Tenancy Security Deposit: A 5-minute guide for landlords

You’ve made the ideal investment and have furnished your rental property. 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 Tenant Fee Ban of 2019 means that there are new caps to how much a landlord may charge as a deposit. In Scotland, landlords may charge up to two months of the rental amount as a deposit. However, in England and Wales, this is limited to five weeks if the annual rental income is below £50,000 and six weeks for annual rental above this amount.

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 five weeks’ rent as a deposit so you won’t be protected for costs incurred above and beyond this amount.

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:

• Deposit Protection Service (Custodial and Insurance-based)
• MyDeposits (Insurance-based)
• Tenancy Deposit Scheme (Insurance-based)

In Scotland, a deposit should be registered with:

• Letting Protection Service Scotland
• Safe Deposits Scotland
• my|deposits Scotland

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.

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.

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.

Can I charge for referencing during a tenancy application?

Recent tenant fee ban changes mean that you may no longer charge for applications and referencing as you might have done previously. While it seems reasonable to charge for referencing, if you do, you could be fined up to £5000. 

What you may do is charge the amount of one week’s rent as a holding deposit. If the application goes through fine, the one-week holding deposit is deducted from the first month’s rent. If the application is unsuccessful, you can keep the holding deposit as payment for your wasted time and expenses.

If new laws mean I have to take pets can I charge a higher deposit?

The legislation in question (The Dogs and Domestic Animals Accommodation and Protection bill) is still making its way through parliament. Isolation at home due to Covid proved what we already know to be true. The symbiotic relationship humans have with animals, in particular dogs and cats, is extremely beneficial for mental health. 

The aim of the legislation (which has widespread support) is to make it easier for renters to keep pets. It will, in effect, force landlords to allow responsible pet owners to be their tenants. 

Previously you might have considered allowing a pet to stay in your rental properties with an additional deposit. However, you may not increase the capped deposit amounts already detailed. You can increase the rent by up to £600 annually but no more than this, regardless of the rental income. 

After the tenancy has finished, you cannot insist that the tenant pays for a professional cleaning service. However, if you rented out the property in pristine condition and the paintwork is covered in dirt from paw prints and tail wagging or the furniture has been damaged by claws or teeth, then you may deduct from the deposit in the usual way. When the legislation is approved it will force renters to cover their pets for damage through pet insurance and renters will have to obtain certificates of responsible ownership.

Tenancy Security Deposit : Important things to remember

Remember, you can only take a deposit for up to five weeks of the calendar rent (or 2 months in Scotland). So bear this in mind when furnishing and leaving items of value in the property.

Calculate the rent carefully as detailed to ensure you don’t break the law.

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.

You may take a holding deposit of one weeks rent for the application which must be deducted from the first month’s rent.

You can charge an additional £600 annual rent for tenants with pets and deduct from the deposit if the pet has caused any damage. 

To cover yourself for amounts above five weeks’ rent, give careful thought to taking a specialist landlord insurance.

Security deposit Tenancy.