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Tenancy Security Deposit

You’ve made the ideal investment and have furnished your rental property, so you’d be happy for your granny to move in. Save, she isn’t. You’ve checked the references of your soon-to-be tenant. But you also want to take a security deposit to protect yourself from any damages down the line. Here’s the lowdown on what you need to know.

What is a tenancy security deposit, and how much can I ask?

A tenancy security deposit is an amount you can ask your tenant to pay. This can cover you in the event there are damages to the property or the contents at the end of the tenancy. The amount is typically one but not more than two months of the rental value of the property.

When is it paid?

The deposit is due when your tenant signs the contract and takes receipt of the keys.

Do I have to charge a deposit?

In short, no. However, it’s extremely advisable, you do. If you are charging a deposit, you MUST enter the deposit protection scheme. You should be aware you can only ask for two months’ rent as a deposit so you won’t be protected for costs incurred above and beyond this amount.

Good to know

You can take out an insurance policy that can help you recoup some costs which may be incurred when you rent your property. Such unfortunate circumstances include unpaid rent, extensive damage, and court costs required to gain either a possession order or eviction notice.

What is the deposit protection scheme?

The tenancy deposit protection scheme came into place on the 6th of April 2007. Until then, while landlords had peace of mind from taking a deposit, tenants had none about the safe return of their deposit. As such, government-backed deposit schemes came about to help protect tenants from unscrupulous landlords. The schemes are companies which safeguard a tenant’s deposit

The schemes also benefit fair landlords by providing free independent adjudication in the event of a dispute.

They also prevent the smaller claims courts from being clogged up by tenancy litigation cases.

What do I need to know about deposit protection law?

It’s important not to fall foul of the deposit protection law as you can be penalised. As a landlord, it’s up to you which one of the three govern-backed schemes you choose. It’s your responsibility to inform your tenant within 30 days within which scheme their deposit is being held.

What are the penalties for not abiding by the deposit protection law?

If you don’t inform your tenant and they make a complaint, you could be fined. You may be forced to pay back the deposit. The court may also grant your tenant compensation, which can be up to three times the value of the deposit.

If you haven’t acted fairly to a tenant by protecting their deposit, then don’t expect your tenant to behave justly to you by paying your rent. You’ll also find that courts look dimly on landlords breaking deposit protection law. As a consequence, you may find that a judge has little sympathy for you at a later date.

If you seek damages for rent arrears, fewer judges will grant in your favour. You may also struggle to win a possession order when attempting to evict a tenant if you failed to protect a deposit.

What schemes can I use?

In England and Wales deposits can be registered with:

Must I hand the tenancy security deposit over to the scheme?

No. But you can. A custodial scheme is free, and you hand over the deposit in full for safekeeping. In an insurance-based scheme, you pay a fee to keep hold of the deposit yourself for the duration of the tenancy.

Good to know

You can find out more details in this government guide.

How to avoid disputes with your tenants?

A dispute is never good. It’s always best to be clear and detailed from the beginning to minimize the likelihood of a dispute. You should also take good-quality dated photographs of the property and the belongings.

You must understand, wear and tear is the responsibility of the landlord.

Understandably, the notion of wear and tear is a subjective one. However, if you buy cheap furniture, be reasonable about it aging during a longer tenancy to avoid pedantic and stressful disputes. Breakages and accidental damage, as well as other things, are deductible.

Good to know

These are things you are entitled to deduct for:

  • Stolen or missing belongings
  • Direct damage to the property and its contents
  • Unpaid rent at the end of the tenancy
  • Unpaid bills at the end of the tenancy
  • Indirect damage due to negligence and lack of maintenance
  • Lack of sufficient hygiene
  • Lack of maintenance of facilities, e.g., the garden
  • Unwanted belongings left at the end of the tenancy
  • Lost or unreturned keys/changed locks

Do I need to return the total deposit and how long do I have to do this?

No. Everyone has accidents. Your tenants may be happy to accept they caused some accidental damage and expect you to deduct a reasonable amount. However, once you have agreed on that amount, you must return the reduced deposit within ten days of that date.

If you do enter into a dispute with your tenants, though, and you’re in an insured scheme, you will need to return the deposit to the scheme. It will be held there until the dispute is settled.

Tenancy Security Deposit : Important things to remember

Remember, you can only take a deposit for up to two months of the calendar rent. So bear this in mind when furnishing and leaving items of value in the property.

You must give your tenant the full details of where their deposit is being held within 30 days. If not you could be heavily penalised. You must return your tenant’s deposit within ten days upon reaching an agreement.

You may not deduct for general wear and tear. You need to incorporate this into your costs when you decide upon a rental amount.

To cover yourself for amounts above two month’s rent, give careful thought to taking out specialist landlord insurance.

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