Hi Richard

Some good news for you if you have not already discovered.  Having immersed myself in all the available information, here is the answer to your question:

First "What is a “tenancy deposit”?" 

This may seem a silly question, but perhaps the first thing you need to ask yourself is, "What is a tenancy deposit?"  In reference to the new tenancy deposit laws the answer to that question lies in the text of the Housing Act 2004 Chapter 4 Tenancy Deposit Schemes see Section 212 paragraph 8:

"tenancy deposit", in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for-
 
(a) the performance of any obligations of the tenant, or
 
(b) the discharge of any liability of his,
 
arising under or in connection with the tenancy.

This is really important to know because if you have not yet entered a tenancy with the person who has given you a deposit, they are not yet a tenant.  You do not need to have the deposit protected under a government approved scheme until a tenancy agreement has actually been entered

This is very important for landlords to know because quite frequently they will take a deposit from a prospective tenant and, prior to entering a tenancy agreement, will conduct various pre-tenancy vetting procedures such as credit checks and reference checking.

If you have any doubts about my interpretation of the above, it may please you to know that this is also the interpretation held by the Department of Communities and Local Government (responsible for the tenancy deposit schemes) and outlined in their document entitled Tenancy Deposit Protection – Overview. Given the amount of important information within this overview it was a surprisingly difficult document to discover. I came across it by accident when doing a Google search and you can download it here from a little-known website called www.lacors.gov.uk  - LACORS stands for the Local Authorities Coordinators of Regulatory Services. Surprisingly I could not find this document on the Communities and Local Government’s own website!  Correction, having contacted them about this they've now added it here - http://www.communities.gov.uk/index.asp?id=1163532

Most of the information is contained within a FAQs section and question 34 reads like this:

Q.34 Is a holding deposit (i.e. a deposit that is taken before the landlord and tenant have entered into an agreement in respect of a tenancy of a specific property) that is taken on or after 6 April 2007, a tenancy deposit that has to be protected in a scheme?
 
No. A holding deposit taken in these circumstances is not a tenancy deposit for the purposes of section 212 of the Housing Act 2004 and will not be required to be held under an authorised Scheme. A deposit is only required to be placed in a scheme if it is money held which is paid as security for the performance of any obligations of the tenant or the discharge of any liability of his, arising under or in connection with the tenancy. So if the tenancy agreement has not been entered into, or there are no contractual obligations resting on the tenant when he pays the holding deposit, then the deposit paid is not a deposit for the purposes of the Act.
 
However, if a landlord is holding a holding deposit in respect of a person who subsequently becomes his tenant, then the landlord must either return the holding deposit to the tenant (so that the tenant can give it to him again as a tenancy deposit) or retain it, and protect it in a scheme within 14 days of the tenant agreeing to enter into a tenancy (i.e. from the date that the holding deposit becomes a tenancy deposit).
 
This is really good news because:

a. it can be convenient to take an initial smaller holding deposit in the pre-tenancy stage either because you are taking a deposit a long way before tenancy is due to commence or because a prospective tenant may have a short-term cash flow problem

b.  the two main schemes that landlords will probably use (The DPS and TDSL) do not allow you to take multiple payments.  The deposit must be paid in one single payment. Well, in truth TDSL will allow multiple payments, but will charge you the same for each part payment.

c.  you can stall entering a tenancy agreement with the prospective tenant until all pre-tenancy vetting has been completed and other pre-tenancy paperwork received and signed. 

Only once you have actually entered a tenancy agreement with the prospective tenant do you need to arrange to have the deposit protected within 14 days.

Hopefully that should bring a  to your face.

I've actually designed a Deposit Receipt specifically with this in mind explaining clearly the purpose of the deposit and how and when it's purpose will change   from being a Holding Deposit to a Tenancy Deposit.

Let me know if you would like a copy.  My contact details are at http://www.cardiffhouseshare.co.uk my own site.

So in answer to your questions:

a. No a Holding Deposit does not need to be protected provided a tenancy agreement has not been entered - so maybe it's better to stall entering one until it is absolutely necessary, all checks have been completed and the full deposit has been paid otherwise if your holding deposit is smaller than your tenancy deposit you will have to protect 2 deposit payments (an initial amount and then a further amount at a later date)and this is either impossible (The DPS) or expensive (TDSL)

b. Once a tenancy agreement has been entered you MUST protect any holding deposit  already received within 14 days as it may be at this stage assumed to be a tenancy deposit or return it to the tenant.  Or you could simply convert it's purpose to be that of rent and it will no longer serve to be a deposit of any sort. If you do the latter I would recommend that you clearly explain this in advance to any tenant in your paperwork.

c. If the tenant does not take the tenancy you can not simply retain the full deposit as any clause allowing you to do so could be easily contested as unfair according to OFT guidelines. You can however, deduct a reasonable amount from the holding deposit.  Here is some standard text approved by the OFT for an agreement when taking a holding deposit:

If the tenant withdraws from the agreement thereafter, other than due to the landlord's default, then the holding deposit will be used to off-set the landlord's reasonable costs incurred until the property is re-let.

see Office of Fair Trading  - Guidance on unfair terms in tenancy agreements Retention of prepayments on consumer cancellation -paragraph 1(d) of Schedule 2 page 79

Hopefully this clarifies matters somewhat for you?

Dave Watkins