When renting a property out, it’s important to take a deposit from a tenant to ensure that any damage at the end of the tenancy is covered. However, taking a deposit comes with a raft of legislation aimed at protecting the tenant and so you need to ensure you are legally compliant.
Landlords with tenants on Assured Shorthhold Tenancies (ASTs) are required to protect a tenant’s deposit with one of three government approved schemes; the TDS, My Deposits, the DPS or the new alternatives now available on the market. A tenant must also be issued with paperwork related to their deposit protection, known as Prescribed Information (specified legal wording). This must all be done within 30 days of receiving the deposit, and not just from the start of the tenancy. So if you receive the deposit 10 days earlier than the tenancy start date, you must make sure you protect it within 20 days of the tenancy start date (best to do it right away!). If you are resident landlord, otherwise known as a live-in landlord, and share accommodation with your tenants, you are not required to protect a deposit.
Failure to protect tenant deposit
If you do not protect the deposit (at all or within the 30 day limit), or serve the Prescribed Information, you will be liable to not only repay the deposit back to the tenant, but between 1-3 times the deposit amount on top of that. So if failed to protect a deposit of £1000, you could end up paying out £3000. And more bad news, you will also be unable to serve a Section 21 notice if you need possession of the property. If you have protected the deposit later than the 30 day period, you will still not be able to serve a Section 21 notice. If you haven’t protected your tenant’s deposit at all, or late, your best option is to return the full deposit and then serve a Section 21 if required. If you do return a deposit for failing to protect it, ensure everything is in writing and signed by your tenants so they cannot dispute the money has been returned to them.
If you and your tenants decide they will stay on after the fixed term, you may have to re-protect the deposit- it will depend on the scheme you use so always check with them if unsure. However, you will not be required to re-serve the Prescribed Information, thanks to the Deregulation Act. If the tenancy runs into a Statutory Periodic Tenancy (SPT), you will only need to let the deposit scheme know so they can change the status- again, you will not have to re-serve any paperwork. Be aware, these rules only apply if nothing changes on the tenancy, if you have a change of tenants then you should re-protect the deposit.
The Deregulation Act has also made it clear that deposits taken before 6 April 2007 don’t need to be protected unless the tenancy became a statutory periodic after 6 April 2007. However, if a landlord whose tenancies started before 6 April 2007 wants to regain possession of their property by issuing a Section 21 notice, they will have to first protect any deposit and send the tenant the Prescribed Information, but they no longer risk a fine for late protection.
If you have a managing agent, you must remember that you, as the landlord and owner of the property, are still solely responsible for any fines due to failing to protect the deposit correctly. You must make sure your managing agent has protected the deposit and served the Prescribed Information otherwise the tenant will have to make the claim against you, even though it was the agent’s fault. You can subsequently sue your managing agent for failing in their due diligence to you, but that’s a lengthy process and by making simple checks early on, you can avoid that scenario entirely.
Here are our top tips;
1: Protect it (and quickly!)
This is a legal obligation and must be done within 30 days of the payment of the deposit, not the start of the tenancy,
You can register the deposit with a custodial scheme, which will hold the cash on your behalf until the end of the tenancy, but if you want to keep the cash in your own account you’ll need to register it with an insurance-backed scheme.
Once protected, you must issue your tenant with all the correct paperwork telling them where and how the deposit is protected.
2: Invest it (wisely)
It’s best to open a separate bank or building society account for your tenant’s deposit so that you don’t muddle it with your own funds and spend some of it, accidentally or intentionally.
You won’t get rich on the interest earned, not while interest rates are so low, but your earnings over the year might at least cover the cost of registering the deposit.
Look at current accounts as well as savings accounts as some offer better rates of interest, although check the terms and conditions first.
If you haven’t already got a cash ISA, it might be worth putting the deposit into one of these as any interest you earn will be tax-free, although some pay less interest than regular savings accounts so you need to do the maths.
Wherever you invest the money, make sure you’ll be able to withdraw the whole amount without any financial penalties at the end of the minimum period of the tenancy – which might be only six months if there’s a break clause in the contract - or with a month’s notice if the tenant is on a periodic contract.
3: Return it (swiftly)
The deposit must be returned to the tenant, minus deductions for any unpaid rent, loss or damage to property, after the end of the tenancy. Technically speaking, the onus is on the tenant to request the refund but it’s best practice to repay the deposit within 10 days of the end of the tenancy, after final inventory checks have been carried out.
Deducting money from the deposit can lead to disputes with the tenant and if these can’t be resolved the tenant has the right to complain to the tenancy protection scheme, which will ask you to hand over the disputed amount until its adjudicators have resolved the matter.
To try to avoid a dispute, write to your tenants at least a couple of weeks before the end of the tenancy with a gentle reminder of everything they need to do to ensure they get all their money back.
As most deposit disputes occur over the cleanliness of a property it’s best to specify in the tenancy agreement whether you expect it to be cleaned to a professional, ‘good domestic’ or simply ‘domestic’ standard. Remember to take into account fair wear and tear. Having an inventory and check-in and check-out reports should also help to avoid any arguments over the deposit.
Finally, once you’ve refunded the deposit, don’t forget to unprotect it with the scheme by simply notifying them that the tenancy has ended.
Inventories compare the state of the property when tenants move in (check in) to when they leave the property (check out). The inventory is only concerned with the comparison between the two dates – if the property was in disrepair before the tenants moved in, and if it’s still in disrepair when the tenants leave – no deposit should be deducted. Inventories are so important when taking a deposit, in fact, you may as well not take a deposit if you’re not going to get a professional, third party inventory carried out.
The Tenancy Deposit Dispute Service is a free service that’s available if there is any deposit dispute. The key point here is proof of the offence. Evidence taken into account is: legality of the tenancy agreement, the inventory, photographic evidence, invoices/ receipts, cleaning charges, account statements and utility bills/ charges.
As you’ve read, it is extremely important to be legally compliant when taking a deposit from a tenant. If you’re unsure of following the deposit protection steps yourself, Upad can register your deposit as part of the Tenant Sign-Up service, ensuring you are protected and compliant.