Do You Really Need to Register Your Tenant's Deposit?
Most, if not all, landlords will charge their tenants a deposit. There is no legal obligation to do so of course but it does provide a sense of security. And tenants do expect to have to pay a deposit. So most landlords are used to dealing with them. Yet despite it being the law since 2007 some still don't realise that they must register their tenant's money with a deposit protection scheme.
What is the deposit protection scheme?
If you are a landlord and take a security deposit from your tenant you must use a government approved deposit protection scheme. This became law in 2007. The intention is to protect both landlord and tenant from spurious claims. Though landlords may not always see it that way.
If there is a dispute at the end of the tenancy with the landlord wishing to withhold some or all of the sum for damages or money owed, an independent adjudicator will decide the issue. When the dispute is resolved the scheme distributes the money according to the judgement.
There are four companies who run deposit protection schemes. Three are insurance based with the landlord paying the premiums whilst the other holds the full deposit.
What you need to do after receiving a tenant's deposit
When a tenant pays their deposit there a few things you need to do. Remember these aren't suggestions. You must take these steps to comply with the law and to protect yourself from financial loss (more about this shortly). Within 30 days of receiving the deposit you must:
- Register the deposit with a government approved deposit protection scheme.
- Provide the tenant with the name and contact details of the scheme you are using.
- Give the tenant your own contact details and / or those of your letting agent.
You also need to provide the tenant with information about:
- Why you have taken a deposit.
- How the tenant can apply for the return of the deposit.
- What happens to the deposit in the event of a dispute at the end of the tenancy.
Why you need to register the deposit
It's the law. You have no choice. But in case you need further motivation the consequences of not registering the deposit can be painful. And expensive.
If you have a clued up tenant they can take legal action against you. That's the bad news. The worse news is the tenant will inevitably win the case. The judge could award your tenant compensation of a minimum of 100% or a maximum of 300% of the deposit. You will also have to return the original deposit. So not registering a £1,000 deposit could end up costing you £4,000.
You could also face problems if you try to evict the tenant. You will no longer be able to use Section 21 so if you do need to evict the tenant at some stage you will have to use Section 8 and prove you have grounds for eviction.
If you haven't registered a deposit
Hopefully you will not be in this position. If you are there isn't too much you can do except to do what you should have done in the first place. Protect the deposit with one of the schemes and send the tenant all the relevant information. The tenant may just accept the paperwork without question. Unfortunately, if the tenant does decide to take legal action you have very few grounds on which to oppose it.
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