It is a sensible precaution for every landlord to take a deposit from a new housemate or tenant, to protect against damage to the property, or unpaid rent or bills. Often the deposit is equivalent to one months rent, however it may be more of less than this.
Landlords who take deposits from tenants must by law, protect the deposit using a government approved Tenancy Deposit Scheme. A landlord who does not protect a deposit cannot serve a Section 21 Notice to regain possession. The landlord may also be fined up to three times the value of the deposit.
There are two methods to protect a deposit. An 'Insurance Backed Scheme' or a 'Custodial Scheme'. The landlord, not the tenant, decides which of the two schemes to use.
The landlord has 14 days after receiving the deposit to register it in one of the approved schemes. At the end of the tenancy the landlord has 10 days in which to return the deposit, or part of it, if money has been deducted.
Here the landlord retains the deposit and takes out an insurance policy to protect it.
Details of the insurance policy are passed to the tenant so that they are aware of its existence and the protection it offers.
The insurance policy ensures that if the landlord unreasonably withholds repaying the deposit, the policy will repay the agreed value back to the tenant.
If a dispute arises, the landlord pays the disputed amount to the scheme for safekeeping until the disagreement is resolved. The remainder of the deposit is repaid to the tenant.
Under the custodial scheme the landlord pays the whole deposit to the custodian at the start of the tenancy. The custodian keeps the deposit in a designated bank account.
The deposit is held by the custodian until the end of the tenancy, at which point it is returned to the tenant.
If a dispute arises, the deposit is held by the custodian until the dispute is resolved.
Once the dispute is resolved, the deposit will be returned to the tenant, less any agreed amount that is to be paid to the landlord.
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