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This article applies to England and Wales only.
IMPORTANT AMENDMENT APPLYING FROM APRIL 2012: You must protect tenants' deposits in an approved scheme within 30 days of receiving the money. Also within 30 days you must issue the tenant and any relevant person with a copy of the deposit protection certificate and also any prescribed information, including any scheme leaflet, and state in the tenancy agreement who is holding the deposit and where it is protected. Also if you're going to serve a Section 21 at move in then both the notice and any form you get the tenant to sign acknowledging receipt should be post-dated by 30 days to allow you time to protect the deposit before the notice is deemed served.
Deposits paid for tenancies that started before the 6th April 2007 do not need protecting, and nor do deposits for tenancies that are not Assured Shorthold Tenancies. Examples of this are where the rent is more than £100,000 per year (this is a common-law tenancy) or where the tenant lives with the landlord in the landlord's main residence (this is a licence).
Landlords themselves (and not letting agents employed by landlords) are ultimately responsible for the deposit. If the landlord's agent disappears with the tenant's deposit then the landlord will have to make good the amount.
If the landlord does not protect the deposit and the tenant decides to make an issue of it with the courts, the landlord will be fined an amount equivalent to 3 times the deposit, which will be given to the tenant. The judge has no discretion over this, even if a landlord made an honest mistake. Landlords must even re-protect the same deposit and issue a new deposit protection certificate when renewing a tenancy - even if the details of the tenant, terms or rent amount have not changed at all. Unsurprisingly a charge is made to the landlords or letting agents for this, which is inevitably passed down to the tenant, contributing to the impression held by many landlords and tenants that the legislation is just a job creation scheme the same way Energy performance Certificates are perceived to be.
The purpose of the deposit protection scheme is to stop landlords unfairly keeping tenants' deposits at the end of a tenancy, although in practise it has often meant tenants unfairly receiving their deposits back when the landlord should have been able to keep it. In the event of any dispute over the deposit between the landlord/letting agent and tenant at the end of the tenancy the protection schemes offer a dispute resolution/arbitration service. If either party doesn't want to use the arbitration service then they can opt to proceed to court.
Details have come out in online landlord communities of very dubious or inappropriate decisions made by the arbitrators employed by the deposit protection schemes and it was discovered that these arbitrators in many cases had no legal training and were not people who were familiar with property letting on a day-to-day basis. This problem might have been rectified by the time of writing but if anyone reading this is in any doubt about the calibre of the adjudicators employed by the deposit protection scheme they are members of then it might be better to elect to go to court to settle any dispute.
Landlords cannot hold back money out of a tenant's deposit for issues that are considered to be fair wear and tear. For example, if a tenant has been living in a house for 3 years then it would be considered fair wear and tear for there to be some marks on the walls and to have carpets that have lost their lustre somewhat, but holes in walls and cigarette burns in carpets would not be fair wear and tear.
Obviously what is 'fair wear and tear' is somewhat subjective without knowing the condition of the property in the first place. This is what inventories are for, and letting a property without one is not a very good idea, as you will never be able to keep a tenant's deposit back for damage to the property as you will not be able to prove the property was not in the same condition when the tenant moved in. The original way an inventory was done was to walk around the property room by room, writing down details of everything that was present and its condition. As you can probably work out, this in itself is quite subjective, as one person's idea of 'good clean condition' might be quite different to another's. Some people still carry out inventories this way, but thankfully most people have moved with the times and carry out photo or video inventories. These are completely non-subjective and are also much easier to produce.Because they are difficult to dispute, video inventories provide for quick settlement of any disagreements over the deposit at the end of the tenancy. The video should be taken just before the tenancy starts. The tenant then signs at the time they move in to agree the accuracy of the inventory, also signing a copy of the disk that the inventory is recorded on. The tenant also should receive a copy of the inventory for their own records.
Because they are difficult to dispute, video inventories provide for quick settlement of any disagreements over the deposit at the end of the tenancy. The video should be taken just before the tenancy starts. The tenant then signs at the time they move in to agree the accuracy of the inventory, also signing a copy of the disk that the inventory is recorded on. The tenant also should receive a copy of the inventory for their own records.