Understanding Tenancy Deposits

Understanding tenancy deposits and how their protection schemes work is crucial for both landlords and tenants. Landlords need to know the correct steps to take to ensure they are compliant, and we understand that the requirements can be confusing. For tenants, securing the return of your rental deposit at the end of a tenancy can feel like a daunting process, but with the right preparation and understanding of the rights of both parties, it doesn’t have to be.

To ensure a smooth end of tenancy, this guide will cover the following important laws and definitions to know as a tenant or landlord around deposits:

• Holding deposits
• Tenancy deposits
• Tenancy deposit caps
• Tenancy deposit schemes
• Tenancy deposit protection schemes
• Tenancy deposit when checking out

Key Types of Deposits

Holding Deposits

A holding deposit is paid by a prospective tenant to a landlord or letting agent. The deposit is paid before signing a tenancy agreement, and expresses the tenant’s interest in reserving the property, to rent it.

• The deposit secures the property for the prospective tenant whilst referencing checks are completed

What are the tenant rights surrounding holding deposits?

• Landlords and agents cannot legally take more than the cost of one week’s rent of the property for the deposit
• If the landlord decides not to proceed with the tenancy, then the tenant must be refunded
• If the tenancy goes ahead, then the deposit may be deducted from the first payment of rent or tenancy deposit
• The deposit is non-refundable if the tenant withdraws, provides false information, or fails the right-to-rent checks

Tenancy Deposits

A tenancy deposit, also known as a security deposit, is a sum of money paid by a tenant to a landlord or letting agent prior to moving into a rental property

• A tenancy deposit serves as financial security to landlords and agents, to protect them in instances of unpaid rent, damage to the property caused by the tenant, or any breach in the tenancy agreement

How should a landlord manage the tenancy deposit?

A landlord can request to hold up to a maximum of five weeks rent as a deposit

• By law, tenancy deposits must be protected by a government-approved tenancy deposit scheme.
• A landlord can also offer tenants a deposit replacement scheme. This means the tenants pay a fee to join a scheme and do not have to part with large sums of money as a deposit.
• Once the tenancy ends, the deposit is returned to the tenant, minus any deductions made

What are Tenancy Deposit Caps?

Tenancy deposit caps is a legislation that prevents landlords from requesting security deposits worth more than than five weeks’ rent if the total annual rent is below £50,000, or 6 weeks’ rent if the total annual rent is £50,000 or above.

• Passed in June 2019 in England, the Tenant Fees Act protects tenants from unfair charges by landlords and lettings agents on fees such as:
  • Referencing and admin costs
  • Credit checks
  • Renewal fees

Landlords and agents are only permitted to charge for:

✅ A refundable holding deposit charged at no more than one weeks’ rent

✅ Rent

✅ Tenancy Deposit (refundable and capped as per the above information)

✅ Payments associated with the early termination of the tenancy upon request of the tenant

✅ Changes to the tenancy upon request of the tenant (capped at £50 unless higher costs are justified)

✅ Costs of utilities, TV licenses, and Council Tax

✅ Late payment of rent or replacement of a lost key/security device that provides access to the property

Tenancy Deposit Protection Schemes

Tenancy Deposit Schemes: Cash vs Deposit Replacement Schemes

Introduced in April 2007, landlords and letting agents have a legal duty to protect tenants’ deposits using a government-approved tenancy deposit scheme.

In England and Wales, the three approved schemes your deposit can be registered with are:

• Deposit Protection Service (DPS)
• MyDeposits
• Tenancy Deposit Scheme (TDS)

Prior to the beginning of the tenancy, tenants should receive information about the chosen scheme the landlord or letting agent has used to protect their deposit.

Custodial versus Insured Tenancy Deposit Protection Schemes

💰 In a Custodial Tenancy Deposit Scheme:

• The deposit is held for free by the scheme provider during the tenancy
• At the end of the tenancy, the scheme returns the deposit to the tenant, minus any agreed deductions
• If there is a dispute on the amount being returned to the tenant, the scheme will hold the money until it is resolved
• This option is typically preferred by landlords or lettings agents who don’t wish to handle the tenant’s deposit directly

💰 In an Insured Tenancy Deposit Scheme:

• The landlord or lettings agent will keep the deposit during the tenancy, but they must pay a fee to the scheme provider for deposit protection
• If there are disputes at the end of the tenancy, the landlord or agent must return the deposit amount in question to the scheme whilst it is being resolved
• Once settled, the scheme can distribute the money accordingly
• This option allows landlords and agents to hold onto deposit funds, but it requires strict compliance with the rules and regulations

Click here if you would like to find out what scheme your deposit is protected in.

Are There Alternative Options?

If you cannot afford a deposit, a landlord can also offer your tenants a deposit replacement scheme, this means the tenants pay a fee to join a scheme and do not have to part with large sums of money as a deposit.

The benefit to landlords is that the schemes often offer more protection than the traditional way of holding a cash deposit.

Deposits and Checking Out

Getting Your Tenancy Deposit Back

• Landlords and tenants must come to an agreement on any amount being deducted from the deposit
• Clear and concise check in and check reports out provided by accredited inventory providers will ensure this is possible
• Any damages to the property not considered as fair wear and tear will be chargeable to the tenant

Read our full guide on understanding fair wear and tear in rental properties.

Deposit Discrepancies

• If a landlord and tenant disagree on the deductions being proposed, the non-disputed amount should be released back to the tenant and the dispute amount logged with the deposit scheme

Disputing Deposit Deductions

• Going back to evidence, if this is not clear and thorough, the arbitrators will not award claims to the landlord. Tenants must also support their claims as much as possible; email trails, photographs all help a fair decision to be made.

The check out process and returning of deposits doesn’t have to be stressful if you understand your rights and responsibilities. By following the steps outlined here, maintaining good communication, and documenting the property’s condition, both landlords and tenants can maximise the chances of a smooth end of tenancy process.