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7 things you didn’t know about tenancy deposit schemes

Posted by Lais on 11/03/2016

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We are always surprised by how many landlords find themselves in a hassle when they fail to protect a tenancy deposit as required by law.

This often happens as a result of a genuine mistake: the landlord didn’t know, was misinformed or believed their letting agency would be taking care of it.

This article is here to help you avoid any problems with tenancy deposit law. And, even if you use a letting agency, have a read anyway just to make sure you are complying.


What is a tenancy deposit scheme?

At the start of any tenancy, you can take a deposit from your tenants as security that they will return the property to you in good condition and with payments up to date.

However, since April 2007, you need to protect these deposits within a government-backed scheme.

The Tenancy Deposit Scheme exists to protect the tenant’s deposit, offer a fair way of disputing problems (if it comes to that) and help you and the tenant agree on the contract terms. Make no mistake – unless there are problems to dispute, this deposit belongs to the tenant.

What can you do to make sure the deposit won’t come back to haunt you?

We have put together this list of 7 things you need to know to make sure that you are following the tenancy deposit scheme rules:

1.  You have 30 days to protect the deposit. The 30 days start from the day that your tenants make their payment and NOT the day that the funds have cleared. You have 3 schemes to choose from: DPS, MyDeposits, and TPS. Alternatively, you can choose not to take a deposit from your tenant at all.

2.  You have 2 types of schemes to choose from. The main difference is who holds the money during the tenancy period. With the Custodial Scheme, the provider holds the deposit. If no disputes arise, the money is transferred back to the tenant at the end of the tenancy. This option is free and a no-brainer!

With the Insured Scheme, you or your letting agency can hold the deposit but must also pay an insurance premium to the scheme. If there are disputes, you need to transfer the deposit to the scheme until a settlement is reached. This option is costly and is only worthwhile if you have a large enough portfolio to make money out of the interest gains.

3.  Not setting up a scheme can cause you a huge headache. Tenants can press charges against you if you don’t protect their deposit. You can be fined up to 3 times the amount of the deposit. On top of that, you’ll be prevented from serving a section 21 notice. And, of course, you won’t be able to deduct any compensation for damage/loss from the deposit either.

4.  You need to know your scheme! If your letting agency is handling the deposit scheme on your behalf, make sure you ask for the proof of this protection. Keep this document together with your copy of the tenancy agreement. Asking about your scheme will avoid the letting agency forgetting to set it up.

5.  Not telling your tenant about the scheme can get you in trouble as well. You have 30 days to let your tenant know the name and type of the scheme and how to get their deposit back. The tenant could sue you for simply not providing the information. See a full list of information you need to give your tenant on the government’s website. What we usually do at RentSquare is give you and the tenant a copy of the scheme’s documentation – all other information should go in a good tenancy agreement anyhow.

6.  You don’t need to protect a holding deposit. If your tenant gives you a holding deposit to reserve the property then you only need to protect it once this becomes the deposit for the tenancy itself. Of course, it is still good practice to provide a document that states the conditions of the holding deposit (i.e. how a refund is handled), so make sure you’ve done that.

7.  Dispute resolutions are free. Yes, that is right! If you and your tenant can’t agree on a fair compensation for a particular problem, then you can take advantage of the scheme’s free dispute resolution process. An independent adjudicator will rule on a settlement based on the evidence that you and your tenant both provide.

Now you know that, if you plan to take a deposit, make sure you protect it with one of the tenancy deposit schemes. Choose the scheme that works best for you. The simplest option is the custodial option with DPS which is free and very quick to set up. This can save you a lot of hassle. And don’t forget to inform your tenant of the scheme you’ve chosen – at the end of the day it is their money we are talking about.


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