Deposit protection – what do residential landlords need to know?

What is a tenancy deposit?

Usually, a landlord will require a tenant to pay a sum of money to them called a tenancy deposit, after a tenancy agreement is signed but before the tenant moves in to the rented property. The deposit acts as a form of insurance for the landlord – they can look to be reimbursed by the deposit if the tenant breaches the terms of the tenancy agreement, causes damage to the property, or falls into rent arrears for instance.

If you're a letting agent, landlord or tenant, you should know the ‘ins and outs’ of deposit protection. It is a legal requirement for all deposits resulting from assured shorthold tenancies in England that commenced after 6th April 2007, to be registered with a government-approved deposit protection scheme. A landlord who fails to do so could be fined up to the equivalent of three months’ rent and may be prevented from issuing a Section 21 notice to regain possession of the property should they wish to do so – the consequences of deposit protection breaches are covered in a previous article.

Government-backed tenancy deposit schemes

Once the deposit is received, the landlord / agent has 30 days to register it with a government-backed tenancy deposit scheme (“scheme”). In England, these are the Tenancy Deposit Service, the Deposit Protection Service and MyDeposits. The deposit must remain protected for the entire duration of the tenancy.

The scheme will offer two forms of protection for the deposit - custodial or insured. Custodial protection is where the deposit is held by the scheme for free. Insured protection is where the landlord / agent holds the deposit in their own bank account and the scheme insures it for a fee, which allows the landlord / agent to accrue interest on it. The landlord can choose which type of protection to use, but they then must register and provide the tenant with the ‘prescribed information’ within 30 working days of receiving the deposit. The prescribed information is set out in the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 but includes the:

• Deposit amount
• Property address
• Name, address and contact details of the scheme
• Name, address and contact details of the landlord, tenants and any third parties who have contributed to the deposit
• Custodial Terms and Conditions, if a custodial scheme is used

How much deposit can a landlord take?

The Tenant Fees Act 2019 capped the amount of deposit that a landlord can take from a tenant, at the equivalent of 5 weeks rent where the annual rent is below £50,000, and 6 weeks rent where the annual rent is £50,000 or above. You can calculate the maximum amount of deposit that a landlord can take, by using the following calculation:

1. Multiply the monthly rent by 12 months, to find out what the annual rent is.
2. Divide the annual rent by 52 weeks, this will tell you the rent for one week.
3. Multiply the rent for one week by 5 (if the annual rent is below £50,000) or 6 (if the annual rent is £50,000 or above). This will tell you the maximum amount of deposit that the landlord can take from the tenant in those circumstances.

When calculating the weekly rent, do not just divide the monthly rent by four, this will not be accurate as some months are longer than others. Also, round figures down when carrying out your calculations, rather than up, to ensure that you do not exceed the maximum deposit allowed. 

For example, with a monthly rent of £1,500: -

1. £1,500 per month x 12 months = £18,000 (the annual rent)
2. £18,000 ÷ 52 weeks = £346.15 (one week rent)
3. £346.15 x 5 weeks = £1,730.75 (the maximum amount of deposit in this situation)

Claiming deductions from a tenancy deposit

If a tenant meets the terms of their tenancy agreement and leaves the property in the condition it was let to them in, they can expect to have the deposit returned to them at the end of the tenancy. If not and the landlord wants to make a deduction from or claim the deposit, they should tell the tenant so, first. If the tenant disputes the landlord’s position and the parties cannot agree on how the deposit should be shared (or not shared) the landlord is not just entitled to the monies.

All schemes offer a free service to impartially resolve deposit disputes by assessing the evidence, such as photos, videos and inventory and check-out reports. Deposit disputes highlight why inventories and inspections are important, as they provide evidence as to the property’s condition at a particular time. The scheme’s decision is final but a landlord (or tenant) could take the issue to court if they disagree with the decision made.

Common reasons for deposit deductions

Common deposit deductions include where the tenant has:

• Caused damage to the property
• Caused indirect damage due to negligence
• Damaged the landlord’s contents or contents are missing
• Returned the property in a state worse than what it was let to them in
• Left unwanted belongings at the property at the end of the tenancy without the landlord’s agreement
• Fallen behind with their rent payments - if the rent arrears are more than the deposit, the landlord would have to consider taking the tenant to court for the remainder
• Unpaid bills

Landlords are legally required to keep a property in repair during a tenancy and so deductions cannot be made in respect of all maintenance and repairs. Likewise, tenants do have a responsibility to treat the property in a ‘tenant-like manner’. Who, the landlord or tenant, is responsible for what in rented property is covered in detail in one of our earlier articles.

Returning the deposit and resolving disputes

At the end of the tenancy and once any deposit deductions have been agreed, the rest of the deposit, if any, must be returned to the tenant within ten days. 

Whilst the adjudication process for deposit disputes via one of the approved schemes is popular given the cost or lack thereof, both parties have the ability to refuse adjudication and use the court process instead. This can be particularly useful when either the claim is greater than the value of the deposit or there are other issues between the parties that could, and from a costs' effectiveness standpoint, should be addressed at the same time such as claims of disrepair.