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F A C T S H E E T

Tenancy Deposit Protection

What is a tenancy deposit?

A tenancy deposit is paid by the tenant to the landlord as security against breaches of a tenancy agreement.  Sometimes referred to as a bond, the deposit belongs to the tenant and continues to do so until such time as the landlord becomes entitled to make justifiable deductions from it.

What the deposit covers and the terms and conditions for returning it should be included in the tenancy agreement. Landlords may deduct an appropriate amount for damage to the property and its fixtures and fittings, and for outstanding bills for which the tenant is liable, provided there are provisions in the tenancy agreement allowing the landlord to do so. The deposit may not be used to cover fair wear and tear.

At the end of the tenancy (‘determination’), the tenant forfeits only that part of the deposit which the landlord can justifiably withhold to cover the landlord’s loss. The remainder of the deposit should be returned to the tenant promptly.

The Law on Tenancy Deposit Protection

Tenancy deposit protection (TDP) came into effect on 6 April 2007 as part of the Housing Act 2004.  The law requires all deposits taken on assured shorthold tenancies in England and Wales starting after 6 April 2007 to be protected in a government-authorised deposit protection scheme.

Landlords do not have to take a deposit, but if a deposit is taken it must be monetary and it must be protected in a government-authorised scheme. Landlords should not be beguiled into believing that they can circumvent the legislation by taking what amounts to a deposit in a different way.  The courts are finding against landlords who spuriously claim not to have taken a deposit when in fact they have (more below).

The Scottish Government and the Northern Ireland Executive are looking at options for deposit protection.

The NLA View

The government originally intended to introduce a universal, mandatory, custodial tenancy deposit protection scheme. The NLA conceded that there was a problem with a minority of landlords wrongly withholding deposits, but believed the government proposal would be disproportionate and bureaucratic.  Faced with the inevitability of legislation, the NLA argued for the inclusion of an insurance-based option which would enable landlords who regarded the taking and holding of deposits to be an important part of their lettings business to continue to do so.

In response to these representations the government amended their proposals to include provision in the subsequent legislation for insurance-based options to operate alongside a default, custodial scheme.

It is important to understand that the government’s overriding aim is to safeguard the tenant.  It is also hoped that TDP will influence landlord-tenant behavior in a positive fashion, in turn raising standards in the private-rented sector.  This is why the NLA decided that the best way to safeguard landlords’ legitimate interests would be for the NLA itself, in partnership with its insurance advisers, Hamilton Fraser plc, to bid for a contract to run an insurance-based scheme.  In this way the NLA’s experience in landlord-tenant matters could be brought to bear on processes to ensure as far as is practicable that competing interests of landlord and tenant are properly taken into account.

TDP Schemes

Three schemes are authorised by the government:

	A custodial scheme run by the Deposit Protection Service (www.depositprotection.com)
	An insurance-based scheme designed primarily for use by letting agents and administered by The Dispute Service (www.tds.gb.com)
	my|deposits, an insurance-based scheme designed primarily for individual landlords and operated by Tenancy Deposit Solutions Ltd, a company jointly owned by the National Landlords Association and Hamilton Fraser Insurance plc (www.mydeposits.co.uk)

my|deposits is the only tenancy deposit protection scheme specifically designed for individual landlords to take and hold deposits themselves for the duration of the tenancy without having to hand them over to a third party.  The Scheme is also open to agents, an increasing number of whom are finding that my|deposits best meets their requirements.  Landlords and agents are charged modest fees to use the services of the Scheme.  The scheme is user friendly and pay-as-you-go, its fees are tax-deductible against rental income, and discounts are offered to NLA members.

Dispute Resolution

The overwhelming majority of tenancies are ended to the mutual satisfaction of both landlord and tenant.  A few end with a dispute over the deposit.  The legal presumption in favour of the tenant means that landlords or agents wishing to withhold all or part of a deposit must justify any claim, however strong the reason for doing so.

Landlords and agents have to lodge the deposit, or part of it, with the Scheme Administrator only in the event of a dispute at the end of the tenancy.

We believe the NLA’s understanding of landlord-tenant behaviour ensures that the Scheme’s procedures strike a fair balance between the interests of landlord and tenant.  Provided the parties agree, disputes are resolved by Alternative Dispute Resolution (ADR).  The scheme has robust procedures for weeding out spurious and vexatious claims.

Carried out by qualified adjudicators, ADR is impartial, evidence-based and relies on documentation.  The majority of cases are referred to an external, independent dispute-resolution service.  My|deposits firmly believes that this arrangement is essential for maintaining quality of service.

Of the disputes that have been referred to ADR in the two and a half years since the Scheme started, just over half (55%) have been determined in favour of the tenant.  Most decisions which go against the landlord do so because the landlord either declines to provide evidence, or the evidence provided is incomplete or inconclusive.  Without documentary evidence the landlord will not succeed with a claim because the default position in the absence of evidence is that the money will be returned to the tenant.

The experience of my|deposits shows that landlords and agents do relatively well from adjudication if they provide sound evidence in support of any claim they make.  This is why the NLA stresses the importance of landlords keeping comprehensive records.  As a minimum, inventories and details of rent payments should be kept. It is worth noting that a substantial proportion of disputes relate to the cleanliness of the rented accommodation at the end of the tenancy.

Letting Agents, the Law and Tenancy Deposits

Many landlords retain the services of a letting agent to manage their rented properties.  These services frequently include taking, holding and protecting deposits on behalf of an agent’s landlord clients.

Your agent will have joined the Scheme.  Your agent will register you, as a landlord client, with my|deposits and provide your details to the Scheme.  Having done that the agent may protect deposits on your behalf.  You should note that the Scheme will deal only with your agent.  However, it is important that you, the landlord, understand a number of key principles with regard to deposit protection(s) arranged by your agent:

• You have appointed an agent to represent you. The agent has authority to act generally on your behalf and legally commit you with regard to deposit protection.  Any dispute between you and your agent is a matter for the two of you to resolve.

• Under the terms of the my|deposits Scheme Rules of contractual membership, agents are required to maintain a client account in respect of deposits.  All deposit money must be held in a designated client account separated from the agent’s own money. Unfortunately there have been occasions when agents have stolen deposit money, and instances have occurred when deposits have been ‘lost’ and untraceable when an agent has become insolvent.

• You as the landlord are always ultimately responsible for the return of the deposit. This responsibility remains for the duration of the Assured Shorthold Tenancy (AST) and until the deposit is returned to the tenant including, if necessary, after resolution of a deposit dispute. If your agent is at fault for any problems relating to the deposit you still remain liable for the return of the deposit to your tenant(s). It is vitally important that you understand these continuing responsibilities.

The NLA advises landlords that agents they deal with should be members of a recognized body such as ARLA, NALS, UKALA, NAEA or RICS.  They should satisfy themselves that the agent operates a ring-fenced client-money account.  If in any doubt the landlord should hold the deposit, in which case he will be responsible for protecting it.

Prescribed Information

Under s212 Housing Act 2004 and pursuant to the Housing (Tenancy) Deposits (Prescribed Information) Order 2007, every tenant must be provided with the ‘Prescribed Information’ when the deposit is first protected.  To assist landlords my|deposits has included this information on its revised Deposit Protection Certificate, which is required to be handed to the tenant when the deposit is protected.

Failure to protect a deposit or even to provide the Prescribed Information to a tenant can have serious consequences for the landlord:

• Until the deposit is protected, the landlord will be unable to use notice-only grounds under Section 21 of the Housing Act 1988to regain possession of a property.
• The landlord will be required to either return the deposit to the tenant or lodge the full amount with the authorised custodial tenancy deposit scheme (under what is known as an ‘order to protect’).
• The landlord will be instructed to pay within 14 days of a court order compensation to the tenant equal to three times the amount of the deposit.

Protection Renewal

If at the end of the initial fixed term of a tenancy the landlord (or agent) agrees a new fixed term with the same tenant then a new AST is deemed to be created. In this case the deposit must be re-protected. If the tenancy continues unchanged as a statutory periodic tenancy, the existing protection will continue and no renewal is necessary.

This information sheet is part of a series produced by the NLA. Members can access the index and other sheets in the series via the NLA website on www.landlords.org.uk.

Further information and membership application forms may be obtained by contacting the National Landlords Association, 22-26 Albert Embankment London SE1 7TJ (Tel: 020 7840 8900), by e-mail at or by visiting the NLA website at www.landlords.org.uk.

Copyright © National Landlords Association Limited 09 January 2007. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written permission of the copyright owner except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd. Any unauthorised reproduction or transmission of any part of this Information Sheet may result in prosecution.

This Information Sheet is intended as general guidance only for individual readers and does not constitute accountancy, tax, investment or other professional advice. NLA Limited accepts no responsibility or liability for loss which may arise from reliance on information contained in this Information Sheet. Tax legislation, the law and practices by government and regulatory authorities are constantly changing and the guidance given should be assumed to be correct only as at the date of publication.