Asking your tenants to put a deposit down before they move in can save a landlord an awful lot of trouble.
If the let goes to plan, then this deposit is returned to the tenant, while if something goes wrong the landlord can claim some or all this money to help cover their costs.
Whether it be used for covering missed rent payments or paying for repairs to damaged property, reclaiming the deposit can make an otherwise costly and challenging situation manageable.
Generally, the tenant pays up to five weeks rent up front, which must be looked after by a tenancy deposit protection scheme. In most cases no more than this can be taken, due to rules brought in under the Tenants Fees Act 2019.
Do I have to use a tenancy deposit scheme?
If a tenant on an assured shorthold tenancy pays a deposit it must be secured by one of three UK Government approved tenancy deposit protection schemes.
This was brought into law in the United Kingdom Housing Act 2004 and has been a requirement since 2007.
These schemes help keep tenants’ deposits safe from a minority of unscrupulous landlords and ensure that they are returned.
This is provided that the tenants do not break the terms of their tenancy agreement.
If tenants do break the agreement, for example by damaging the property or not paying rent, the landlord can claim their costs from the deposit.
If a landlord takes a deposit but fails to protect it using one of the three government approved tenancy deposit schemes, the tenant can get a court order for the landlord to repay up to three times the deposit.
Not protecting a deposit also means a landlord can no longer evict their tenant using a Section 21 no fault eviction.
A tenant’s deposit must be protected in one of these schemes within 30 days of it being received by a landlord. If the deposit is not protected in this timeframe, it should be returned to the tenant.
What are the types of tenancy deposit schemes?
There are two types of tenancy deposit schemes, custodial and insured.
In a custodial scheme the deposit is held by the scheme provider, while in an insured scheme the landlord keeps the deposit.
There are benefits to using both types of tenancy deposit scheme.
Custodial schemes
The first type of tenancy deposit scheme is the custodial scheme. This type of scheme is free and is the most popular.
A custodial scheme will hold on to the deposit until the tenancy has come to an end.
It will release the required money to both parties when they agree on how it is to be split or after any disputes have been resolved.
One downside of a custodial scheme is that if a dispute takes place, a landlord will not receive any funds until the end of the dispute and can be left to fund remedial works themselves.
Insured schemes
The other type of deposit protection scheme is an insured scheme. In an insured scheme, a landlord can keep the deposit while paying insurance in order to protect it for as long as the tenancy lasts.
Providers charge for this type of scheme and the scheme provider guarantees that tenants will always get any money which they are entitled to.
The benefit of an insured scheme for a landlord is that they can accrue interest on the deposit for the duration of the tenancy.
This makes it an attractive proposition to people with large property portfolios or expensive individual properties, as the total interest on their deposits can dwarf the registration cost.
Landlords do not have to involve an insured scheme when returning the deposit. They are free to confer with their tenants and agree deductions without any need to contact their provider.
Dispute Services
If a landlord and tenant do not agree on how a deposit should be divided all tenancy deposit providers offer a free dispute service.
Using these services is easier and much quicker than pursuing a claim through the courts, and claims can be resolved within as little as 28 days.
Both a tenant and a landlord can initiate the dispute process, however, the burden of proof is placed on the landlord.
This means they must prove that their claim on the deposit is legitimate using evidence. A tenant only needs to provide evidence in response to the landlord’s claims.
Evidence can include things like the tenancy agreement, bank statements, utility and council tax bills, inventory reports, email or letter correspondence, cleaning charges, photographs, and witness statements.
Once the evidence has been gathered the case is then sent to an impartial adjudicator at the deposit scheme, who will decide how the deposit should be divided.
Occasionally, including in situations where the police are involved, an adjudicator may decide that the case needs to be resolved through a formal court process.
In the case of a dispute involving a landlord using an insured scheme, the landlord must pay the tenancy deposit scheme the disputed amount.
For example, a tenant has put down a deposit of £500 for a property.
The landlord wishes to deduct £200 for damages, and the tenant is disputing £100 of these deductions.
In this case the landlord needs to return the undisputed £300 to the tenant and send the £200 disputed to the deposit scheme so it can be divided as the adjudicator sees fit.
Who are the three tenancy deposit scheme providers?
There are three different tenancy deposit schemes available in England. These are the Deposit Protection Service, My Deposits, and the Tenancy Deposit Scheme
Each is owned by a different company, and their services have slight differences.
The Deposit Protection Service (DPS)
The largest of the three available schemes, the Deposit Protection Service holds more than 7 million tenant deposits.
It is owned by Computershare, an Australian publicly listed financial services company. It offers both insured and custodial deposit schemes.
The first step to protecting a tenant’s deposit with DPS is to create an account on their website. You will need to provide an email address, create a password, and answer some security questions for identity validation reasons.
To use the Custodial Scheme, you first create a free custodial account with the DPS. You can then add properties and tenants to your account.
When you receive your deposit, you need to transfer it to the DPS. The easiest way to do this is via bank transfer.
Note that you can add a property without tenants, meaning that you can set up the deposit scheme before your tenant even pays their deposit.
To add a tenant, you will need their name, title, contact details, the start and end dates of the tenancy, the rent amount, and the deposit amount.
To use the insured scheme, you need to create an account and pay your required fees. This is £18.75 for deposits under £500 and £27.75 for deposits of £500 or more.
In addition, in order to use the DPS insured scheme, you must have Client Money Protection in place.
DPS is well suited to larger corporate landlords and offer a discount for landlords with more than 100 deposits.
My Deposits
A second deposit protection scheme trades under the name My Deposits.
It is part of the Hamilton Fraser Group, which is indirectly owned by Brown and Brown, an American publicly traded insurance company.
It also offers both free custodial and paid insured deposit schemes and is the only scheme endorsed by the National Residential
Landlords Association, offering members a discount on their insured deposit schemes.
Deposit protection on deposits below £500 costs £20 for non NRLA members and £13.20 for members.
If your deposit is more than £500, the prices are £27.20 and £17.95 respectively.
The Tenancy Deposit Scheme
The oldest deposit protection scheme, established in 2003, The Tenancy Deposit Scheme is the only UK owned and not for profit option among the schemes.
They are run by The Dispute Service ltd, a UK based not for profit company.
Like the other two providers, the Tenancy Deposit Scheme offers both insured and custodial deposit protection services.
Deposits of £499.99 and under cost £18.50 to protect as part of their insured scheme, while for larger deposits the fee is £25.50.
The custodial service is free. Discounts to £13.20 and £17.95 are available for NRLA members.
In conclusion
The type of tenancy deposit scheme you use is up to you, with both custodial and insured variants offering advantages.
Insured schemes can be better for larger landlords and can give landlords access to money from the deposit faster. Alternatively, custodial schemes are free, and require less work on the part of the landlord but have the downside of losing out on the potential interest the deposit could have earned.
Similarly, each company’s product is suitable for a landlord in a different situation— My Deposits offers the lowest rates on insured schemes for NRLA members, while the Deposit Protection Service offers discounts for large landlords.
You will need to weigh up the benefits and costs of each scheme and provider in order to figure out which one suits you best.
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