If you’re thinking of renting out a property, or investing in buy-to-let in Ilford or Redbridge, you need to understand the varied legal aspects of being a landlord, such as what you are required to do with the tenancy deposit.
There are regulations in place to ensure that landlords place deposits into a government-approved deposit protection scheme and failure to do so can have legal implications.
Using a tenancy deposit scheme has benefits for you and your tenant. It means the deposit is safe and sound but also that you both have use of the free dispute resolution service if you have a dispute with your tenant regarding the deposit.
There are three government-approved schemes to choose from, each with slightly different processes. Another legal requirement to be aware of is the cap on the deposit amount you can request from the tenant.
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To help navigate your legal requirements, we have created a list of the most commonly asked questions on the subject of tenant deposit schemes. We cover how the schemes work and what actions you need to take when you have a new tenant moving into your rental property.
What Is A Tenancy Deposit Scheme (TDS)?
New regulations were introduced in April 2007 for the private rental sector in England and Wales to provide improved deposit protection for tenants. This included the introduction of the requirement for landlords to place the tenant deposit into one of the three approved schemes:
These only apply in England and Wales, and for Scotland and Northern Ireland landlords, different schemes are in place.
Landlords can choose whichever scheme they prefer and they are required to provide the details of the scheme to the tenant by the deadline of 30 days after receiving the tenant’s deposit.
The details they must provide to the tenant are:
Deposit amount
Deposit scheme name, contact details and address
Landlord’s name, contact details and address
Tenants’ names, contact details and address
Details of how to apply for deposit release
Guidance on how to dispute deductions and what to do if the landlord fails to comply with the rules
Insurance Vs. Custodial Schemes
When choosing from the three government-approved schemes, landlords can also choose whether to use a custodial or insurance scheme. Here is how they differ:
1. Custodial Deposit Schemes
A custodial scheme is where the entire deposit is protected by paying the full amount into the deposit scheme. Then when the tenancy ends, the scheme returns the amount to the tenant, minus any agreed damage costs. If there is a dispute, the independent dispute service helps landlords and tenants to find a resolution. These schemes are free to use.
2. Insurance Deposit Schemes
An insurance-based deposit scheme is where the landlord keeps the tenant’s deposit but pays a fee to insure the amount. The landlord is not permitted to use the money and must keep the full amount throughout the tenancy period. Once the tenancy ends, the landlord repays the deposit to the tenant minus any agreed deductions, and any disputes can be referred to the scheme’s adjudicator.
In the event that the landlord does not repay the deposit, the insurance scheme pays the deposit back to the tenant and then they will request the money from the landlord.
Does It Matter Which Scheme I Choose?
There are relatively small differences between TDP schemes, so research the pros and cons before choosing.
Custodial schemes are free to use and there’s no limit on the number or value of deposits you can protect. With insurance deposit schemes, you must pay a premium to access the service. Some landlords opt for a custodial deposit scheme due to its simplicity and lack of fees.
Meanwhile, others choose an insured scheme because it allows them to retain the deposit in their own bank accounts and earn any interest they accrue on the money.
However, there are limits to the value of how much you can insure, you must show proof of property ownership, and if you’re acting as a registered company, it must be based in the UK.
What Is The Law Around Landlord Deposit Schemes?
There is no legal requirement to take a deposit from a tenant, but it helps to protect you against financial losses that can be caused by tenants damaging your property. It also offers protection against unpaid rent.
When the Tenants Fees Act was introduced in 2019, this set a cap on the amount that landlords can request as a deposit amount. For most tenancy types, this equates to a maximum of five weeks’ rent.
What A Landlord Must Do With A Tenant’s Deposit
Once you have received a deposit from a tenant, you have 30 days to transfer it into one of the government-approved deposit schemes. You must also provide the details of the scheme to the tenant as well as the details of the independent dispute resolution service.
What Are The Schemes’ Benefits For Landlords?
As a landlord, using one of the schemes provides free access to the dispute resolution service. This means that you will receive support if you have a dispute with the tenant over how much deposit should be held back due to any damages or unpaid rent.
To use the service, landlords provide evidence such as photos and descriptions of the damage to allow the adjudicator to decide whether any deduction should be applied and how much should be deducted. Doing a comprehensive inventory at the beginning of the tenancy with videos and photo to evidence the property condition will help to support any claims.
If either the landlord or tenant disagrees with the decision of the adjudicator, they can take the case to court to be decided.
Are There Any Tenancy Deposit Scheme Penalties?
The legislation for private landlords states that you must:
Put the tenancy deposit in an approved scheme
Provide tenants with the relevant information of the scheme
Do both of these actions no later than 30 days after receiving the tenant’s deposit
The potential consequences of not complying with these legal requirements include paying your tenant compensation, which can be as much as three times the deposit value. It may also be more difficult to evict tenants if you have breached your legal requirements.
What Are The Tenant Benefits Of Deposit Protection?
For tenants, they will have peace of mind that their deposit is stored securely. They also have the benefit of using the independent dispute resolution service, rather than the landlord deciding how much deposit is deducted.
What Are The Deposit Scheme Costs To A Landlord?
There are no fees for joining custodial schemes. For insurance schemes, landlords pay a fee dependent on the amount of deposit and any discount applicable if the landlord is member of the National Landlords Association (NRLA). Fees for insurance schemes start at around £13.
What Can A Landlord Deduct From The Security Deposit?
Deductions can only be made if a tenant is in agreement and the landlord will need to provide supporting evidence to justify any proposed deductions. If items are lost or damaged, proof of value of the item may be required.
These are the acceptable reasons why landlords might deduct part or all of a deposit:
If the tenant has missed bill payments or rent payments.
To cover the replacement of items that have gone missing but were on the original inventory.
The cost of repairs due to damage caused by the tenant, either through negligence or deliberate damage.
Maintenance costs, for example if the tenant has not carried out gardening duties that were included in the tenancy agreement.
Cleaning or repair costs resulting from the tenant not maintaining a good standard of hygiene in the property.
Costs of removing items that the tenant leaves in the property.
The Deposit Releasing Process
The deposit return process differs slightly depending upon the type of deposit scheme chosen, and whether or not there are unresolved disputes about any deductions from the deposit.
For Insured Schemes…
In insured schemes, the landlord or agent holds the deposit during the tenancy. The landlord is required to pay the deposit back to the tenant within 10 days of the tenant requesting it. This deadline applies after the amount has been agreed.
If there is a dispute or the landlord intends to make deductions for cleaning, damage, or unpaid rent, the landlord must contact the tenant to advise them. If the tenant does not agree to the deduction, they can use the free dispute resolution service to assess the evidence and provide an impartial decision.
For Custodial Schemes…
Tenants with deposits held in a free custodial scheme can request the deposit return by using the scheme’s online process.
Upon such a request, the scheme contacts the landlord or agent to confirm the amount to be returned or to negotiate any deductions.
If the landlord agrees to the return or a portion of it, the scheme processes the payment usually within 5 working days. If there’s a disagreement over deductions, the scheme offers a dispute resolution service to arbitrate between the parties.
Need help managing your tenancies?
If you still have questions about tenancy deposit schemes, or any other aspect of renting out property in Redbridge, Stratford or Ilford, we’d be happy to help. Contact us to find out more about our letting agent services.
I began as a junior apprentice in a corporate estate agents in 2006 have been working in the property sector since, so over 14 years of experience. I have worked in a range of industries from Property sales and lettings, to construction, development, commercial sales and lets as well as facilities management and maintenance. I have a degree in Economics, enjoy keeping fit and healthy, support Man Utd and have a young family.
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