Tenancy Deposits for rental properties

Information on Tenancy Deposits for landlords and tenants.

From April 2007 all damage deposits taken for Assured Shorthold Tenancies (ASTs) are regulated under the Housing Act 2004. This means that any deposit taken must be protected under one of the 3 government appointed schemes.

Key Points

If a landlord decides to take a Security Deposit for an AST he must inform his tenants within 14 days of taking it which scheme he intends to use.

Holding Deposits are not affected.

There are two main reasons why landlords take deposits:

  • A Holding Deposit - to hold the tenancy for a short period prior to the contact being signed.
  • A Security Deposit (sometimes referred to as a Damage Deposit, Rental Deposit or Bond) - to give the landlord a reserve fund in case of problems.

The Holding Deposit

The holding deposit shows good faith on the part of a prospective tenant enabling the landlord to take further action in the confident knowledge that the applicant is serious and fully committed to the property. The landlord should:

  • Cancel any advertising for the letting
  • Tell other applicants that the tenancy has been taken therefore avoiding "stringing them along for too long", though he may continue to take details as a contingency
  • Prepare a letting agreement
  • Take up references
  • Carry out credit checks (some landlords make a charge for this - administration fee, agents almost always do).

The holding deposit is particularly appropriate where there is good demand for the property and the landlord may lose other prospective tenants if the applicant causes unnecessary delay or declines the tenancy at the last minute.

In the event of the tenancy agreement falling through the landlord may well decide to keep this holding deposit as recompense for the inconvenience and cost caused, but this should be pointed out and stated in writing to any prospective tenant at the outset, along with a written receipt for the deposit held.

The amount of any holding deposit should therefore reflect in advance the reasonable or approximate amount of the landlord's loss in the event of non-completion of the agreement.

Once the agreement is signed the holding deposit would normally then form a part of the Security Deposit, to be held by the landlord or the agent throughout the term of the tenancy. If the landlord decides not to take a Security Deposit, the holding deposit should be returned.

The Security or Damage Deposit

The taking of security deposits has come to be accepted by landlords, tenants and the courts as normal practice in residential lettings in the UK.

However, unlike in some countries, there are no statutory rules laid down. Deposits are contractual between landlord and tenant and the detail - what the deposit covers, interest payable etc - depends very much on what the agreement says.

What exactly should the deposit secure? The usual items are listed below, all of which should be referred to in the letting agreement.

  • Damage to the property, landlords fixtures, fittings and furniture - beyond normal wear and tear
  • Cleaning - for example, a cooker or carpet cleaning.
  • Rubbish removal - tenants may leave unwanted items of their own such as furniture or general rubbish both inside and outside the property.
  • Unpaid rent.
  • Any unpaid account which vendors may attempt to recover from the landlord - generally speaking this does not apply as the contract for the supply of goods or services is usually between the vendor and the tenant.
  • Replacement keys/locks when keys are lost or not returned. If keys are not returned it is a landlord's duty to change the locks.

The letting agreement should state what can be deducted from the security deposit and under what circumstances. For example, if damage occurs during the period of the tenancy then the repair may be funded from the deposit and the tenant would then be required to make the deposit amount up again to its full amount.

Tenants often fail to realise just how much things cost. If a landlord brings in someone to clean a cooker or remove rubbish the charge is often much higher than the average tenant would realise, or is generally be willing to pay.

The Amount of the Deposit

The amount of the deposit should be a maximum of two months' rent. If the deposit is more than this amount it could in theory count as a premium and may give the tenant an automatic right to assign the lease without the landlord's consent.

This eventuality of assignment should be precluded by the terms of the tenancy agreement anyway, but as a precaution the deposit should be kept below two months' rent.

One month's rent is a common figure, though some landlords avoid this as it could encourage the tenant to substitute the deposit for the last month's rent - 5 or 6 weeks may be acceptable.

The Tenancy Deposit Scheme

From 6 April 2007, all deposits (for rent up to £25,000 per annum) taken by landlords and agents for assured shorthold tenancies (AST) in England and Wales have to be protected by a government authorised tenancy deposit scheme. (ASTs are the usual tenancies made between a private landlord and his tenants.)

To avoid disputes going to court each scheme is supported by an alternative dispute resolution (ADR) service, whose aim is to make disputes over the repayment of the deposit faster and cheaper to resolve.

If there is a dispute regarding damage or breach of the tenancy terms then the ADR service will become involved, otherwise the tenant's deposit will be returned without delay.

The onus of proof will be on the landlord or agent. They will need to provide reliable evidence, usually in the form of an inventory, or a schedule of condition and photographs, to support their claim for deductions from the deposit.

The court route is still open to the parties to resolve a dispute, and in cases where the damage claim exceeds the deposit.