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.
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.
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 risk of loss arising from the tenant’s use of the 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 or unpaid rent etc.
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).
Protection of Deposits
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.
Dilapidation deposits received for assured shorthold tenancies created on or after 6th April 2007, or assured tenancies created on or after 1st May 2026, are required to be protected by a government-authorised scheme. The purpose of which is to safeguard tenancy deposits and facilitate the resolution of disputes occurring in connection with such deposits which must be paid by the landlord or agent into a custodial deposit protection scheme or held by them in a separate account protected by a relevant insurance based 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.
Deposit Deductions
At the end of the tenancy the landlord should record any dilapidations and advise the tenant of any deductions proposed from the deposit. The deposit should be returned to the tenant after the end of the tenancy either in full or with deductions as agreed. It will be necessary to follow the scheme procedures for the release of the tenancy deposit monies and 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.
It is important to keep and provide evidence of the condition of the property at the start and end of the tenancy and obtain estimates of any repair work required.
Penalties
The tenancy deposit protection legislation contains onerous sanctions for non-compliance including penalties and courts unable to issue possession orders until the landlord has complied with the legislation.