If you’re renting out property, protecting your tenant’s deposit in a government-backed tenancy deposit protection (TDP) scheme is a legal requirement. This guide explains how deposit protection works and highlights your responsibilities as a landlord.
What is a Tenancy Deposit Scheme?
Since April 2007, landlords in England and Wales have been required to safeguard their tenants’ deposits in one of three approved government-backed TDP schemes. These schemes ensure that tenants’ deposits are protected throughout the tenancy and facilitate fair resolution of disputes at the end of the lease.
The three approved TDP schemes available for landlords in England and Wales are:
In Scotland and Northern Ireland, separate TDP schemes are in place to meet local requirements. Landlords have the flexibility to choose the scheme they prefer, but must notify tenants in writing, providing details of the chosen scheme within 30 days of receiving the deposit.
Types of TDP Schemes: Custodial and Insurance-Backed
There are two primary types of deposit protection schemes:
- Custodial Deposit Schemes: These schemes hold the entire deposit throughout the tenancy. Once the lease ends, the scheme returns the deposit (or an agreed amount minus any costs) directly to the tenant via bank transfer or cheque. Custodial schemes offer an independent arbitration service, which can settle disputes if the landlord and tenant cannot agree on deductions. Importantly, custodial schemes are free for landlords to use.
- Insurance-Backed Schemes: In an insurance-backed scheme, the landlord retains the deposit but pays a fee to insure it. The deposit remains accessible for return to the tenant after deductions, if any, are agreed upon. As with custodial schemes, insurance-backed schemes also provide an independent adjudicator to settle disputes, allowing both landlord and tenant to resolve disagreements at no extra cost.
Understanding Deposits and Deductions
While it is not mandatory to take a security deposit, doing so offers peace of mind, especially as the deposit serves as a financial safeguard against potential property damage.
Under the Tenant Fees Act 2019, deposits are capped at a maximum of five weeks’ rent for most tenancy agreements. If you take a holding deposit to secure the property until a lease is signed, this does not require protection under TDP rules. However, if the holding deposit is rolled into the security deposit, it must be protected.
How TDP Benefits Landlords
A key advantage of government-backed TDP schemes is access to an Alternative Dispute Resolution (ADR) service, which can help resolve any disagreements around deductions at the end of a tenancy. This ADR service ensures both landlords and tenants can reach a fair outcome without court involvement. To make a strong case during disputes, landlords should prepare a thorough inventory at the start of each tenancy, complete with photos and videos detailing the property’s condition and any furnishings.
Permissible Deductions from Deposits
The deposit can be used to cover costs incurred due to:
- Unpaid rent or bills
- Missing items that were included in the inventory
- Damage to the property or its contents, whether intentional or due to negligence
- Failure to fulfill maintenance responsibilities outlined in the lease
- Leaving the property in an unsanitary condition
- Unwanted items left behind after moving out
Essential Checklist for Landlords
The law requires landlords to:
- Protect the tenant’s deposit in a government-backed TDP scheme within 30 days of receiving it.
- Provide tenants with details of the TDP scheme and any relevant documentation.
Failure to meet these requirements can result in significant consequences. A court may order you to repay the deposit in full, along with compensation up to three times the deposit amount, if you miss the 30-day deadline. Non-compliance can also prevent you from serving a Section 21 notice, a no-fault eviction option, which may limit your ability to reclaim the property.
