Deposit protection schemes

If you are renting out your property in England or Wales and decide to take a deposit from the tenant, you must check the requirements for protecting the deposit.

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The deposit

When you rent out a residential property you are able to ask the tenant for a deposit to hold during the term of the tenancy to cover any non-payment of rent, cleaning, damage or breakages that may occur during the tenancy.

You can decide on the level of the deposit but it is usual to ask for one month’s rent in advance.

In England & Wales, deposits taken by landlords of assured shorthold (AST) tenants (with rent under £25,000 per year) must comply with the tenancy deposit protection scheme.

Tenancy Deposit Scheme

If you grant an AST then the deposit must be protected in an approved scheme.

The government backed schemes are:

The scheme protects the deposit and helps with any disputes for its return to the tenant at the end of the tenancy and the Alternative Dispute Resolution service is free of charge.

A deposit does not need to be protected if you are granting a lodger agreement.

There are 2 types of schemes to protect the deposit – a custodial tenancy deposit scheme and an insurance deposit scheme and the landlord decides which scheme to use not the tenant.

Insurance tenancy deposit schemes

The landlord keeps the deposit but it is secured by paying a fee and insurance premiums to the scheme.  Theses premiums will be used to pay the tenant if you do not use the deposit correctly.

Custodial tenancy deposit schemes

The landlord pays the deposit into the scheme within 30 days of receiving it from the tenant

The deposit is held by the scheme until the tenancy comes to an end when the deposit (or the remaining balance) is returned to the tenant.

What if the landlord does not comply?

A landlord must provide a tenant with prescribed information about the scheme within 30 days from receiving the deposit.

If a landlord fails to join a tenancy deposit scheme and protect the tenant's deposit they may be liable for certain penalties. If a court is not satisfied that the deposit is adequately protected, it can order a penalty for a fine of 1 to 3 times the amount of the deposit. As a result, the landlord may be unable to obtain possession of the property (ie use a Section 21 (Form 6A) notice if the property is located in England or a Section 21 notice for Wales if the property is located in Wales).

Renewing the fixed-term tenancy

If a fixed term tenancy is renewed or there is a change in the tenancy terms, then the deposit may need to be re-protected as it is essentially treated as a new tenancy under the legislation. The landlord should check the scheme rules applicable to the scheme that is protecting the deposit. These can usually be found on their website. Some schemes such as the Deposit Protection Service close the deposit on the tenancy end date if they are not advised of an end-of-tenancy intention to renew.

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