Tenancy deposits help to protect your interests as a property manager. However, it is essential that you are aware of your legal obligations when it comes to taking and holding deposits, to ensure that you remain compliant with UK regulations.
What is a tenancy deposit?
A tenancy deposit, also known as a security deposit, is paid by tenants to the property manager or landlord before they move into a rental property. This sum of money acts as security against any damages that may occur to the property over the course of the tenancy.
What's the difference between a tenancy deposit and a holding deposit?
A holding deposit is paid by the tenant to reserve the property while they undergo reference checks. It is usually equivalent to one week's rent and is converted to a tenancy deposit, applied to the first month's rent, or returned.
By contrast, a tenancy deposit is not returned until the end of the tenancy as it acts as insurance against any damages or cleaning fees required. Property managers can make deductions from the deposit at the end of the tenancy if necessary.
How much can you charge for a tenancy deposit?
As part of the Tenant Free Ban 2019, tenancy deposits in England and Wales cannot be more than five weeks' rent for properties with an annual rent of below £50,000. For properties with an annual rent of above £50,000, they cannot be more than six weeks' rent. In Scotland, tenancy deposits are capped at two months' rent.
Deposit protection schemes
As a property manager in the UK, you are legally required to register your tenants' deposits with a government-approved tenancy deposit protection scheme. The deposit protection scheme you use will ensure that your tenants' deposit is secure and safeguarded for the duration of the tenancy. They can also act as a mediator if there are any disputes over tenancy deductions at the end of the tenancy.
In England and Wales, you can use one of the following:
- Deposit Protection Service
- Tenancy Deposit Scheme
In Scotland, you can use:
- Letting Protection Service Scotland
- Safe Deposits Scotland
- mydeposits Scotland
You must inform your tenant of which scheme you have used within thirty days of receiving the deposit from them. If you do not use a deposit protection scheme, you could be fined up to three months' rent, and you may not be able to issue a correct Section 21 notice.
What can be deducted from a deposit?
Tenants have a responsibility to leave the property in an equivalent state to the one they found it in at the beginning of the tenancy, accounting for reasonable wear and tear. If this is not the case, the property manager is entitled to make reasonable deductions from the tenancy deposit for factors such as:
- Damage to the property
- Indirect damage due to the tenant's negligence
- Missing or damaged contents, such as furniture
- Cleaning charges (if the property was returned in a worse state than it was originally let)
- Removal charges for leaving belongings in the property without approval from the property manager
- Outstanding rent
- Unpaid bills
What happens if there is a tenancy deposit dispute?
You need to inform your tenants if you want to make deductions from their deposits. You should do this formally, in writing. Include a clear breakdown of the cost of each deduction, what it is for, and how much is being deducted in total. Your tenants are then free to dispute the deductions if they feel that they are not reasonable or just.
It is best practice to take a comprehensive inventory of the property, accompanied by photographs, at both check-in and check-out. It is important that you date the photos too. That way, you will have clear evidence of the state of the property at the beginning and the end of the tenancy. If you get your tenants to sign and agree to the inventory at check-in and check-out, it will make it easier to resolve any disputes.
If you cannot come to a resolution, you may need to use a tenancy dispute service. This is offered by all deposit protection schemes for free. An independent adjudicator will assess any evidence provided by the tenants and the property manager, including photographs, inventories, property reports, and communications. They will then come to a decision about what is a fair deduction. Their decision is final, and if you want to dispute it further, you will have to do it in court.
What happens at the end of a tenancy?
If you are holding the deposit on an insured scheme, you have ten days to return it to your tenants after any disputes have been resolved and all deductions have been agreed. If the deposit is being stored with a custodial scheme, the tenants can request it directly from them. The property manager will be contacted to be informed that the tenants have requested the return of their deposit.
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