Tenancy deposits and tenancy deposit protection is a subject which has caused a few headaches over the years.

It is generally considered essential that landlords take a deposit from a tenant at the start of the tenancy. This is used as a fund for you to use at the end of the tenancy, if the tenant leaves owing money – either to put right problems with the property such as damage or cleaning, or to cover unpaid rent.

There are alternatives –

• taking a guarantee from a friend, relative or guarantee company
• or using one of the ‘alternative’ schemes (which are actually also guarantees – note that these are not covered in this course), or
• relying on your insurance, in particular, rent guarantee insurance

However, with a guarantee, you have to chase the guarantor (or make a claim if you are using an ‘alternative scheme’)– you do not have the money there when you need it.

Although some of the alternative schemes are quite good and they are becoming more popular.

Insurance policies will generally only cover tenancies where the tenants satisfy strict referencing. These are not the ones likely to be causing the problems!

But although landlords often moan about them, nothing really seems to be as satisfactory as taking a deposit – and the prospect of losing their deposit motivates tenants to keep the property in a good condition and leave it clean and tidy when they go.

A bit of history

Prior to 2007, sadly many landlords abused their position with deposits, often it seemed with impunity.

Legally a deposit is the tenants’ money and they are entitled to its return unless there is a genuine claim. However, many landlords (not all but a substantial minority) tended just to pocket the money and refuse to return it.

After numerous complaints about this and campaigns by tenant organisations, regulations for a tenancy deposit scheme were introduced by the government in the Housing Act 2004.

Sadly the legislation was not well drafted and therefore there have been two amendments, once in 2012 and once in 2015.

The Tenant Fees rules

The 2019 Tenant Fees legislation then limited the amount of money that could be taken for a deposit (in England) to 5 weeks worth of rent (or 6 weeks worth of rent if the annual rent was over £50,000).

There are penalties if too much deposit is taken and, for example, landlords cannot use section 21 or the Welsh no fault grounds for possession until any excess deposit has been refunded to the tenants.

We have a calculator that can be used which you will find on your right or (if you are viewing this on mobile) below.

The tenant fees rules also capped holding deposits at one weeks worth of rent.  Holding deposits are not covered in this course, but full details and documentation are available on Landlord Law for members.

The tenancy deposit protection scheme

This came into force in April 2007 and was then amended in 2012 and again in 2015. It only affects tenancies let on an assured shorthold tenancy (or under an occupation contract in Wales) – however, this is the majority of lets in the private sector today.

The rules provide for the landlord to

• protect the deposit within 30 days AND
• serve a notice giving prescribed information.

Both are necessary.  See below for the penalties which apply if this is not done.

There are two kinds of deposit scheme

• Custodial schemes and
• Insurance based schemes

Custodial Schemes

These are free to use, but you need to pay the money over to the scheme administrators who hold it for the duration of the tenancy. The scheme gets its fee from the interest earned on the deposits held.

Custodial schemes have many advantages.

For example, landlords who use letting agents are protected from the situation that can arise if their agent goes insolvent taking the deposit money with them (although now we have client money protection this should not happen).

The landlord is liable to the tenant to return the deposit at the end of the tenancy, even ifit is the agent who lost the money.

It also gives tenants peace of mind as they know that their deposit is held securely and that it will be dealt with properly.

The disadvantage of the scheme is that it takes several days, and sometimes much longer if one of the parties is unavailable, for the money to be released.

Insurance based schemes

This is where the money is held by the landlord or letting agent.  However, the landlord or agent has to pay a fee to the scheme.  This covers the scheme costs if the landlord or agent loses the money and they have to make good to the tenants.

One big reason why landlords often prefer the insurance based schemes is that it allows them to refund the deposit money immediately to tenants without having to go through the procedure of claiming this from the scheme.

Tenants like this as they generally need the deposit to use for their next property.

The Three Deposit Companies

There are three companies who are authorised by the government to run tenancy deposit schemes:

The Deposit Protection Service (DPS)
Tenancy Deposit Scheme (TDS)
My Deposits

They are all much of a muchness and all offer both custodial and insurance based schemes.

Prescribed Information

All landlords (or agents where agents deal with the deposit) must, in addition to protecting the deposit, serve ‘prescribed information’ on the tenants.  Or, if the deposit money was paid to the landlord or agent by someone else, the prescribed information must be served on them too.

Note that it is the information which is prescribed.  There is no prescribed form.

Most of the deposit schemes will provide a form, and if so, this is the form that you should use.  Note that serving a copy of the deposit certificate and the scheme rules leaflet will not cover all the prescribed information required, so if you scheme does not provide a form you should use one obtained elsewhere.

We have a Landlord Law form with versions for both England and Wales.

Note there was a case in 2012 where a tenant challenged the landlords right to possession under section 21 as he had not provided all the prescribed information.  The landlord said that this was not necessary as the information was freely available on the internet!  The Judges disagreed though and he lost his claim.

Disputes and adjudications

Often, at the end of a tenancy, there are disagreements, with the landlord wanting compensation for damage and the tenants objecting to this.

Landlords and agents should try to resolve this themselves, but this is not always possible. For this situation, all three deposit schemes provide a free adjudication service.

Full details of the adjudication schemes can be found on the scheme websites (which are very informative) but here are a few tips.

It is important to remember when bringing a claim, that the starting point is always that it is the tenant’s money. So, the burden of proving that the deduction is reasonable rests on you. The tenant does not have to prove anything.

What you have to prove

As with all legal claims, you have to prove two things:

1. Liability – ie that the tenant is actually liable for the sum claimed. For example tenants will not be liable for ‘fair wear and tear’ – ie the ordinary damage that can be expected when a property is being lived in.

2. Quantum – this is the amount of money you are claiming.  This has to be reasonable and relate to the actual loss suffered by the landlord. So for example you cannot get ‘new lamps for old’.  If items were not new, the sum that can be claimed will be reduced accordingly.

Essential evidence

The adjudicators all deal with the cases on a paperwork basis only and do not visit the properties. It is essential, therefore, that full evidence is provided by landlords to support their claim.

Landlords often complain that adjudicators favour tenants, but adverse decisions are frequently made because inadequate evidence has been provided to support a landlord’s claim.  Remember that the adjudicators do not have second sight!  You have to prove your claim by providing sufficient evidence.

The evidence you provide should include:

• A detailed inventory of the property at the time the tenant went in. This should either be signed by the tenant as agreed or prepared by an independent third party such as a letting agent or inventory clerk. A proper inventory is essential and if this is not available, then your claim is unlikely to succeed.  Note that the inventory should also record that the property is clean or you will  be unlikely to succeed in any claim for cleaning costs.
• A detailed description of the property at checkout – this should document the difference between the item in question at the start (as evidenced by your inventory) and at the end of the tenancy.
• Estimates and invoices for any cleaning, repair work or replacement items
• A detailed schedule of arrears if you are claiming for rent arrears
• Any photos (or videos) you wish to show the adjudicator to prove the condition of the property. Note, however, that these must be clear and have evidence to prove the item shown and the date the picture was taken. The best way to do this is to write on the back of photographs and get the tenants to sign and date them at check-in

Further information and helpful guides regarding adjudication are available on all three of the schemes’ websites.

Penalties for non-compliance

On the whole, the schemes have worked well, and thousands of deposits have been protected safely. However, many landlords still do fail to protect.

The main penalties are:

• A prohibition on using section 21 unless the deposit money has been returned to the tenants, and
• the right for tenants to apply to the Court for a penalty payment of up to three times the deposit sum.  Unless the tenant has made a claim for the penalty which has been resolved either by court order or settlement.

Unfortunately, the original penalty rules failed to operate as expected and it has been necessary to amend them twice.  The rules now apply as follows:

• The deposit and the prescribed information notice must be served within 30 days.
• If the deposit remains unprotected after 30 days the landlord will have no defence to a claim by the tenant for the penalty payment, until the Limitation Act takes effect after six years.
• The penalty awarded can vary between the value of one to three times the deposit amount, at the discretion of the Judge.
• Where the deposit is not protected or is protected late, landlords will only be able to use section 21 if the deposit has been refunded to the tenants before service of the section 21 notice.  However refunding the deposit money will not help a landlord defend a claim for the penalty.

Old deposits

Because the law has had to be changed twice, the following rules apply to older deposits:

• Deposits paid before 6 April 2007 where the tenancy became periodic before that date and has continued as a periodic tenancy ever since –

These deposits do not need to be protected and the prescribed information does not need to be served, unless the landlord wants to use section 21.  In this case, this needs to be done before any Section 21 notice is served.

• Deposits paid  before 6 April 2007 where the tenancy became periodic after that date, and has continued as a periodic tenancy ever since –

These were the subject of a case, the Superstrike case, in 2013 which showed up another problem with the legislation.  As a result of this all landlords in this situation were given until 23 June 2015 to protect the deposit and serve the prescribed information.

• Deposits paid between 6 April 2007 and 5 April 2012

These should have been protectedand prescribed information served by 6 May 2012 (under the provisions of the  Localism Act 2012).

• Deposits paid after 6 April 2013

These must have been protected and the prescribed information served with in 30 days of payment of the money (ie not the start of the tenancy).

Note also that landlords who properly protect the deposit and serve the prescribed information during the initial fixed term, do not have to re-serve the prescribed information again in any subsequent tenancies, provided there is no change in the parties or the property let

This has been rather a long chapter but a very important one. You may need to read it several times.

Further Reading

Here is some extra reading for you from the Landlord Law Blog:

Tenancy deposits for rented properties with ‘disorganised comings and goings’
Tenancy Deposit protection and points from the Khuja v Chowdhury case
Court of Appeal decision in Johnson v. Old – good news for landlords

Landlord Law members can check compliance with our tenancy deposit compliance checker.

If you have forgotten to protect the deposit in time and need to serve a section 21 notice, our Deposit Error Repair Kit can help.

In the next part of this course, we will look at rent.