Must landlords use a deposit protection scheme?
It is a legal requirement that landlords protect their tenant’s rent deposit. They must do so by using the government's deposit protection scheme.
What is the deposit protection scheme?
As its name suggests it protects the deposit paid to the landlord by the tenant. It protects both landlord and tenant and offers a resolution service in case of disputes.
It also provides the tenant with peace of mind. They know their deposit is safe.
All assured shorthold tenancies must use the deposit protection scheme. As must any tenancy which began after 6 April 2007.
What happens if a landlord does not use the deposit protection scheme?
We mentioned earlier it is a legal requirement that landlords use the scheme. It is in both the landlords and tenants interest that this is adhered too.
After receiving it the landlord has 30 days to protect the deposit. Failure to do so can result in financial penalties.
If a landlord fails to protect a deposit:
- The tenant can apply to the county court for the deposit to be repaid
- The court will order the landlord to pay the tenant compensation. This could be from one to three times the amount of the deposit
- The landlord will be unable to evict the tenant using the shorthold ground.
What happens when a tenant pays a deposit?
The landlord must provide the tenant with the following information:
- Full contact details of the landlord or their letting agent
- Full contact details of the tenancy deposit scheme being used by the landlord
- Information on what the deposit protection scheme is
- How the tenant can apply for the return of their deposit at the end of their tenancy
- How any dispute will be resolved
How does the deposit protection scheme work?
The government have approved four companies to provide the DPS. And there are two different types of scheme. Most are insurance based though there is a custodial option.
This is the most common type of scheme. The landlord or their agent holds the deposit. They then pay insurance premiums to the scheme.
At the end of the tenancy, the landlord or agent repays the tenant directly. Unless there is a dispute.
In which case, disputed funds are lodged with the scheme. When the dispute is resolved the scheme releases the money to either the tenant or landlord depending on the result of the dispute.
An alternative is to pay the deposit directly into a custodial scheme. At the end of the tenancy, the scheme will repay the tenant and distribute any disputed funds. The tenant will also be paid interest on their deposit.
Returning or retaining the deposit at the end of the tenancy
In a perfect world, the landlord will be quite happy to return the tenant's deposit. Unfortunately, this isn’t always the case.
There may be some damage or the tenant may be behind on the rent. The landlord will then look to recover costs from the deposit. If the tenant agrees to the deduction than everything is straightforward.
However, if the tenant and landlord can't agree the dispute must be independently resolved. This could involve county court proceedings.
Alternative dispute resolution
But an easier way to resolve disputes is to use the free alternative dispute resolution (ADR) service provided by the deposit protection scheme.
The ADR will consider evidence from both sides - this is when the landlord's inventory plays a vital role - and will make a binding decision. Both landlord and tenant have to agree to use the ADR. But it is a free and easy way to settle disputes.
Benefits of the deposit protection scheme
The landlord benefits from this scheme in several ways:
- The tenant has the security of knowing their deposit is safe which builds trust with the landlord
- The landlord knows they will be recompensed for any damage to the property
- Access to a free dispute resolution service saving the time and costs involved with legal action
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