It’s common practise in the lettings market for deposits to be taken by a landlord or letting agent as part of the tenancy agreement. This protects landlords against any problems that occur during the tenancy, such as a failure to pay rent, or if the tenants cause damage to the property.
In England and Wales, landlords are obliged to place any deposit they receive (up to the value of £100,000 a year) in to a Government-authorised tenancy deposit scheme. This only applies if the tenant is an assured shorthold tenancy.
In Northern Ireland, there’s no requirement to place deposits in a deposit scheme. However landlords still have a responsibility to return the deposit if the property is in the same condition as when the tenants moved in.
In Scotland, landlords are required for all private residential tenancies to place deposits with one of three government-approved scheme providers. The three approved scheme providers are SafeDeposits Scotland, mydeposits Scotland and the Letting Protection Service Scotland.
In England and Wales there are 2 types of scheme: custodial and insurance-based.
At the start of a new tenancy agreement, the tenant pays their deposit to their landlord or agent as usual. The landlord or agent must then ensure it’s protected by ensuring it’s enrolled in a government-approved scheme. The landlord or agent must notify their tenants of the details of the scheme within 30 days of them making the payment.
Under a custodial scheme, the money is held by the scheme provider, rather than the landlord, until it’s time for it to be repaid at the end of the tenancy.
There is only one custodial scheme provider - The Deposit Protection Service. This scheme is free to use as it is funded entirely from the interest earned from deposits held. You can find more information here on the The Deposit Protection Service.
At the end of the tenancy, if an agreement is made about how the deposit should be paid, the scheme will return the deposit as agreed. If there’s a dispute, the scheme holds the deposit until the dispute resolution service or courts decide what should happen to it. Until resolved, any interest accrued is used to pay for the running of the scheme with any surplus going to the landlord or the tenant, depending on who is entitled to it.
Unlike the custodial scheme, under the insurance-based schemes the landlord keeps the deposit. There is a fee attached to these schemes to insure against the landlord failing to repay the tenant any money due to him/her. There are 2 insurance-based schemes: mydeposits and the Tenancy Deposit Scheme.
At the end of the tenancy, the landlord or agent should return all or some of the deposit (as agreed) within 10 working days. If there’s a dispute, the landlord must hand over the disputed amount to the scheme for safekeeping until it’s resolved. If for any reason the landlord fails to comply, the insurance arrangements will ensure the return of the deposit to the tenant, if they are entitled to it.
If as a landlord you don’t protect the deposit, your tenant can take you to court either during the tenancy or up to three months after it has come to an end. The court can order the landlord to pay the tenant up to three times the amount of the deposit within days of making the order.