic for a landlord to expect this.
It’s important to set out clear guidelines within the tenancy agreement at the beginning of the tenancy setting out the circumstances which would lead to part or all of the deposit being withheld. Similarly any claim for a deduction from the deposit made by the landlord should be backed up with clear evidence in the form of invoices and/receipts.
The amount of deposit charged can vary and depends on how much “risk” the landlord feels that they need to cover. A large deposit may deter future tenants however it may also attract a better class of tenant. A typical sum to be charged as a deposit is two months rental. It is important not to set the deposit at too high a level as this may be regarded as a “premium” and if the deposit is regarded as a premium , the tenant will automatically have the right to give the tenancy to someone else or to sublet.
Deposits can also act as an incentive for tenants to look after the property and ensure that it is cleaned and cleared at the end of the tenancy and may mean that the tenant is less likely to abandon the property and more likely to terminate the tenancy correctly.
Tenancy Deposit Schemes
Deposits have been the cause of many disputes over the years as unscrupulous landlords refused to repay the deposit to the tenants at the end of their tenancy. In response to this legislation was introduced under the Housing Act 2004 to protect the tenants deposit paid under an assured short hold tenancy from 6 April 2007 (“the Legislation”).
Under the Legislation the following requirements were introduced:
- From the moment it is received, deposit must be held within an authorised scheme.
- The schemes initial requirements must be complied with by the landlord within 14 days of the landlord receiving the deposit
- Within 14 days of receiving the tenant’s deposit the landlord must provide a statement to the tenant giving full details of the Tenancy Deposit Scheme being used (the statement must be in the form prescribed by the Legislation).
The Legislation introduced two types of scheme:
- Custodial (where the deposit is held by the scheme)
- Insurance based (where the deposit remains with the landlord and the landlord takes out an insurance to cover the deposit)
Custodial Scheme -The custodial scheme is free to use as the recoups their costs by using the interest raised by the scheme on the funds held within the scheme. The custodial scheme tends to be used by smaller landlords, although it is open to all landlords and letting agents. If a landlord is resident or registered abroad this is the only type of scheme that they can use.
Insurance Schemes - Under the insurance scheme the landlord pays an insurance premium to join the scheme. If the landlord does not repay the deposit either in part or in whole, the scheme repays the money to the tenant directly and recovers the money from the landlord. Under insurance based schemes, the return of the deposit to the tenant is often quicker because the tenant will receive the deposit directly from the landlord and they will not have to wait for the tenancy deposit scheme to refund the money.
It is the landlord’s decision as to which scheme is used.
Each scheme has an alternative dispute resolution (ADR) service to resolve any disputes which may have arisen between the landlord and the tenant. The use of the ADR service is not compulsory and both landlord and tenants still have the option of going to court rather than using the ADR service, but cannot do both.
Penalties for not using a Tenancy Deposit Scheme
If a Tenancy Deposit Scheme is not used by the landlord to protect the tenant’s deposit, the tenant may seek recourse through the courts requiring the landlord to either pay the deposit into one of the Tenancy Deposit Schemes or to return it to the tenant. As well as requiring the landlord to pay the deposit into a Tenancy Deposit Scheme, the court may also order the landlord to pay the tenant a sum equivalent to three times the amount of the deposit. A further penalty is that the landlord will be excluded from using the ‘Accelerated Possession Procedure’ under Section 21 of the Housing Act 1988.
Current Tenancy Deposit Schemes:
The current Tenancy Deposit Schemes that are available are:
- The Deposit Protection Service (a custodial scheme)
- The Dispute Service (an insurance-based scheme)
- Mydeposits (an insurance-based scheme)
A “Relevant Person” is a third party who pays a deposit on behalf the tenant. Examples of a Relevant Person may be, in the case of a student letting, a parent, where the parent may have paid the deposit, or a local authority, where the local authority provides a deposit rather than a guarantee.
Under the Legislation the landlord must provide a statement giving details of the Tenancy Deposit Scheme being used as well as a copy of the tenancy agreement to the Relevant Person.
The “Lead Tenant” system is used where there is more than one person that has an interest in the deposit. This could be a situation where there is more than one tenant sharing or may be parents of students or local authorities providing that deposit. In setting up the Lead Tenant system all the interested parties need to agree which of them will become the Lead Tenant. Under the Lead Tenant system, the Lead Tenant will be the person who has the authority to deal with the deposit at the end of the tenancy on behalf of all the interested parties. The Lead Tenant system is used by The Deposit Protection Scheme and the Mydeposits Scheme.
Bond Guarantee Schemes
Bond Guarantee Schemes are schemes where the need for cash deposit is replaced by a guarantee to the landlord to cover the cost of any damage to the property and/or rent arrears. If the landlord wishes to make a claim they can do so via the bond bank. Bond Guarantee Schemes are generally only available to certain “vulnerable groups” such as those with mental health issues, those on benefits or those newly released from prison.
Bond Guarantee Schemes provide:
- A guarantee against cost of damage to the property
- A guarantee against lost through rent arrears,
- Assistance in getting housing benefit claims processed quickly
Help finding tenants (in certain circumstances)