Do you know how tenancy security deposits work and what it means to you as a landlord?
If not then you need to read this post in full.
It is important that you understand how the scheme operates and what you can and can’t do. You can never be sure that a tenant will not cause damage to your property even if they have impeccable references.
The UK government in 2007 launched the Tenancy Deposit Protection scheme. This scheme is to protect tenants and ensure the return of deposits when a tenant moves out of a rented property. Legislation for the TDP differs across the UK – England and Wales, Scotland and Northern Ireland.
What I am providing you with in this post is an overview of tenancy security deposits and where you stand as a landlord. If you want more information then you can check out the official government page here.
What is a Tenancy Security Deposit?
As a landlord, you are entitled to ask your tenants for a deposit to cover unforeseen expenses such as rent arrears or damages to your property. If these costs exist when the tenant leaves then you can use the deposit to cover them.
One thing that you must understand is that a tenancy security deposit is not for covering wear and tear costs such as the wear on carpets for example. You need to plan for wear and tear as a separate cost and you can factor this in to the rent that you charge.
If you are going to ask a tenant for a security deposit then you must do this when they sign the tenancy agreement and take delivery of the keys to the property. There is no law that says you have to charge your tenants a deposit. But if you are going to do this (I recommend that you do) then you have to comply with the tenant deposit protection scheme.
The most that you can ask as a deposit is two months’ rent. If you incur unforeseen costs beyond that amount then the deposit is not going to cover it. I advise that you have the appropriate insurance in place to deal with this.
In 2019 the government introduced the Tenant Fees Act. This applies to landlords in England and if annual rent is less than £50,000 then the most that you can demand as a deposit form a tenant is 5 weeks’ worth of rent.
Here is an example:
Monthly rent = £1,000 per month
Annual rent amount = £12,000
Weekly rent 12,000 / 52 = £230.7
Maximum 5 week deposit = £1,153.5
If the annual rent is more than £50,000 then the new law allows for a maximum of 6 weeks’ rent for a deposit. I recommend that you get the assistance of the deposit scheme that you are going to use to calculate what you are entitled to demand as a deposit.
You can obtain insurance that will cover you against the cost of extensive damage. If you have to go through eviction proceedings to remove a tenant then the insurance can cover you against expensive court costs.
Tenancy Deposit Protection
As I said earlier, the government introduced the tenancy deposit protection scheme back in 2007. Prior to the introduction of the scheme, landlords had all of the power and tenants had none. There was nothing to stop a landlord refusing to return a deposit even if there had been no unforeseen expenses. Unfortunately, too many unscrupulous landlords did this.
There is an advantage to you as a landlord by using the tenancy deposit scheme as well. If there is a dispute over a deposit then you will be entitled to independent adjudication free of charge. This is also good for the UK court system as it prevents lots of cases reaching the courts.
It is not a good idea to fall foul of the tenant deposit laws as you will face some hefty fines. There are a number of government backed schemes that you can choose from depending where your property is located. You must tell your tenant within 30 days which scheme you choose to secure their deposit.
Failure to inform your tenant about the deposit scheme you are using is very likely to lead to a fine if the tenant complains. In some cases you could be ordered to return the deposit to the tenant. If the case ends up in court then you could face having to pay your tenant compensation which may be as much as three times the deposit value.
It just makes sense for you to comply with the tenancy protection scheme. If you try to trick your tenant then this is going to come back to bite you. Courts will not be sympathetic to landlords looking for damages over rent arrears and other issues if they have not complied with the tenancy protection scheme.
How does Tenancy Deposit Protection work?
Once you receive the deposit from a tenant you need to pay this into one of the government backed schemes. When you do this they will provide you with important documents which will usually include a leaflet providing information about the scheme, which you can then provide to your tenant.
There are different scheme providers depending on whether your property is located in England and Wales, Northern Ireland or Scotland:
England and Wales
The differences by region are down to the number of days that a landlord has to protect the deposit of their tenant and the type of scheme used. There are two different schemes which are custodial and insurance.
With a custodial scheme there is no charge and the provider will securely hold the deposit amount in a bank account. If you go for the insurance option then you have to pay a charge so that you can hold the deposit amount in your bank account.
Both custodial and insurance options are available for landlords in England and Wales. You must register the deposit within 30 days. For Northern Ireland you also have a choice between the custodial and insurance schemes and there is a 14 day limit for registration. Landlords in Scotland can only use a custodial scheme and there is a 30 day registration.
Avoiding Tenant Disputes
You want to avoid disputes with your tenants at all costs. The best way to do this is to make everything clear to your tenant from day one. Always conduct an inventory of your property prior to letting. It is a good idea to take high quality photographs to support this as well.
As far as the tenant deposit is concerned there are a number of things that it can cover:
- Theft of your belongings
- Any missing belongings
- Damage to property or contents
- Rent arrears at the end of the tenancy
- Bills not paid at the end of the tenancy
- Tenant leaves unwanted belongings
- Failure to maintain areas where agreed for example a garden
- Keys lost and the changing of locks due to tenants not returning keys
If there has been damage to your property or contents then it is best to discuss this with your tenant and agree an amount to cover repairs. Once agreed, you are entitled to deduct this amount from the deposit. You must return the balance of the deposit to the tenant within 10 days of agreeing the deduction.
Sometimes a dispute will happen with a tenant and they will not agree with you about damages or anything else that will reduce the amount of their deposit. If this is the case then you will have to return the deposit to the scheme, and it will remain there until the resolution of the dispute.