Most landlords nowadays will take a ‘damage deposit’ from tenants to hold for the duration of the tenancy. When the tenant moves out this is returned to the tenant less any deductions for ‘damage’.
However, there have been many problems with deposits, including some landlords unreasonably withholding them from tenants on a regular basis. This has resulted in the imposition of a statutory scheme under the Housing Act 2004 which is effective from April 2007.
1 Requiring a deposit
A deposit may be required from the tenant before moving into the property. Many landlords feel the holding of a deposit decreases the chances of abandonment, by acting as an incentive for the tenant to terminate the agreement correctly. It also gives security in case the tenant leaves the property owing rent or to pay for any damage or unpaid household bills at the end of the tenancy.
The amount should be negotiated with the tenant. However, if a deposit of more than two months rent is required, it could be regarded as a premium that may give the tenant a right to give the tenancy to someone else or sublet.
Note that the holding of a deposit in many cases is of limited value as tenants regularly leave without paying the final months rent, on the basis that this should be offset against the deposit held.
2 Tenancy deposit protection schemes
The Housing Act 2004 requires a landlord who has received a deposit after 6th April 2007 to protect the deposit with an authorised scheme and supply the tenant with a prescribed form within 14 days.
The legislation only applies to assured ‘shorthold’ tenancies. The legislation will also apply if you renew a tenancy (grant a new fixed term tenancy to the same tenants) after the 6th April 2007, even if you received the deposit before this date for the previous tenancy. If a landlord allows a tenancy that started before 6th April 2007 to roll on, on a statutory periodic tenancy then the legislation does not apply to the tenancy.
The legislation does not require a landlord to take a deposit, it simply places requirements on a landlord should he choose to take a deposit.
A landlord may only take money as a deposit under the legislation.
There are two types of tenancy deposit scheme, custodial and insurance based. The main difference between the two is that the custodial scheme is free of charge to use but the deposit must be passed to the scheme administrator to hold for the duration of the tenancy.
The insurance based schemes allow a landlord to retain the deposit in their own separate bank account but only whilst there is no dispute. If a dispute over the deposit arises, the deposit must be transferred to the insurance scheme administrator. The landlord must pay to use an insurance based scheme.
It is for the landlord to choose which scheme to use and there are three authorised schemes for a landlord to choose from:
The Deposit Protection Service (custodial scheme).
According to research carried out by the Guild of Residential Landlords, this is the most popular scheme. The Custodial Scheme is free of charge to use and the landlord / tenant receives interest, but the deposit must be transferred to the scheme administrator who will hold the deposit for the duration of the tenancy. The scheme have provided a special clause that should be inserted into your tenancy agreement. Click here for contact details Tenancy Deposit Schemes.
Tenancy Deposit Solutions (insurance based scheme)
One of the insurance based schemes priced towards private landlords on a pay as you go option, which allows you to retain the deposit for the duration of the tenancy but you must pay to use the scheme. A clause in your tenancy agreement may be required. Click here for contact details Tenancy Deposit Schemes.
Tenancy Deposit Scheme (insurance based scheme)
The other insurance based option, priced towards letting agents and allows agents to retain deposits on a per office basis which means they pay per office rather than per property. Similar options are also available for large corporate landlords. Click here for contact details Tenancy Deposit Schemes.
You will need to register with the appropriate scheme, of which all three can be done on-line, although the latter option (Tenancy Deposit Scheme) requires you to go through an application process and you may have to wait for a decision before they will allow you to be a member.
When you receive a deposit, you must register the tenancy with the appropriate scheme and transfer the deposit money (custodial scheme) or pay the insurance premium (insurance based scheme) within 14 days of receiving the deposit.
Prescribed information
Along with protecting the deposit, a landlord must also supply a prescribed form (or a form substantially to the same effect) to the tenant within 14 days. The prescribed form is called a section 213 notice (because it is a notice required by section 213 Housing Act 2004) or a deposit information certificate.
The form is probably best served at the same time as signing the tenancy agreement because the tenant must be “given the opportunity to sign” the certificate contained within the prescribed form. The landlord must sign the certificate within the form. (This is not the certificate provided by the scheme administrator about the deposit, it is a different certificate.)
The information required within the prescribed form is contained in The Housing (Tenancy Deposits) (Prescribed Information) Order 2007 and it must contain a certificate signed by the landlord with specific wording (See below).
The prescribed information required is as follows:
• The name, address, telephone number, e-mail address and any fax number of the scheme administrator of the authorised tenancy deposit scheme applying to the deposit;
• Any information contained in a leaflet supplied by the scheme administrator to the landlord which explains the operation of the provisions contained in sections
212 to 215 of, and Schedule 10 to, the Act;
• The procedures that apply under the scheme by which an amount in respect of a deposit may be paid or repaid to the tenant at the end of the shorthold tenancy (“the tenancy”);
• The procedures that apply under the scheme where either the landlord or the tenant is not contactable at the end of the tenancy;
• The procedures that apply under the scheme where the landlord and the tenant dispute the amount to be paid or repaid to the tenant in respect of the deposit;
• The facilities available under the scheme for enabling a dispute relating to the deposit to be resolved without recourse to litigation; and
• The following information in connection with the tenancy in respect of which the deposit has
been paid-
i; the amount of the deposit paid;
ii. the address of the property to which the tenancy relates;
iii. the name, address, telephone number, and any e-mail address or fax number of the landlord;
iv. the name, address, telephone number, and any e-mail address or fax number of the tenant, including such details that should be used by the landlord or scheme administrator for the purpose of contacting the tenant at the end of the tenancy;
v. the name, address, telephone number and any e-mail address or fax number of any relevant person;
vi. the circumstances when all or part of the deposit may be retained by the landlord, by reference to the terms of the tenancy; and
vii. confirmation (in the form of a certificate signed by the landlord) that-
• The information he provides under this sub-paragraph is accurate to the best of his knowledge and belief; and
• He has given the tenant the opportunity to sign any document containing the information provided by the landlord under this article by way of confirmation that the information is accurate to the best of his knowledge and belief.
Disputes
Both schemes offer a free to use alternative dispute resolution (ADR) service, however the ADR is not compulsory on either party and in more complicated cases it might be wise to consider using courts instead. In particular because there is no appeal to the ADR.
Penalties
If a deposit is taken but either the deposit is not protected in an authorised scheme by the landlord or the landlord fails to provide the prescribed information, the tenant may apply to the court who must order the landlord to pass the deposit to the custodial scheme or repay it to the tenant.
The court must also require the landlord to pay the tenant three times the amount of the deposit.
A landlord is unable to serve the no fault section 21 notice requiring possession on a tenancy where the deposit is not protected or the prescribed information has not been provided.
A useful independent website offering information on tenancy deposit schemes can be found at: www.tenancydepositschemes.net
Full contact details fot all three schemes can be found here Tenancy Deposit Schemes.
3 Legitimate withholding of part or all of the deposit
Deposits can cover:
• Damaged items.
• Stolen items.
• Outstanding debts attached to the property.
• Failure of the tenant to carry out obligations set out in the tenancy agreement such as cleaning.
• Non-payment of rent.
Allowance for fair wear & tear must be made, which is not recoverable from a deposit. Wear and tear is the sort of damage which is the result of normal living in a property. You cannot expect to receive a property back in the same pristine condition as it was at the start. You can expect it to be clean and tidy, but if a tenant has been living in the property for two years, you must take this into account. For example paintwork will be less fresh and carpets may be worn.
4 Best practice regarding deposits
The tenancy agreement should state clearly the circumstances under which part or all of the deposit may be withheld at the end of the tenancy. It is advisable to keep the deposit in a separate bank account so that it can be returned at the end of the tenancy, unless the conditions for withholding it are met.
If the tenant cannot afford the deposit, the local authority’s Housing Department or Housing Advice Centre may operate a rent or deposit guarantee scheme in the area, which would guarantee rent or the costs of damage for a specified period. Click here for local authority contact details.
At the end of the tenancy the inventory should be checked and an assessment made of the condition of the property – the landlord should take into account reasonable wear and tear.
If a claim is going to be made from the deposit the landlord should account for this with invoices or receipts and send the balance of the deposit to the tenant.