A ‘tenancy deposit’ is money paid by a tenant to a landlord at the beginning of a tenancy. This money is held as security to ensure that the tenant meets his/her obligations in the tenancy agreement. In many cases a deposit will be paid to an agent acting on behalf of the landlord.
For Assured Shorthold Tenancies (ASTs), the landlord or agent must pay the deposit into a deposit into an authorised protection scheme.
If a tenant breaches one or more obligations in the tenancy agreement, the landlord could have any losses caused by the tenant’s breach deducted from the deposit when the tenancy comes to an end.
Such losses could include:
- Unpaid rent.
- Damage caused to the property which is beyond normal “wear and tear”.
- Further damage to the property caused by a tenant’s failure to report any initial damage.
- The property having been left in a dirty condition.
- Missing items included on the tenant’s inventory.
Does a landlord have to take a deposit?
Landlords are never required to take deposits.
But if a landlord that does want to take a deposit from a tenant renting in an AST, the deposit:
- Can only be in the form of money. This includes cash, bank transfers, cheques and card payments. This cannot include items of property such as a car or jewellery.
- Must be protected by an authorised deposit scheme.
To find out if your tenancy is an Assured Shorthold Tenancy, see: ‘Assured Shorthold Tenancy Agreements’.
For more information on the types of deposit protection schemes, and landlords’ obligations in relation to them, see: ‘What does a landlord have to do when and after he/she takes my deposit?’ and ‘Tenancy deposit protection schemes’.
Why should a landlord take a deposit?
- It incentivises tenants to take good care of the property and pay rent on time:
Having already parted with their money, it is obvious that a tenant wishing to gain the money back would be more likely to comply with his/her obligations in the tenancy agreement.
If a landlord is owed money at the end of a tenancy (e.g. for unpaid rent or damage) which the tenant refuses or is unable to pay, the amount owed may easily be deducted from the deposit. This saves the landlord the cost and time of attempting to recover unpaid rent using the Small Claims Court.
- Cheapness of deposit protection schemes:
Tenants’ deposits are cheap to protect. Custodial schemes are provided free of charge and fees for insurance schemes are cheap. For example, for the Deposit Protection Service’s insurance scheme, agents currently pay a £9.50 fee per deposit; and landlords pay £15 for each deposit under £500 and £22.50 for deposits £500 and over (see the DPS pricing table). For information on insurance based schemes, custodial schemes and providers see: Tenancy Deposit Protection Schemes.
- Deposit protection schemes offer ADR which ensures that any deductions made are fair:
In the case of ASTs, if there is any dispute between the landlord and tenant about deductions to the deposit, these matters are solved through alternative dispute resolution services offered by protection scheme providers. The benefit of this is that the party making the decision on the amount of deposit to be returned to the tenant is impartial, meaning that any money deducted is likely to be a fair amount.
Disadvantages of taking deposits:
- There are strict deadlines, procedures and sanctions for landlords and agents required to protect deposits for ASTs:
Having received a deposit from the tenant, a landlord has 14 days to protect it using an authorised scheme. The landlord must also notify the tenant of the steps taken to protect the scheme within the same period. At the end of the tenancy, a landlord has 10 days to return the deposit to the tenant.
If a landlord fails to protect a tenant’s deposit, the tenant may apply to the court or the landlord to pay a penalty equal to three times the deposit. The landlord could also lose his/her right to repossess the property under s.21 of the Housing Act 1988.
- No deductions can be made until the end of the tenancy:
In cases where a tenant fails to pay rent in a particular month, the landlord will not be able to recover this until the tenancy ends. This could be problematic if a tenant’s rent is relied on to meet mortgage payments on the property.
What alternatives are there to taking deposits?
- Non-returnable administration fees:
A non-returnable fee charged by the landlord to pay for administrative costs such as drafting the tenancy could be a useful alternative. However, the fee must be non-returnable. If it is returnable, this could be interpreted as a deposit by the courts which, if not protected, could result in sanctions being imposed on the landlord.
Private insurance could be bought by landlords to cover missed rent payments or damage caused by the tenant. The disadvantage of such schemes is the cost, which could be passed to the tenant’s through his/her rent.
A guarantor is a person who agrees to incur liability for unpaid rent and other breaches of obligations by the tenant in the tenancy agreement. Landlords and agents should make sure that:
1) The guarantor is has the ability to pay.
2) The guarantee agreement lasts for the same period of time as the tenancy.
How are deposits paid if there are multiple tenants?
In the case of joint tenancies, a landlord can either take a deposit from the tenants as a whole, or separately.
- If a deposit is taken from the tenancy as a whole, the tenants will have to decide how to divide the returned deposit where reductions have been made. In the case of ASTs, a ‘lead tenant’ will be made responsible for acting on behalf of the other tenants in matters dealt with by deposit protection schemes.
If separate deposits are taken from each tenant, these can be registered separately with the deposit protection scheme. However, money deducted from deposits in respect of shared areas such as kitchens and living rooms may still be shared by all the tenants.
This Article was written by Samuel Pearcey a law undergraduate at UWE Bristol