Under the Housing Act 2004 any landlord or letting agent that takes a deposit for an Assured Shorthold Tenancy must join a Tenancy Deposit Scheme.
When does the Tenancy Deposit Scheme apply?
The Tenancy Deposit Scheme applies to all Assured Shorthold Tenancies, whether the landlord is a private individual or company and whether the tenancy is for the entire property or a room in a shared house (unless the landlord also lives there).
The Tenancy Deposit Scheme does not apply if you are sharing accommodation with your landlord in their home as a lodger.
Rooms in halls of residence are generally not let on Assured Shorthold Tenancies if they are controlled by the university. However some universities use private companies to operate their halls of residence in which case these companies may let the accommodation on Assured Shorthold Tenancies and the Tenancy Deposit Scheme will apply.
The Tenancy Deposit Scheme applies to “Damage Deposits” (that is a deposit held by the landlord against any damage that may be caused by the tenant). It does not apply to “Holding Deposits”. Holding Deposits are explained below.
A Holding Deposit is paid to the landlord / agent to hold the property for you whilst you decide whether to take it or not. Exactly what has been agreed depends on the wording, but usually once you have paid a Holding Deposit the landlord / agent should not then show the property to other prospective tenants. Essentially you should paying to get “first refusal” on the property.
If you decide not to take the property, you are likely to lose this Holding Deposit because the landlord / agent can argue that they have lost rent by not leasing it to someone else whilst you were deciding whether to take the property or not.
Holding Deposits are controversial. The tenant will lose money if they decide not to proceed but the landlord does not lose any money if they decide not to accept the tenant’s offer. This means that in any negotiations carried out before the lease is signed, landlords are under far less pressure to agree tenant requests once a Holding Deposit has been paid.
It is also not unheard of for landlords and agents to take multiple holding deposits for the same property on the basis that, by asking for a Holding Deposit from all enquirers, the landlord is simply finding out which ones are serious about the property.
The Tenancy Protection Scheme does not apply to Holding Deposits and this area of Landlord and Tenant law is poorly regulated. We would advise that you do not pay a Holding Deposit and, if you do, only if you are sure that you want to take the property. If you do not feel you can avoid it, you should make sure that you obtain a receipt for the deposit and that this outlines all of the main terms including the rent, length and start date of the tenancy and the length of time for which the deposit secures the property for you. You should also have read through a copy of the proposed Tenancy Agreement before you pay any money.
We will never ask you for a Holding Deposit. After giving first refusal to existing tenants we let on a “first come first served basis”, the property being secured by signing the Tenancy Agreement and paying the first month’s rent.
Paying a Damage Deposit
Before you pay the deposit you should ask what the landlord intends to do with it and which scheme they are going to use to protect it (see “Schemes” below).
When you pay the deposit, the law requires that, within 14 days, the landlord or agent is required to give you details about how your deposit is protected including:
- The contact details of the Tenancy Deposit Scheme.
- The contact details of the landlord or agent.
- How to apply for the release of the deposit.
- Information explaining the purpose of the deposit.
- What to do if there is a dispute about the deposit.
However, whilst the law gives the landlord 14 days, it is not unreasonably for you to expect them to already know what they are going to do with your deposit when you sign the agreement (see “Enforcement” for action that you may take if the landlord does not provide you with this information or protect your deposit).
There are two types of scheme: “insurance-backed” and “custodial”. Under the insurance-backed schemes the landlord or letting agency pays a premium to the scheme but retains the deposit themselves. With custodial schemes the deposit is transferred into the scheme within the 14 day timescale.
There are only 3 companies that have been awarded contracts by the UK government to run Tenancy Deposit Schemes.
MyDeposits – an insurance-backed scheme
The Tenancy Deposit Scheme (TDS) – an insurance-backed scheme
The Deposit Protection Services (The DPS) – a custodial scheme
Insurance-backed schemes are paid for by the insurance policy that the landlord must take out. The custodial scheme is paid for by the interest on the money held by the scheme.
The Landlord and Tenant Act 2004 states that, if a landlord or letting agent does not protect a tenant’s deposit and provide the tenant with the prescribed information within the 14 day timescale then they have no right to regain the possession of the property under Section 21 of the Housing Act. The tenant may also apply to the Court for the deposit to be protected and for compensation. The compensation for the tenant is entitled to 3 times that of the deposit.
What happens at the end of the tenancy?
At the end of the tenancy if there are no disputes over the condition of the property or amount of deposit to be refunded the tenant should receive the deposit back.
Under a custodial scheme, if both the landlord and tenant agree that the deposit is to be returned, the Custodial Scheme will refund the money to the tenant, together with a proportion of the interest accumulated.
Under an insurance-backed scheme, and assuming there are no disputes over the amount of deposit to be refunded, the landlord must return the deposit to the tenant within 10 days.
What happens if there is a dispute?
Both the insurance based and custodial schemes provide details of an Alternative Dispute Resolution (ASR) service.
Any disputes over the deposit can be referred to the ADR service provided both the landlord and tenant agree to use this service to settle the dispute. Once the ADR makes a decision about the deposit it is binding and neither the tenant nor landlord can take the dispute to the Court.
If the tenant or landlord does not wish to use the ADR service then a dispute is resolved through the Courts.
We would recommend that the lease states that any disputes will be referred to the Alternative Dispute Resolution service.
Who holds the deposit when the dispute is in the process of being resolved?
Insurance Based Schemes
If the deposit was registered with an insurance based scheme, the landlord would not be able to hold all of the deposit whilst the dispute is being resolved. The undisputed amount can be returned to the tenant and the landlord can keep the remaining disputed amount. However, the disputed amount is required to be put into the insurance based scheme. Only when the ADR service or the Court has reached the decision on how the deposit should be dealt with will the scheme refund the deposit based on the decision made.
The disputed deposit will remain in the Custodial Protection Scheme, whilst the remaining undisputed amount can be retuned to both tenant and landlord. When the ADR service or Court has made a decision on the deposit dispute the amounts will be refunded accordingly but the Custodial Protection Scheme.
What happens with the tenant or landlord cannot contact the other party to arrange for the deposit to be refunded?
If for some reason the tenant or landlord has lost the contact details and are unaware of the whereabouts of the other party, then they can apply to the Tenancy Deposit Protection Scheme for the deposit to be refunded.
The claim must include information to demonstrate the attempts made to contact the other party and whether or not they will agree to use the Alternative Dispute Resolution service if the other party was contactable and disputed the claim.