How to make sure that your deposit is protected correctly

As a landlord, it’s crucial to be sure that your tenants’ deposits are adequately and legally protected, as there is a legal requirement to protect any tenancy deposits taken in a government authorised tenancy deposit scheme.  

It’s estimated that around 4.5 million tenants’ deposits, worth around £4.5 billion, are being held in government approved protection schemes, or by a landlord or letting agent. But it’s also estimated that there are more than half a million deposits that are not protected, 17 years after deposit protection was first introduced. 

If you’re a new landlord it’s important to understand your legal responsibilities around tenancy deposit protection, so that you follow, and comply, with the law. NRLA tenancy deposit protection partner, mydeposits, has put together this useful guide, which will cover: 

• What is a tenancy deposit
• Tenancy deposit schemes
• What happens at the end of a tenancy
• The alternatives to taking a deposit
• Rent to rent and deposits

What is a tenancy deposit?

A tenancy deposit (sometimes known as a security deposit) is often taken by the landlord at the beginning of a tenancy. It is then protected by the landlord and either returned in full at the end of a tenancy or could be subject to deductions if there is damage to the property or if rent is owed. Though there’s no legal requirement to take a deposit, it’s good practice to make sure that there is a financial safety net in place, if there is any damage. It’s also a great incentive for most tenants to look after a property well as they won’t want to lose any money through deposit deductions at the end of the tenancy. 

What is a tenancy deposit scheme?

Tenancy deposit schemes were first introduced by the UK Government in 2007, offering much needed security and protection to landlords, tenants and agents, as part of the drive to professionalise the rental sector. If you rent out a property on an assured shorthold tenancy (AST) (or an occupation contract in Wales), and decide to take a ‘cash’ deposit from your tenant, then legally you must place it in a tenancy deposit scheme within 30 days of receiving it and provide your tenant with detail of the protection that includes how the deposit is protected, which is called the ‘prescribed information’ within the same timeframe.  

Most tenancies are automatically ASTs. You’ll know that they are an AST if all of the following conditions apply: 

• You're a private landlord or housing association
• The tenancy started on or after 15 January 1989
• The property is your tenant's main accommodation
• You do not live in the same property as the tenant
• The rent is less than £100,000 a year, or more than £250 a year (£1,000 a year in London)

Tenancy deposit schemes offer the landlord (or agent acting on their behalf) two options. One is for the scheme to hold the deposit, which is free (custodial scheme), and the other allows the landlord or agent to hold the deposit but they must pay the scheme to insure it (insured scheme).  

Across the UK there are three government-backed schemes a landlord can choose from, mydeposits is the only provider that covers all UK regions, and Jersey. 

What happens at the end of the tenancy? 

If the landlord or agent decides there are no deductions to be made, then the deposit can be returned in full to the tenant. In the event of settlements or issues being proposed that require resolution at the end of the tenancy, the process is different depending on which type of scheme has been used: 

Custodial:

If there is a case for proposing settlements, then both parties (landlord and tenant) need to confirm to the scheme how much should be returned to the tenant. If the landlord wishes to make a claim and the tenant disagrees, then the scheme’s adjudicators need to be provided with evidence to make an impartial decision. Their decision will be final. 

Insured:

If the landlord wishes to propose a settlement and the tenant disagrees, then the unresolved amount that the landlord is claiming for has to be handed over to the tenancy deposit provider and they will hold it until a resolution has been finalised. Any amount remaining from the deposit is handed over to the tenant immediately. 

The most frequent issues which can lead to a formal resolution being needed include damage, redecoration, replacing broken items, cleaning or rent arrears. 

What can happen if a deposit isn't protected? 

If a landlord or agent does not protect their tenant’s deposit and inform the tenant which scheme it is protected with, they have broken the law. This means that the tenant could take them to court and claim compensation of up to three times the deposit, plus costs, plus the original deposit amount for non-protection. It also means that should they wish to evict their tenant; they be unable to as any Section 21 notice will be invalid. For more information on this, read mydeposits guide for the NRLA,  ‘The impact of unprotected deposits on evicting your tenant and serving a Section 21 notice’.  

Case study: 

The following case study highlights the necessity of checking the deposit is protected and that any agent employed by you to manage your lettings is performing their duties in full.  

The landlord said: 

• They asked the agent for the tenant’s deposit and references after the tenant was arrested
• He contacted all three tenancy deposit schemes to make a claim for the deposit, but none had any record of a deposit protection
• The agent ignored requests for copies of the reference checks so rent could not be collected through insurance
• The agent changed their business name three times since he signed the property management agreement

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 tenancy 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 and rent collection for the landlord
• Emails confirmed that a rent guarantee policy was agreed by the landlord and agent and put in place. But without a proper referencing report from the agent the landlord was unable to claim on the policy
• 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
• 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 lawful instructions, they had ultimately caused the landlord to break the law
• Poor communication had caused the landlord stress and inconvenience

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 not provided their service with the due diligence, skill and care required and the following awards were made:
  • £1,442 conpensation 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 ultimate responsibility for protecting a deposit falls on the landlord, so as well as checking that the deposit is protected* you should be sure any letting agent that manages your property: 
  • is accredited by at least one reputable organisation
  • carries out proper referencing and provides you with a copy of the report
  • provides proof that the tenancy deposit has been properly protected 
    *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 

What are the alternatives to taking a deposit? 

Instead of taking an upfront deposit, a landlord may offer the tenant the choice to pay a monthly ‘subscription’ to help reduce moving-in costs. The landlord still receives the same protection against any damages, or other breaches, as if they’d taken a ‘cash’ deposit. However, there is no potential of deposit related fines as the landlord hasn’t collected money from the tenant. The downside for the tenant is that they do not get any of their money back. 

Does rent to rent make compliance more complicated? 

Rent-to-rent, or ‘guaranteed rent schemes’ as they are also known, are increasingly more common in the private rented sector. They are however complex contracts involving multiple parties and responsibilities so can easily go wrong. Two Property Redress Scheme case studies featured in their latest annual report illustrate this:   

• PRS case study on serviced accommodation and deposit 
• PRS case study on late rent payments and ending a rent-to-rent agreement 

Rent-to-rent is where a company, a local authority (corporation) or an individual (the ‘rent to renter’) rents a property from a landlord (owner) and the landlord receives a guaranteed rental income for an agreed term, regardless of whether the property is occupied or not. The rent to renter then sublets the property to an ‘occupier tenant’ or tenants, at a higher rent than is paid to the landlord owner, making a profit in return for the risk taken and their efforts. It is ultimately the responsibility of their landlord (the rent to renter) to protect any deposit in one of the government-approved schemes.

For more information on what can go wrong with rent-to-rent, read this NRLA article by PRS Tenancy Mediation, ‘The pitfalls of rent-to-rent: Navigating challenges through mediation’. You can also read this article on LandlordZONE, with advice from Suzy Hershman, Resolution Department Lead at mydeposits, on the need to approach rent-to-rent agreements with caution.  

In conclusion

Failure to follow deposit protection regulations can have serious consequences for landlords, particularly those seeking to gain possession of their rental property.  

Landlords must recognise that even if they use an agent to manage their tenancies it is the landlord who is ultimately responsible for the deposit protection, so it is vital that you appoint an accredited agent and that you are provided with copies of the relevant documentation.  

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.