Deposits and Tenancy Deposit Schemes

Many landlords take a deposit from tenants to hold for the tenancy. When the tenant moves out, this is returned to the tenant less any deductions permitted, typically for damage (above fair wear and tear), additional cleaning, and cover any outstanding rent. Note: Deposits can only be withheld if the contract stipulates what the deposit is being held against.

Because a small minority of landlords wrongly withheld or did not return deposits, the Government introduced a statutory deposit protection scheme in the Housing Act 2004. This safeguards all deposits taken under an assured shorthold tenancy after 6 April 2007 or assured shorthold tenancies that have been renewed since that date. In certain circumstances, since amendments made by the Deregulation Act 2015, all deposits for assured shorthold tenancies should be protected to serve a section 21 notice, even deposits taken before 6 April 2007. Deposits relating to other types of tenancies are not covered.

Requiring a Deposit

A landlord may require a deposit from a tenant before they move into the property. For tenancies or renewals since 1 June 2019, the maximum deposit requested is five weeks of rent where the rent is less than £50k per annum or six weeks of rent for £50k and over.

Landlords often feel that holding a deposit means a tenant is less likely to abandon the property and instead terminate the tenancy correctly. A deposit can also ensure the property is properly cleaned and cleared at the end of the tenancy. Deposits can also help protect landlords against unpaid rent at the end of the tenancy. The deposit amount to be levied is part of negotiating a contract or agreement with the tenant. The deposit amount can vary significantly and depends on how much 'risk' the landlord perceives they are taking by letting the property to that tenant. Large deposits, however, can deter prospective tenants, and judgment must be exercised in setting a market-friendly but practical deposit level.

The deposit should be taken after a tenancy has been agreed on and signed by all parties but can be taken before keys are handed over and before the tenant moves in.

Protecting a Deposit

The Housing Act 2004 introduced specific requirements relating to deposit protection, which commenced on 6 April 2007. The Act has subsequently been amended by the Localism Act 2011 (the changes came in on 6 April 2012), and the legislation surrounding deposits was further amended on 26 March 2015 by the Deregulation Act 2015.

Under the Housing Act 2004 -

a deposit must be dealt with per an authorised tenancy deposit scheme from the moment of receipt
landlords must comply with their chosen scheme's initial requirements within 30 days of receiving the deposit
landlords must give prescribed information to the tenant and to anyone who paid the deposit on the tenant's behalf within 30 days of receiving the deposit

The legislation uses the term to comply with the initial requirements of a scheme, commonly called protecting the deposit.

Precisely how to protect a deposit depends on the individual scheme of choice, but essentially, they all require a landlord or agent to -

register with the scheme
enter details about the property
enter information on the tenancy and deposit
enter information on the tenant(s)
either send the deposit to the scheme or pay if it is an insured-based scheme (some agents will use a system that pays per office rather than per deposit).

In an assured shorthold tenancy, the landlord must protect the deposit within 30 days of receiving it. This means the 30 days might start before the tenancy 'commences'. For example, a student might sign and date a tenancy agreement in January and pay the deposit simultaneously. However, the tenancy might not start until the following September. In this example, the 30 days would begin in January, when the deposit was paid, not September.

A renewal tenancy on or after 6 April 2007 is the same as receiving a new deposit in connection with a tenancy and would trigger deposit protection. Assuming a deposit was correctly protected when initially received (and prescribed information given), for any renewals after that time, the deposit doesn't need to be re-protected as long as the deposit remains in the same scheme and the renewal is between the same landlord, tenant and property as initially completed. Individual scheme rules may need to be followed if a renewal tenancy is entered into.

Penalties for Failing to Protect a Deposit

Suppose a landlord fails to protect a deposit within 30 days of receiving it in connection with a tenancy. In that case, a penalty of 1 - 3 times the deposit is payable if a tenant or person who paid the deposit on their behalf applies to court. Depending on the circumstances, this is usually in addition to an order requiring protection or returning the deposit. The amount of the penalty is at the discretion of the court.

In addition to the financial penalty, where the landlord or agent did not protect a deposit within 30 days, the landlord cannot serve the section 21 notice (no reason notice) unless the deposit is fully returned before the service. The balance must be refunded before service if there are 'agreed deductions'. For example, if there are rent arrears, both landlord and tenant can agree to reduce the arrears by using the deposit. For this to work, it must be 'agreed' by both parties, and the court will want to see a written agreement.

Even if a deposit has been protected after 30 days, that is not good enough to serve a section 21 notice. The deposit (despite being protected) would have to be returned (or agreed deductions) before the service of the notice. If a deposit has been protected late (after 30 days), the penalty would nevertheless be payable if sought through the court by the tenant.

If the deposit is returned in full (or agreed deductions) due to it not being protected or was late, the penalty of between 1 and 3 times the deposit remains payable regardless should the tenant seek compensation through the courts.

If a deposit was received before 6 April 2007, the tenancy became a statutory periodic tenancy on or after 6 April 2007, and the tenant remains in occupation under that statutory periodic tenancy, the deposit had to be protected within 90 days of the Deregulation Act 2015 being passed (the Act was passed on 26 March 2015). The same penalties apply if the landlord doesn't protect such a deposit within 90 days (no section 21 until returned plus financial penalty).

Where a deposit was received before 6 April 2007, the tenancy went periodic before 6 April 2007, and the same tenant is in occupation under that periodic tenancy, the tenant can seek no penalty for any failure to protect. However, if a section 21 notice is to be served, the deposit must be first protected, returned in full or agreed deductions.

A tenant (or person paying the deposit on their behalf) can claim the financial penalty during a tenancy or after leaving for up to 6 years.

Prescribed Information

Just as important as protecting a deposit is giving the prescribed information within 30 days of receipt.

The information is quite lengthy and must include the following:

The name, address, telephone number, e-mail address and any fax number of the deposit scheme administrator
Any information contained in a leaflet supplied by the scheme administrator to the landlord which explains the operation of the provisions contained in sections 212 to 215 of, and Schedule 10 to, the Act
The procedures that apply under the scheme by which an amount in respect of a deposit may be paid or repaid to the tenant at the end of the shorthold tenancy
The procedures that apply under the scheme where either the landlord or the tenant is not contactable at the end of the tenancy
The procedures that apply under the scheme where the landlord and the tenant dispute the amount to be paid or repaid to the tenant in respect of the deposit
The facilities available under the scheme for enabling a dispute relating to the deposit to be resolved without recourse to litigation
The amount of the deposit paid
The address of the property to which the tenancy relates
The name, address, telephone number, and any e-mail address or fax number of the landlord
The name, address, telephone number, and any e-mail address or fax number of the tenant
Such details that the landlord or scheme administrator should use to contact the tenant at the end of the tenancy
The name, address, telephone number and any e-mail address or fax number of any relevant person
The circumstances when the landlord may retain all or part of the deposit by reference to the terms of the tenancy
Confirmation (in the form of a certificate signed by the landlord) that the information he provides under this sub-paragraph is accurate to the best of his knowledge and belief
He has given the tenant the opportunity to sign any document containing the information provided by the landlord under this article by confirmation that the information is accurate to the best of the tenant's knowledge and belief.

Schemes are not allowed to supply the information, and the information must be given (and signed as accurate) by the landlord or agent.

All the information must be present. A link to the scheme rules on their website is not enough. You must physically give the appropriate rules or information to the tenant(s) and relevant person(s).

Where it asks for the landlord's details, this may be the agent's details if there is one (at the landlord's discretion).

Suppose you protected the deposit within 30 days but gave the prescribed information after 30 days. In that case, a section 21 notice can be served (as long as the prescribed information was provided 'before' service), but the penalty of between 1 and 3 times the deposit would still be payable if the tenant applied.

Where a tenancy is renewed, and as long as the deposit was correctly protected and prescribed information given at the time of receipt, no further prescribed information is required whilst the deposit remains in the same scheme and the renewal is between the same landlord, tenant and property.

On appeal, a lower court has held that prescribed information given before the landlord received the deposit renders it invalid, and a section 21 notice cannot be served. It's common for deposit-prescribed information to be included in the tenancy agreement so the tenant can sign it simultaneously. In that case, it is best to send a copy of the prescribed information (a copy of the signed tenancy, including the information) after the deposit has been protected, along with the deposit protection certificate.

Serving this document

Serve the deposit prescribed information in line with the service clause in your tenancy agreement—normally by first-class post to the property, hand delivery, or (if the contract allows) email.
Always put all tenants' names on the heading and envelope, and keep a certificate of posting or a photograph of hand-delivery.
Joint tenants: Shelter's professional guidance confirms that one copy, in a single communication addressed to all joint tenants (or a nominated lead tenant), is "arguably sufficient" for statutory documents such as deposit prescribed information, provided each tenant is named in the document. However, despite this, giving each named joint tenant a duplicate copy is ideal.
Where the document is to be given before occupation or at the start of the tenancy, attach it to the digital signing tenancy pack and email it to every tenant so there is no dispute about receipt.

For fuller details on service rules, see our Service of Notices guide.

Types of Schemes

The schemes are of two types:

Custodial (where the scheme administrators hold the deposit, and which is free of charge) or
Insurance (where the landlord holds the deposit but has to pay an insurance premium).

At the time of writing, three schemes are authorised under the Housing Act 2004, and all three offer a custodial or insured option.

The custodial scheme is open to all landlords and letting agents and is free to use. The landlord or agent must pay the deposit to the scheme administrator within 30 days of receipt. The scheme is funded by the operator's interest in the deposits they hold.

Landlords and agents pay a fee to join insurance schemes. Insurance schemes operate on the basis that the deposit continues to be held by the landlord or agent during the tenancy. If there is a dispute about the deposit at the end of the tenancy, the deposit holder must pay the disputed amount to the scheme. The scheme will make an award based on the decision of the scheme's adjudicator, an order by the court, or if the parties can subsequently reach an agreement. The deposit money is insured so that if the landlord or agent does not pay the correct amount to the scheme when requested, the scheme can claim on the insurance, pay the tenant's award, and then try to recover the tenant's award from the landlord or agent. Suppose there is no dispute about the proposed deductions from the deposit. In that case, tenants can often receive their deposits (or the balance due to the tenant) more quickly under these schemes because the landlord/agent can pay it back (rather than wait for the custodial scheme to refund the money).

The landlord must decide under which scheme the deposit will be held, either custodial or an insurance-based scheme. The prescribed information that landlords must give tenants, not more than 30 days after receiving the deposit, includes providing the tenant (and anyone who paid the deposit on the tenant's behalf) details of the scheme under which the deposit will be held.

All the schemes have an alternative dispute resolution (ADR) service that seeks to resolve deposit disputes. The use of a deposit protection scheme's ADR service is not compulsory. Both landlords and tenants can still go to court, but they cannot do both. Sometimes, the judge ordered landlords who took their case to court to use the ADR service. There is a general obligation in the Civil Procedure Rules (the court rules) to try other means of resolving disputes before going to court -- because court proceedings are often time-consuming and expensive.

Authorised Tenancy Deposit Protection Scheme Providers

There are three authorised schemes:

The Deposit Protection Service (further details from www.depositprotection.com).

The Dispute Service (further details from www.thedisputeservice.co.uk) and

Mydeposits (additional information from www.mydeposits.co.uk).

Different membership options are available through the schemes. For example, managing agents may pay a membership fee that covers that agent for all deposits they receive. Alternatively, a landlord with only one or two properties who does not use an agent may be able to pay a flat fee per deposit, which may be more cost-effective.

Landlords or their agents should familiarise themselves with the rules of their chosen scheme. The rules may direct landlords and agents to include particular clauses in their standard tenancy agreements. If tenancy agreements or other documents are not in the form required by the scheme, or if timescales are ignored, the adjudicator may award the full deposit to the tenant by default -- whatever the merits of the landlord's claim.

Starting on 6 April 2017, a local authority may seek information from the schemes to facilitate investigations for the Housing and Planning Act 2016.

Withholding Part of the Deposit

Deposits can cover:

damaged items
outstanding debts attached to the property
failure of the tenant to carry out obligations set out in the tenancy agreement, such as cleaning
non-payment of rent
other breaches of the tenancy.

In assessing any damage, allowance must be made for fair wear and tear, which is not deductible from the deposit. Fair wear and tear is paid for in the rent charged. Wear and tear arise from everyday living in a property. Landlords should not expect to receive a property back in the same condition it was let at the start of the tenancy. Tenants should be expected to return the property clean and tidy. But after, say, a two-year tenancy of everyday living, a landlord will have to accept that paintwork might look tired and carpets might look worn.

The tenancy agreement should state clearly the circumstances under which the landlord may withhold the deposit at the end of the tenancy.

Suppose the tenant cannot afford the deposit. The local authority's housing department or housing advice centre may operate a rent or deposit guarantee scheme in the area, securing rent or damage costs for a specified period.

At the end of the tenancy, the landlord should check the inventory and an assessment of the condition of the property - the landlord should take into account reasonable wear and tear.

If a claim is being made from the deposit, the landlord should account for this with invoices or receipts and agree with the tenant about the proposed deposit deductions. The landlord should promptly send any unclaimed deposit balance to the tenant. The landlord should not keep the full deposit to get the tenant to agree to deductions about part of the deposit.

Returning the deposit

There is no specified time limit for when a deposit must be returned, and it's acceptable to survey the property to compare the inventory and get quotes for necessary work before it is returned.

However, the tenant can contact the scheme and request payment if the deposit hasn't been returned within ten days. The landlord will be notified of the request and may be able to submit evidence to delay the process.

To return a deposit, if it is held in a custodial scheme, the landlord or agent will go onto the scheme's online portal and request for the amount to be returned to the tenant. If the landlord or agent holds it through an insured scheme, they can return the deposit by any agreed means, including bank transfer. Any balance not returned may have to be sent to the scheme to hold during dispute resolution if there is a dispute over the amount returned whilst using an insured scheme.

Relevant Person

Where a third party provides the deposit, i.e. money changes hands instead of the guarantee schemes listed below. That person is a 'Relevant Person' and needs to be provided with a copy of the prescribed information. This is very common in student letting, where parents often give the deposit, and some local authorities will offer a physical monetary deposit rather than a guarantee. The Relevant Person should also be provided with a copy of the tenancy agreement, as it could help avoid or resolve disputes later if they are told upfront what the landlord might use the deposit for. Like tenants, Relevant Persons can claim against landlords or agents if they are not given prescribed information or if the landlord/agent fails to comply with the chosen deposit protection scheme's initial requirements.

Lead Tenant

The Deposit Protection Service (DPS) and the Mydeposits scheme use a 'Lead Tenant' or 'Nominated Tenant' system. This applies in any situation where more than one person is interested in the deposit. This could be where joint tenants, parents of students, or local authorities provide the deposit. In setting up the Lead Tenant, all parties interested in the deposit need to agree on who that will be. This may cause problems with students signing a joint tenancy trying to get six parents who have not met to settle or if they choose a Lead Tenant who leaves the property before the end of the tenancy.

If a local authority had provided the deposit, the Lead Tenant might not be a tenant, but the local authority which paid a deposit on behalf of the tenant.**

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