5 reasons why landlords should take a deposit

In this article, Resolution Department Lead at mydeposits, Suzy Hershman along with Steve Barnes, Head of Broking at Total Landlord and Tim Frome, Head of Government Schemes at Total Property, talk about the humble tenancy deposit. We explain why it’s so important to landlords, what alternatives exist and how the impending Renters’ Rights Bill will make deposit protection compliance more important than ever.

The article will cover:

• an introduction to tenancy deposit protection
• the alternatives to taking a deposit
• the five main reasons for taking a deposit
• the importance of protecting the deposit correctly (with case study)
• why the deposit is no substitute for insurance

Introducing tenancy deposit protection schemes

Before 6 April 2007 in England or Wales, if a landlord chose to keep any part, or or all of a tenant’s deposit at the end of the tenancy the tenant had very few legal ways of getting it back. Though most landlords acted fairly and only made deposit deductions for genuine reasons, a small number of landlords took advantage of the system, overcharging for things like cleaning or simply retaining the deposit for no reason and without an explanation.

Following the 1990s buy to let boom , rogue residential landlords regularly provided the media with sensationalised stories of terrible living conditions and huge profits being made at the tenants’ expense. Against that backdrop, when the National Association of Citizens Advice Bureaux (NACAB) published a report in 1998 highlighting the difficulties faced by tenants trying to reclaim their deposits from private landlords, it concluded that the case for reform was ‘overwhelming’ and that the failure to regulate deposits damaged the image and reputation of the private rented sector. This ‘bad press’ combined with political pressures saw legislation included in The Housing Act 2004 which made it compulsory for deposits paid in relation to an Assured Shorthold Tenancy after 6 April 2007 to be lodged with a government-approved tenancy deposit protection (TDP) scheme.

What is a tenancy deposit?

A tenancy deposit is an amount of money that the landlord or agent can request from the tenant before they move into a property, as security against non-payment of rent, damage to the property or for missing items highlighted in the inventory. Also known as a ‘security deposit’ a landlord or their agent must protect this money for the length of the tenancy and then refund it to the tenant after they have left, less any reasonable proposed settlements made by the landlord relating to property damage or any outstanding rent. 

The alternatives to taking a deposit

The majority of landlords, agents and tenants recognise that taking a deposit is best practice, as it protects all parties’ best interests, but it is not a legal requirement to do so and there are alternatives.

1. Deciding not to take a deposit

If you choose, you do not need to take a deposit at all. There are risks associated with having no deposit to fall back on but there are also some potential benefits in not asking for one:

• You may be able to let the property more quickly as tenants will not need to save up for a deposit on top of paying their first month’s rent
   
• You’re more likely to attract one of the many good tenants out there who can afford to pay their rent on time and in full each month, but just don’t have enough saved for the deposit
   
• you could save some time and money by not protecting a deposit due to less administration involved in the protection process, depending on your choice of protection model
   
• There is no risk of your tenant taking you to court or of you being unable to evict them using a Section 21 notice, due to poor deposit administration

2. Using an alternative product

Alternative products to the traditional deposit model may offer more protection than simply taking no deposit at all. These deposit replacement schemes include insurance-based options with set up fees and monthly premiums, and ‘self-insured’ up-front fee models. All of these schemes require proper referencing checks to be carried out before choosing a scheme, so there is still some level of administration and due diligence required which is in every landlords best interests.

Not all these schemes follow a Code of Practice and some agent operated schemes have been flagged as lacking in transparency so if this is your choice, it’s important to do your research on the extent of the tenant’s possible accountability at the end of the tenancy.

Note: Though most new tenancies are assured shorthold tenancies (ASTs), non-assured shorthold tenancies may be used when the AST is not an option. This includes landlords living in the same property as the tenant but with separate facilities, or if the property isn’t the tenant’s main accommodation.

What is the maximum deposit amount?

Under the Tenant Fees Act there is a cap on the deposit amount that can be taken depending on the annual rent:

• No more than five weeks’ rent where the total annual rent is less than £50,000
   
• No more than six weeks’ rent where the total annual rent is £50,000 or more

Tip: To calculate a week’s rent, multiply the monthly rent by 12 and divide by 52.

Deposits provide peace of mind

Despite the additional administration involved and the availability of deposit replacement schemes, most tenancies still involve taking a deposit from the tenant. In April 2024 there were over 4.6 million deposits protected in England and Wales alone. After more than 17 years, it is a tried and tested means of protecting both the landlord’s financial interest and the property itself.

The five key reasons for taking a deposit:

1. As a safeguard against damage

The main reason to take a deposit is as a financial safety net. If the tenant causes any damage to the property, it is entirely reasonable for a landlord to keep some or all the deposit money to help cover the cost of repairs. It also helps the tenant cover the cost of any issues that need dealing with, without needing to find additional money.

2. It gives the tenant a ‘stake’ in the property

When renting out a property, landlords are providing tenants with a home. Taking a deposit from a tenant provides them with the added motivation of looking after the property responsibly on your behalf, to make sure they get all or most of their deposit back. It also shows evidence of a tenant’s financial stability and their commitment to the rental agreement.

A happy tenant will feel more comfortable and safer in their home, and as a result, are more likely to look after your property well and potentially stay longer.

3. Showing you’re a good landlord

Good landlords make every effort to give their tenants the best possible renting experience. Requesting a deposit shows that you are a landlord who believes in a system which treats both landlords and tenants fairly. Taking and protecting deposits correctly will all become more important with the introduction of the Renters’ Rights Bill. There’s more on the Bill below and you can read more about how to be a good landlord here.

What is the Renters’ Rights Bill?

The Renters’ Rights Bill is the current government’s proposal, intended to reform the private rental sector and ‘rebalance the rights and responsibilities of renters and landlords’.

It includes abolishing Section 21 (‘no fault’) evictions, providing more security for tenants, taking tougher action against ‘failing’ landlords and improving housing quality. It aims to improve the current system for both the 11 million private renters and 2.3 million landlords in England, giving tenants much greater security and stability so they can stay in their homes for longer, build lives in their communities, and avoid the risk of homelessness. The Bill will likely become law in summer 2025.

4. A deposit provides negotiation options

If the end of tenancy negotiations with the tenant are unsuccessful, having taken and protected a deposit offers you the opportunity to use the free, independent resolution service provided by your tenancy deposit protection provider, like mydeposits.

Unfortunately, tenants are sometimes unaware of the costs involved in repairing damage, deep cleaning or removing those items left behind, all of which take time, effort and cost. If you are looking to recover more than the deposit amount when the tenancy ends, you can also take legal advice to explore your options, or try mediation through NRLA partner, the Property Redress Scheme’s Tenancy Mediation Service, also powered by Total Property.

Very few tenancies end without the landlord and tenant coming to an agreement over the deposit, but when they do, and courts are involved, it can be costly and time consuming for both parties. Having options available to find a solution before the situation escalates is better for all involved.

5. To cover outstanding costs

The intention of deposit protection is usually to recover costs of things like damage, repairs and cleaning. But if needed it can also be used to cover the final month’s rent if unpaid, outstanding bills or other rent arrears. This highlights the need to keep the deposit protected until the tenancy ends and not to use any of the deposit to carry out repairs caused by the tenant during the tenancy. It should be stated that taking a deposit is not a substitute for having comprehensive landlord insurance

The importance of protecting the deposit correctly

Though you are not legally required to take a deposit from your tenant, if you have a tenant on an assured shorthold tenancy (AST), or an occupation contract in Wales, and take a deposit from them, then by law you (or your agent) must protect the deposit with a tenancy deposit protection (TDP) scheme. The implications are serious if it is not protected correctly.

How to protect a deposit:

• You must protect the deposit with one of the government-authorised TDP schemes within 30 days of receiving it (not the tenancy starting)
   
• You must give the tenant written information about the scheme their deposit is protected with (including whether it is insurance-based or custodial) and details of their dispute resolution service
   
• The tenant should also be given:
  • details of how to claim back the deposit at the end of the tenancy
  • the likely circumstances why settlements from the deposit may be proposed
  • their options on what to do if they disagree with any proposed settlement and the landlord’s proposed deposit refund, following unsuccessful negotiation
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• The deposit must be protected until the end of the tenancy

If you break the deposit rules:

• you will be unable to serve a Section 21 (eviction) notice if the deposit is not protected with a scheme or if it was protected more than 30 days after receiving it
   
• non-protection or not providing the required scheme information, may mean your tenant is entitled to up to three times the deposit amount in compensation, in addition to the deposit, which could result in both parties ending up in court

Case study: the landlord is ultimately responsible

The following case study highlights the necessity of checking that the deposit is protected and that any agent employed by you to manage your lettings, is fully compliant on your behalf.  

What happened?

• After the tenant was arrested, no more rent was paid and the landlord’s emails, requesting copies of the deposit protection certificate and the referencing report, were never responded to by the agent
   
• It then became apparent that the deposit had not been protected and no referencing had been carried out

What evidence was provided?

• Management agreement, AST agreement, rent guarantee policy, emails, invoice and rent statement

What was decided and why?

• The tenancy agreement confirmed the deposit amount taken was £1442 and the monthly rent payable was £1250
   
• The management agreement confirmed that the agent was responsible for referencing, protecting the deposit, putting the guaranteed rent policy in place (also confirmed by email) and rent collection for the landlord
   
• Without a referencing report from the agent the landlord was unable to claim on the policy
   
• The agent was found to have fallen short of what is reasonably expected of them. In not complying with the terms of their agreement and not following their landlord’s instructions, they had caused the landlord to break the law

The decision

• The agent provided no response, so this case was a default decision based on the evidence and statements from the complainant landlord
   
• It was decided that the agent had provided very poor service, and had not carried out their due diligence with the skill and care required, and the following awards were made:
  • £1,442 compensation equivalent to the tenant's outstanding rent owed, as the agent did not do what was required for payment through the insurer
  • £500 for poor service and communication issues

Key takeaway points

The landlord has the ultimate responsibility for protecting a deposit, so as well as checking that the deposit is protected, you should be sure any letting agent you choose to manage your property:

• is accredited
   
• carries out proper referencing and provides you with a copy of the report
   
• provides proof that the tenancy deposit has been properly protected

Note: mydeposits has a free to use deposit checker

• If you take out a rent guarantee policy, make sure that it provides the required cover and be aware of any restrictions

No substitute for insurance

As the above case study highlights, even if you do take a deposit, bear in mind that it may be insufficient to cover the whole cost of damage or unpaid rent, for example. With rental prices currently outpacing income in most areas, the strain on household budgets is likely to increase the number of tenants falling into rent arrears, so it’s worth making sure that you have adequate rent guarantee insurance in place. It’s also wise to make sure that your landlord insurance policy covers you for malicious damage and accidental damage by tenants.

Insurers saw a significant rise in accidental damage claims during the pandemic, and the latest figures suggest that this increase may be part of a longer-term trend, with a small increase in the number of claims but a significant rise in the average cost for each claim due to inflationary pressures.

Summing up

Taking a deposit remains best practice for protecting your property and meeting the terms of the tenancy agreement. It is frustrating when the landlord-tenant relationship breaks down over damages in the property, the need for deep cleaning, or rent owing, but the deposit is there for these reasons.

Make sure that you (or the agent if it’s their responsibility) have protected the deposit in a scheme within the required 30 days and that the tenant has received the necessary detail (the prescribed information). Otherwise, you may find that deductions are not possible and there may be other legal consequences .

Your tenancy agreement’s deposit clause should set out the circumstances and reasons why you as a landlord may propose settlements from the deposit, either in full or part (e.g. to repair damage caused by tenants, for cleaning or rent arrears). This is a good place to start when negotiating and advising a tenant why you are proposing costs. Before this, it’s always worth confirming what you’re proposing is reasonable and not just wear and tear or the landlord’s responsibility. Our NRLA guide explains what you can and can’t claim against the deposit for.

It's important to stress that the deposit alone may be too little to meet the total cost of poor or accidental tenant behaviour. It is also not designed to provide cover for many other things that might affect your rental property. That is where landlord insurance comes in, to protect you, your tenants and your investment. Find out more about NRLA and mydeposits insurance partner, Total Landlord here.

Finally, we must remember the impending Renter’s Rights Bill, that is expected to become law next year, and the additional support that our partner services are able to offer landlords in what may be a challenging period.

Protecting your investment

With a deposit: We highly recommend that you take deposits from all your tenants. NRLA deposit protection partner, mydeposits, is a government authorised tenancy deposit protection scheme who uniquely cover every region of the UK. NRLA members get a 30% discount on the deposit protection fee when you protect a deposit online with mydeposits insurance in England and Wales. To claim your discount, you will need to verify your NRLA membership with mydeposits when you pay your deposit protection fee on check out.

With access to free mediation: With the best will in the world sometimes landlords and tenants just disagree on proposed settlements from the deposit. As well as the free, independent dispute resolution service, through mydeposits - mydeposits customers also have access to low cost mediation through PRS Mediation.   

Remember! NRLA members get a 30% discount on the deposit protection fee when they protect a deposit with the mydeposits insurance-based scheme in England and Wales. 

With the right insurance: Even with the best preparation, the unexpected can still happen which is why you need landlord insurance. Total Landlord is an award-winning partner of the NRLA who have been providing landlords and agents with high quality buy to let cover at a great price since 1996.