Customisable business insurance
It is likely that anyone who has ever rented a property will know about deposits, and for property owners up and down the country, taking a deposit from a tenant is an important part of securing your investment and protecting your property against damage.
Who has to pay a deposit?
There is no legal requirement for a landlord to take a deposit at the start of a tenancy, however, as a landlord in the UK, you are entitled to request a deposit from tenants before they move into your property and most landlords will do so.
There are, generally speaking, two kinds of deposit that a tenant may pay before beginning their tenancy:
- Holding deposit – this is paid by a prospective tenant in order to hold the property for them, before they’ve signed a tenancy agreement. By taking the deposit, you as the landlord agree to take the property off the market and go on to let the property to the tenant. This type of deposit does not have to be held in a deposit protection scheme.
- Security deposit – This deposit is to cover the potential cost of damage to the property by the tenant, unpaid bills at the end of the tenancy and rent arrears. This type of deposit must be put into, or insured by, a deposit protection scheme by law.
If you take a holding deposit from a tenant to guarantee them the property, then you should either promptly return the deposit once the tenancy agreement is signed, or deduct it from the amount being asked for the security deposit.
Deposit protection schemes in the UK
The majority of private residential lets in the UK are of a type known as an ‘assured shorthold tenancy’ or AST, and by law, any security deposit taken from a tenant for an AST must be placed in, or insured by, a tenancy deposit protection (TDP) scheme within 30 days of receiving the money.
Exactly which TDP scheme you use will depend on where in the UK your property is located.
England and Wales
In both England and Wales, there are three authorised schemes to choose from:
Similarly, in Scotland there are three authorised deposit schemes, which are:
Finally, in Northern Ireland, there are another three schemes which are specific to the country:
It is up to you as the landlord to choose which protection scheme you wish to use, but you must choose one of the authorised ones in order to comply with the law.
‘Custodial’ vs ‘insured’ schemes
With each TDP scheme in the UK, you have the option to choose either a ‘custodial’ or ‘insured’ scheme to protect the tenant’s money.
- Custodial – this is where you, the landlord, hands over the deposit to the protection scheme who holds it for you for free.
- Insured – you keep hold of the money and pay the protection scheme to insure its value. This will usually cost between £15 and £30 per deposit, depending on the sum of money being insured.
There are benefits and drawbacks to each type of scheme and you will have to choose whether you value keeping hold of the money yourself enough to pay the cost of insuring it. You must, however, choose one of the two types and cannot keep hold of the deposit without insuring it.
How much should a landlord charge for a deposit?
Under the terms of the Tenant Fees Act 2019, deposits in England are limited to the equivalent of:
- 1 week’s rent for a holding deposit
- 5 weeks’ rent for a security deposit (for annual rent up to £50,000)
- 6 weeks’ rent for a security deposit (for annual rent above £50,000)
It is not permitted to request a deposit from your tenants beyond these limits and while these are the maximum permitted size of deposits, a standard size is often the equivalent of one month's rent.
Returning a deposit
Once a tenancy ends, you must return a tenant’s deposit in a timely manner. For insured protection schemes where you have held the money from a deposit yourself, you must return the deposit within 10 days.
For custodial schemes where the money is held by the deposit protection agency, the landlord and tenant must agree on how much of the deposit is to be returned and inform the scheme administrator. When the amount to be returned has been agreed (and this can be anywhere from 0% to 100% of the deposit), the TDP scheme will usually release the funds back to the tenant within two days.
What reasons are there for deducting money from a deposit?
In order to deduct money from a tenant’s deposit, the onus is on the landlord to prove that a deduction is necessary and justified. Circumstances in which a deduction is justified include when:
- Rent is left unpaid at the end of the tenancy
- Bills are left unpaid
- The landlord’s contents have been stolen or damaged by the tenant
- The property itself has been directly damaged by the tenant
- The tenant has left items in the property and not arranged for them to be picked up
- The property has become damaged due to negligence by the tenant
You cannot deduct money from a deposit for general deterioration of the decor or furnishings over time, as this is known as ‘fair wear and tear’. If the wear and tear is excessive and caused by the tenant being negligent (such as leaving a window wide open during a storm causing water damage to the carpets), then you are entitled to deduct the cost of repair from the deposit.
What happens in the event of a dispute?
If, as a landlord, you cannot agree with the tenant on the cost of any damage or cleaning that you intend to deduct from the deposit, then each TDP scheme has a free dispute resolution service who will help both sides reach an agreement.
If you do not wish to use the dispute resolution service, then your tenant has the right to make a claim against you in a county court (otherwise known as ‘small claims court’). You have a right to make a counterclaim if you believe that the tenant's demands are unreasonable.
The Renters Reform Bill and lifetime deposits
The UK government first announced in the Queen’s Speech in April 2019 that it would bring forward a Renters Reform Bill which would include some dramatic changes to the way in which the private rental sector operates. The aspect that grabbed the most headlines involved the proposed abolition of Section 21 of the Housing Act and the end of so-called ‘no-fault evictions’.
However, another important element of the proposed bill is the establishment of ‘lifetime deposits’. Under this proposed scheme, tenants would only put a deposit down when they move into their first rented home, and that deposit (assuming there are no deductions from it for damages) moves with them from rental property to rental property. It would be secured by a deposit protection scheme throughout its lifetime and would remove the need for renters to raise the additional money to pay a new deposit for their next home before their previous deposit had been returned.
While these proposed reforms have been on the table since 2019, at the time of publication the government has yet to publish a detailed white paper, outlining exactly how the law would work. However, details are expected to be published in spring 2022.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.