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Tenancy Deposit Schemes – How to protect yourself as a Landlord

It is crucial that Landlords understand that they have two legal duties when taking a deposit from a tenant. Those duties are:

  • to lodge the Deposit with a recognised organisation or to have appropriate Deposit insurance;
  • to provide the tenant with very specific information – not simply a deposit certificate.

Many landlords comply with the first duty. But many, probably most, fail to comply with the second duty. Even landlords agents are often not aware of the extent of the second duty to provide specific information. The importance of this second duty was underlined in a decision of the Court of Appeal around the end of 2011.

Landlords can be very heavily penalised in two ways if they do not comply with the scheme. The two possible penalties are:

  • the county court must order the landlord to pay to the tenant the equivalent of three times the amount of the deposit, where the tenant has applied to the court on this basis;
  • the landlord cannot successfully apply for possession on the basis of a section 21 Notice (Notice of Seeking Possession when no breach of tenancy alleged). The possession claim will be dismissed.

In 2011 the government accepted that the current deposit protection scheme is too severe on landlords. A new more manageable scheme has been drafted and a date for its commencement in law has yet to be fixed.

In the meantime, landlords need to take preventative measures at the earliest possible stage after receiving a deposit in order avoid the penalties and to ensure their tenancies finish with as few problems as possible.

Tenancy deposit scheme: the basics

The requirement for landlords to protect the deposits of tenants with Assured Shorthold Tenancy agreements (AST) became mandatory on April 6, 2007 and affects all ASTs created on or after that date.

How the scheme operates

There are two approved tenancy deposit schemes:

The Custodial Scheme
This is administered by the Deposit Protection Service. The landlord pays the deposit over to the scheme and there is no administration fee as interest earned on the deposits covers running costs.

The Insurance Scheme
In this scheme, the landlord keeps the deposit but pays a premium together with a joining and yearly membership fee. The scheme is operated by two organisations who have each been awarded a contract to operate an authorised insurance-based tenancy deposit protection scheme

  • ‘Tenancy Deposit Solutions Ltd’ – This scheme is administered by Hamilton Fraser Insurance and is sponsored by the National Landlords Association;
  • ‘The Tenancy Deposit Scheme’ - Despite its name, it does in fact operate an insurance scheme.

Dispute resolution under the tenancy deposit scheme

In the event of disagreement between the landlord and tenant at the end of the tenancy, the parties may elect to use the Alternative Dispute Resolution (ADR) service which is free of charge. Alternatively, the parties can deal with the dispute through the County Court although this takes longer and is not a free service.

Using the ADR service tenants can, without any cost, challenge a landlord’s deduction from a deposits. Landlords are more likely to incur associated costs in both time and professional advice.

However, there are a number of simple steps landlords can take to protect their position. These are steps which can discourage tenants from making frivolous challenges make it more likely that landlords will be successful if the case were go to ADR.

Protecting your rights as a landlord

To protect your rights as a landlord to retain part or all of a deposit when appropriate, you should take the following essential steps

  • register the deposit.
  • obtain professional advice on the prescribed information that must be given to the tenant about the deposit.
  • serve the tenant with the prescribed information about the deposit within 14 days of the tenancy commencing or collecting the deposit, whichever is the earlier.
  • keep accurate records and correspondence about rent payments, missed payments and rent arrears.
  • compile an accurate and detailed checking-in inventory at the start of the tenancy. The inventory needs to show the state and condition of fixtures, fittings and furniture etc. when the tenant moved in. It may be useful to have photographs. Ask the tenant to sign and date the checking-in inventory.
  • use the checking-in inventory to produce a detailed checking-out inventory.
  • consider using an independent inventory checking service at the start and end of the tenancy to minimise the risk of dispute.
  • keep receipts for materials and labour if you have to repair tenant damage and obtain photographic evidence of the damage.
  • do not agree with the tenant to use their deposit to cover their last month’s rent as damage to the property may exceed the value of the deposit.
  • make sure you have contact details for the tenant as it may be necessary for you to take court action against the tenant, or their guarantor, if the cost of rectifying damage by the tenant and/or the value of the rent arrears exceeds the value of the deposit.

For help with a specific case, email landlord and tenant solicitor Cate Searle or call her on 01273 609911.