“Tenancy Deposit Schemes are compulsory for residential landlords.”

Angela Newman LLB
Solicitor

Angela Newman LLB

Tenancy Deposit Schemes

If you are a landlord, you need to know about Tenancy Deposit Schemes, or you could end up in court. Below is a summary laying out the facts.

Click here to download a PDF factsheet about Tenancy Deposit Schemes

Landlords entering into assured shorthold tenancy agreements must protect their tenant’s deposit through an authorised Tenancy Deposit Scheme (‘TDS’). This applies to all assured shorthold tenancies granted since 6 April 2007.

The idea behind a Tenancy Deposit Scheme is that:-

  • if there is a dispute, the landlord and tenant can use Alternative Dispute Resolution (‘ADR’) to try to reach an agreement between themselves; and
  • it protects the tenant’s deposit.

TDS Requirements

On receiving a deposit, the landlord must:-

  • deal with the deposit in accordance with an authorised scheme, and keep to its rules; and
  • give the tenant particular information about the scheme and the deposit within 30 days (e.g. say what scheme the deposit is held under, should a dispute arise).

The tenant is advised to check that their deposit is held by that scheme. 

Details of the 2 types of scheme

There are two types of tenancy deposit scheme: a ‘custodial’ scheme, and an ‘insurance-based’ scheme.

A)         Custodial scheme

The tenant pays their deposit to the landlord.  The landlord must then pay the whole of the deposit to the Deposit Protection Service (DPS), who hold this throughout the tenancy. At the end of the tenancy the DPS will pay out the deposit to the person(s) entitled to it.

B)        Insurance-based Schemes

The landlord receives the deposit from the tenant but holds it himself, only transferring it (plus the interest gained on it) to a scheme, if a dispute arises at the end of the tenancy.  The scheme then holds the deposit until the dispute is resolved, and will distribute it to whoever is entitled to it.

Should the landlord fail to pay the deposit to the scheme at the time of a dispute, the scheme will pay out the proportion owed to the tenant by agreement or by court order, and will reclaim this from the landlord. 

Should less than the whole deposit and interest be agreed or ordered by a court to be returned to the tenant, the scheme will return the remainder of the deposit to the landlord.

Where more than the total deposit and interest is agreed or ordered to be paid to the tenant, the scheme must pay the tenant the extra within 10 days, and will reclaim this from the landlord.

On returning any deposit to the landlord following the dispute, the interest gained on the money whilst being held by the scheme’s insurer will be returned at a rate set by the Government.  Any extra interest earned can be kept by the scheme’s insurer and can be used to pay for the running of the scheme. 

Since this is an insurance scheme, the landlord will have to pay an insurance premium to use it.

What if you don’t use a Tenancy Deposit Scheme?

The Tenancy Deposit Scheme is compulsory: a landlord must use either a custodial or an insurance-based scheme and must follow the rules.

If the landlord does not do so, it cannot ask a Court to evict a tenant using the ‘accelerated possession procedure’ following service of a notice (under s21 Housing Act 1988) and so any eviction will be delayed. Although the initial notice to the tenant can be served late, the only way a landlord can evict under s21 if the deposit has not been protected, is to refund the full amount to the tenant. 

Even where the deposit is refunded, the landlord can be fined for not protecting it and/or not serving a notice: this fine can be from one to three times the amount of the deposit.

The rules relating to tenant’s deposits are very strict and must be complied with.