What is a Tenancy Deposit Scheme?
Despite having been in force since April 2007, many landlords are still unaware of what a tenancy deposit scheme is. This article covers the basic must knows of what a tenancy deposit is.
The Government website is not up to date with its guidance for landlords in relation to the tenancy deposit scheme legislation. The Government website states that the tenancy deposit protection scheme applies if the tenancy started after 06 April 2007, this is not correct.
You must place your tenants’ deposit in a tenancy deposit protection (“TDP”) scheme if you rent out your home on an assured shorthold tenancy. This is required under Chapter 4 of the Housing Act 2004 and applies to all assured shorthold tenancy agreements, irrespective of whether the tenancy commenced before, on or after the Chapter 4 of the Housing Act 2004 came into force. This was clarified by the Deregulation Act 2015.
If you receive a valuable item as a deposit instead of money (for example a car or watch), you do not have to put it in a TDP.
These government-backed schemes ensure your tenants will get their deposit back if they:
- meet the terms of your tenancy agreement
- do not damage the property
- pay the rent and bills
You (or your letting agent) must put your tenants’ deposit in the scheme within 30 days of getting it.
You can use any of the following schemes if your property is in England or Wales:
All TDP schemes offer 2 options as to how a tenancy deposit can be protected:
- the scheme hold the deposit for free – known as a ‘custodial’ scheme
- you or the agent holds the deposit and you pay the scheme to insure it – known as an ‘insured’ scheme
At the end of the tenancy
The deposit must be returned to your tenants within 10 days of you both agreeing how much they’ll get back.
If you’re in a dispute with your tenants
The deposit is protected in the scheme until any dispute over the deposit between the parties is settled.
If you’re in an ‘insured’ scheme, you or the agent must give the deposit to the TDP scheme. They will hold it until the issue is settled.
If you’ve received a holding deposit from your future tenants (money to ‘hold’ a property before an agreement is signed), you do not have to protect it. Once they become tenants the holding deposit becomes a deposit, and you must protect it.
Deposits made by a third party
You must use a TDP scheme even if the deposit is paid by someone else, like a rent deposit scheme or a tenant’s parents.
Penalties and Consequences of Non-Compliance
Where the TDP requirements are not complied with, a tenant could seek 1-3 times the value of the tenancy deposit from the landlord as a penalty for non-compliance.
There are defences to claims by tenants which a separate article covers: Defending Tenancy Deposit Claims
The other consequence for failing to comply with the tenancy deposit scheme requirements is that a section 21 notice (under the Housing Act 1988) cannot be served on the tenant. The only way to lift this restriction is to agree with the tenant for the deposit to be used towards rent; or to return the tenancy deposit in full.