Have you protected your tenant’s deposit in a licensed government scheme?

At the start of a tenancy landlords and agents often take a deposit from tenants as security against potential breaches of the tenancy agreement by tenants, for example, damage caused to the property which is beyond normal ‘wear and tear’.

Although some landlords choose not to take a deposit, it is generally considered a good idea to do so as it gives the tenant an incentive to look after the property. Landlords and agents should however be aware of their legal obligations when taking a deposit from their tenants. Most importantly, it is vital that your tenant’s deposit is protected within a licensed government scheme in order to remain compliant.

 

Your legal obligations as a landlord

In April 2007 the government introduced tenancy deposit protection legislation to improve standards within the property industry. Landlords or agents taking a deposit from their tenants must protect it within a government authorised scheme if they are renting out a property on an Assured Shorthold Tenancy (AST) that started after 6 April 2007.

The legislation aims to not only protect the tenant’s deposit, but also ensures that, should all the terms of their tenancy agreement be met at the end of the tenancy, their deposit is returned to them. For landlords, the legislation provides peace of mind that deductions can be made to compensate the landlord for losses they have suffered in the event that the tenant has breached the terms of the tenancy agreement.

It is a legal requirement for landlords and letting agents who take a deposit from their tenant on an AST in England and Wales to;

  1. Protect the tenant’s deposit in one of the three government authorised schemes – Hamilton Fraser is the parent company to mydeposits, one such scheme
  2. Provide tenant(s) with the correct prescribed information

Both actions must be completed within 30 calendar days of receiving the deposit from the tenant.

The deposit protection schemes in England and Wales are:

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How can you protect your tenant’s deposit?

Across the market there are two main ways to protect your tenant’s deposit – ‘custodial’ or ‘insurance’ deposit protection. mydeposits operates both a custodial and insurance based deposit protection scheme.

Custodial deposit protection

The deposit is held by the chosen scheme e.g. mydeposits rather than the landlord or agent
The deposit is held for the duration of the tenancy by the scheme in a secure UK bank account
The deposit is released by the scheme back to the tenant (taking into account any deductions made due to breach of the tenancy agreement)
Ideal for landlords with low value deposits

Insurance deposit protection

The deposit is held by the landlord or agent rather than the chosen scheme
A small deposit protection fee is taken to legally protect each deposit
The deposit must be held in a segregated client account by the landlord or agent
The landlord or agent is able to release the deposit back to the tenant at the end of the tenancy
Ideal for landlords with high value deposits

What does a deposit cover?

At the end of the tenancy, depending on how the tenant’s deposit was protected, either the landlord, agent or deposit protection scheme will hand the deposit back to the tenant. In some instances proposed deductions may be made to the tenant’s deposit if they have breached the tenancy agreement. This could include, but is not exclusive to;

  • Damage to the property (this does NOT include fair wear and tear)
  • Cleaning issues at the end of the tenancy
  • Failure to pay rent

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What happens if my tenant raises a dispute?

Protecting your tenant’s deposit correctly also ensures both you and your tenant are supported by a third party when it comes to returning the deposit at the end of the tenancy. For example, if a tenant has breached the tenancy agreement by causing damage to the property that needs to be rectified, the landlord may consider withholding all or part of the deposit to compensate for the damage and cover the cost of rectifying it.

Tenants can raise a dispute with the scheme their deposit was protected by if they feel that their deposit was unfairly withheld at the end of the tenancy.

In scenarios like this, deposit protection schemes provide alternative dispute resolution to help mediate and resolve disputes over deposit returns.

This is beneficial for both landlords and tenants as it allows an independent, evidence based assessment of the deposit allocation to ensure a fair outcome for both parties. It also helps landlords and tenants avoid costly court fees and mitigates against further issues occurring.

Despite this system being in place if required, mydeposits report that only one per cent of deposit protections actually end in dispute.

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Regional landlords – your obligations

If you are a landlord in Scotland, Northern Ireland or Jersey you are still required by law to protect your tenant’s deposit in an authorised scheme specific to that region.

The deposit protection schemes in Scotland are:

The deposit protection schemes in Northern Ireland are:

There is only one provider of deposit protection within Jersey:

 

Read more about your obligations as a landlord in our comprehensive landlord legislation guide.

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