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Although the letting of property can be a lucrative source of income for a landlord, the granting of a tenancy can be an expensive and time consuming process. Landlords therefore almost always require a prospective tenant to pay a holding deposit even before the tenancy is agreed, as well as a further amount of money as a dilapidations deposit to cover any damage that occurs to the property during the tenancy.

Protection of Deposits

Since 2007, and the implementation of the Housing Act 2004 (as amended by the Localism Act 2011), in many prescribed situations tenancy deposits are required to be protected by a government-authorised scheme. Assured shorthold tenancies, the standard tenancy granted, are affected by this significant change, the purposes of which are to safeguard tenancy deposits and facilitate the resolution of disputes occurring in connection with such deposits. This prohibits landlords taking a deposit unless it is safeguarded by a scheme; such deposits must be paid by the landlord or agent into the custodial deposit protection scheme or held by them in a separate account protected by a relevant deposit scheme. The tenancy agreement must clearly state which scheme is to be used and the circumstances in which all or part of the deposit may be withheld at the end of the tenancy.

Where a deposit is held under one of the government sponsored tenancy deposit protection schemes, it will be necessary to follow the scheme procedures for the release of the tenancy deposit monies. Where there are deductions it will normally be necessary to gain the agreement of both the landlord and tenant regarding these deductions before the deposit can be released. If the agreement is not forthcoming, the dispute can be referred to the scheme dispute resolution process.

Penalties

The tenancy deposit protection legislation contains onerous sanctions for non-compliance which have now been amended by the introduction of the Localism Act 2011 on 6th April 2012. Where the landlord or other person receiving the deposit has not complied with the legislation, the following sanctions are available:

–  The landlord will not be able to regain possession of the property under section 21 where they have failed to protect the deposit within the 30 day period (previously 14 days) unless:

  • the deposit has first been returned to the tenant in full, or with such deductions as agreed with the tenant; or
  • any court proceedings brought by the tenant for non-compliance have been concluded, withdrawn or settled.

–  Where the correct prescribed information has not been given to the tenant a section 21 notice cannot be served until the correct prescribed information has been provided (but this can be more than 30 days after receiving the deposit).

–  Where the court believes that the landlord or agent has failed to comply with these requirements they will be ordered to pay a fine to the tenant of between one and three times the deposit amount, even where the tenancy has ended.

Holding deposit

There is often a delay between a tenant applying to take a property and the property becoming vacant, during which any references and credit checks are undertaken. Therefore, the position of the landlord is commonly protected by the taking of a holding, or reservation, deposit. Such a deposit indicates the prospective tenant’s commitment to renting the property, as the undertaking of credit checks and references can be time-consuming and expensive and other applications may be turned away. The Tenant Fees Act 2019 limits a holding deposit to one week’s rent and sets out the requirements for returning the holding deposit to the tenant.  See Tenant Fees Act article and Letting Factsheet 51 for more information.

Holding deposits are not subject to statutory tenancy deposit protection if they are accepted prior to the granting of a tenancy, and are not used as a bond during the tenancy. If they are included in the dilapidations deposit once the tenancy has been agreed, they will require the protection of a government-authorised scheme.

Dilapidations deposit

If the credit-check and references are satisfactory, before the tenant takes possession of the property he may also be required to add to the holdings deposit in the form of a larger tenancy dilapidations deposit. As the landlord is entrusting to the tenant a valuable asset, and perhaps also his furnishings, it will be very important to him that the value of his property is not diminished. The dilapidations deposit safeguards the landlord against any risk of loss arising from the tenant’s use of his property, as it can be offset against outstanding expenses at the end of the tenancy. This acts as a security, to protect the landlord from suffering loss as a result of any breach of a covenant contained in the tenancy agreement, such as the tenant leaving the property but owing money to the landlord for any damages, unpaid rent or unpaid household bills.

At the end of the tenancy the landlord will record dilapidations. If these are significant then it is advisable for him to draw up a schedule of dilapidations to enable him to claim dilapidations from the tenancy deposit. Once the tenant has returned the keys and check-out has been completed, it is important that the dilapidations deposit is returned to the tenant with reasonable expedience. This may involve the obtaining of estimates for any work needing to be done as a result of dilapidations, so that any remaining deposit monies can be returned to the tenant.

Under the Tenant Fees Act 2019 tenancy deposits are limited to five weeks’ rent (or six weeks for high rent cases where the annual rent is £50,000 or more).

The tenant’s money

The deposit funds remain the tenant’s money, and can only be utilised or appropriated without his consent if there has been a breach of the covenant contained in the lease. It is therefore essential that the tenancy agreement contains a clause allowing the landlord or letting agent to utilise the tenant’s deposit if there has been a breach of any covenant contained in the lease. If the deposit is held solely ‘against dilapidations’, then it may not be used for any other purpose than to fairly compensate the landlord for the dilapidations that have occurred.

Return of the deposit

The dilapidations deposit should be promptly returned to the tenant, provided he has looked after the property in a ‘tenant like’ manner, observed all of the covenants in the tenancy and restored the property to the landlord in a clear and undamaged condition. The deposit should be returned to the tenant in full if there are no dilapidations, or in part if any dilapidations he has caused are of lesser value than the deposit. There is no legal requirement for interest on the dilapidations deposit to be paid to the tenant. However, deposit funds are effectively held in trust by the landlord or the agent, so the tenant is usually entitled to any interest gained unless it is agreed otherwise. For clarity, it is beneficial that the position as to interest is included in the tenancy agreement. There should also be a clause stating whether the deposit is held by the agent ‘as agent for the landlord’ or ‘as stakeholder’.

Relevant Factsheets

Factsheet 24 – Tenancy Deposits and the Housing Act 2004

Factsheet 24a – Tenancy Deposit Protection – the choices

Factsheet 24b – Tenancy Deposit Protection – statutory information requirements