Deposit Protection: Safeguarding Rental Deposits and Avoiding Disputes
by Property Investments UKThe Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
Most landlords will require a deposit when letting a property. If they do this deposit needs to be protected by an approved tenancy deposit protection scheme. Here’s how deposit protection schemes work, and how they can safeguard a rental deposit and help to avoid disputes.
- Why Do You Need a Deposit?
- How Much Can a Rental Deposit Be?
- The Problem with Deposits in the Past
- How Tenant Deposit Protection Works
- Safeguarding Rental Deposits – Custodial and Insured Schemes
- What Happens to Deposits at the End of a Tenancy?
- Holding Deposits
- How Dispute Resolution Schemes Work
- Tenancy Deposit Scheme Providers
- What Happens if Landlords Don’t Use Deposit Protection?
- What the Renters (Reform) Bill Says about Deposit Protection
Why Do You Need a Deposit?
When you let a property it’s highly advisable to take a deposit from your tenant. You do not have to take a deposit, however.
The purpose of a rental deposit is twofold: It covers the cost of any damage (or at least part of it) that the tenant does to the property. It can also be used to contribute to the cost of any rent arrears that the tenant might incur.
How Much Can a Rental Deposit Be?
In England, the maximum amount a landlord can ask for as a tenancy deposit is a sum no greater than five weeks’ rent. For example, if the weekly rent on a flat is £300 the maximum tenancy deposit will be £1,500.
If the annual rent is more than £50,000 six weeks’ rent can be required as a deposit.
Although landlords can request a larger deposit for those who have pets it cannot be greater than the five-week maximum.
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The Problem with Deposits in the Past
In the past tenants’ deposits were paid directly to the landlord who held them throughout the period of the tenancy. The landlord was required to refund the deposit at the end of the tenancy but was not required to save or protect it in any way. The landlord was also entitled to decide for themselves how much could be deducted from a deposit at the end of a tenancy for damages etc., and how much should be refunded.
This led to problems and disputes in some cases, where landlords and tenants disagreed about the amount of any deductions. There were also problems where the landlord claimed to be unable to repay the deposit, or even could not be traced.
As a result, as of April 2007, the government introduced a tenancy deposit scheme or TDS which legally requires all rental deposits taken as part of assured shorthold tenancies to be protected. Landlords or letting agents taking deposits from tenants on ASTs must put their deposit into an approved tenancy deposit protection scheme or TDP scheme for short.
The purpose of TDP schemes is to ensure that tenants can get their deposit back at the end of their tenancy, less any valid deductions, and to resolve any disputes regarding refunds.
Deposits do not need to be protected if the tenancy is an assured tenancy or a protected tenancy, nor if the lodgers or tenants are in student halls.
How Tenant Deposit Protection Works
When a landlord or letting agent takes a deposit from a tenant they must protect it in an approved tenancy deposit scheme (details in the next section).
Landlords must provide the tenant with certain prescribed information within 30 days:
- The address of the rented property.
- The amount of deposit that has been paid.
- How the deposit is protected including the name and contact details of the relevant tenancy deposit protection (TDP) scheme and its dispute resolution service.
- The landlord or letting agency’s name and contact details.
- The name and contact details of any third party that may have paid the deposit (eg. a relative or friend).
- The circumstances under which they can keep some or all of the deposit.
- The method by which the tenant can go about applying for a refund of the deposit.
- What to do if the tenant cannot contact the landlord at the end of the tenancy.
- What to do if there’s a dispute over the deposit.
Safeguarding Rental Deposits – Custodial and Insured Schemes
Rental deposits can be safeguarded within a TDP scheme in either of two ways:
Custodial schemes: With a custodial scheme the landlord receives the deposit from the tenant and then pays it over to the scheme which holds it until the end of the tenancy. These schemes are normally free of charge.
Insurance schemes: With an insurance-backed scheme the landlord keeps hold of the deposit. However, it is insurance backed by the TDP service for which a fee is payable. This insurance pays back the deposit if the landlord is unable or unwilling to do so.
What Happens to Deposits at the End of a Tenancy?
At the end of a tenancy, the landlord and tenant must agree on how much of the deposit is going to be refunded, whether it is all or just some of it. Once this has been agreed this amount must be refunded either directly by the landlord or through the TDP scheme within 10 days.
If there is a dispute then the deposit will be protected by the TDP scheme until the dispute is resolved.
The TDP scheme will ensure that the tenant gets their deposit back if they have no rent arrears, have not damaged the property and have abided by the terms of the tenancy.
Landlords are permitted to take money from a deposit for unpaid rent, unpaid bills, damaged or missing items or necessary cleaning of the property.
A holding deposit is a deposit that a landlord or agent takes in order to reserve a property for a tenant. A landlord or agent does not have to take a holding deposit, but they can if they wish to do so. Holding deposits are generally refundable if they do not lead to a tenancy but there are some circumstances in which a landlord can keep a holding deposit.
A holding deposit can only be up to the value of one week’s rent.
Holding deposits are not tenancy deposits. They are not protected in any way.
A holding deposit can be used as part of the tenancy deposit when the tenancy is signed and then it must be protected.
How Dispute Resolution Schemes Work
If there is a dispute over a deposit refund – for example if the parties disagree about how much of the deposit should be returned – each deposit protection scheme offers a dispute resolution service or similar. These dispute resolution services are free of charge.
It is not mandatory to use these dispute resolution services for every dispute but if one party requests to use it the other party must agree.
Both parties are asked to provide evidence and then the scheme makes a decision. Their decision on deposit refunds is final.
Tenancy Deposit Scheme Providers
There are three tenancy deposit schemes available to landlords and tenants:
Tenancy Deposit Scheme
The Tenancy Deposit Scheme (TDS) is a government-approved, not-for-profit tenancy deposit protection scheme in England and Wales operated by The Dispute Service Ltd.
Tenancy Deposit Scheme offers both free custodial protection (where they hold the deposit) and insured protection (where the landlord holds the deposit). It provides free, impartial end-of-tenancy dispute resolution plus mid-tenancy conciliation and mediation services.
Deposit Protection Service
The Deposit Protection Service (DPS) offers free custodial deposit protection or insured protection for a fee. It offers a free dispute resolution service.
MyDeposits is part of the HFIS Group. HFIS is a group of specialist insurance and regulatory brands for the private rented sector. They also offer two types of deposit protection, insured and custodial. MyDeposits also offers access to its own adjudication service.
What Happens if Landlords Don’t Use Deposit Protection?
It is a legal requirement under the Housing Act 2004 that landlords protect any deposits they take under an assured shorthold tenancy using an approved deposit protection scheme.
If landlords do not properly protect a tenant’s deposit or do not provide them with the prescribed information about it, the tenant may be able to bring a claim against them in the County Court. If the court finds that the landlord has not protected the deposit it can order them to either repay the deposit to the tenant or protect it using an approved scheme within 14 days. The court can also order the landlord to pay the tenant up to three times the deposit as compensation.
Very importantly, if a landlord has not properly protected the deposit it may make it difficult to evict a tenant. They may not be able to use a Section 21 eviction notice. A court may also decide that a tenant will not have to leave the property when the tenancy ends if the landlord has not used a TDP scheme when they should have.
What the Renters (Reform) Bill Says about Deposit Protection
The Renters (Reform) Bill, which the government published in May 2023, proposes a major overhaul of landlord and tenant law in England. The Bill proposes some significant changes to tenancies in that assured shorthold tenancies will be abolished, but it does not propose any changes to the requirement to protect rental deposits.
The information in this article applies to England. Tenancy law is different in Wales but there is still a requirement for tenancy deposits. There are separate tenancy deposit protection arrangements for Northern Ireland and Scotland.