Tenancy deposits are the most common cause of disputes and court actions between landlords and tenants. To avoid lengthy and costly legal battles, here is a landlord’s guide to handling a tenant’s money.
What is a tenancy deposit?
Sometimes known as a security bond, it is a sum of money the tenant gives a landlord or agent at the start of the tenancy and represents an insurance policy should the tenant damage the property, leave without paying their rent or, most commonly, leave the property requiring professional cleaning before it is re-let.
The money remains the tenant’s property until respective deductions are made when their lease expires or is terminated. Whatever is left is refunded back to the tenant.
While there is nothing stopping landlords accepting an expensive piece of jewellery as a deposit, security bonds are typically paid in cash and more often than not are equal to the value of a month’s rent. However, landlords of high-end properties can and do demand up to three months’ rent.
What is it?
Under the Housing Act 2004, landlords offering a property on an assured shorthold tenancy that started after 6 April 2007 must place tenancy deposits in a government-backed tenancy deposit scheme.
In essence, the service providers act as an unbiased third party that makes sure the deposit money ends up in the correct party’s hands at the end of the tenancy. If a bond is disputed, a tenant can contact a TDP provider and request an Alternative Dispute Resolution – a free service the schemes provide when landlord and tenant don’t agree on the deposit after the lease has ended.
The company will provide an unbiased adjudicator who will investigate the matter and request evidence from both the landlord and former tenant. After their review, they will announce their decision. The money stays with the TDP scheme until both landlord and tenant come to an agreement or a court order is presented in either party’s favour.
Examples where the deposit protection doesn’t apply include:
- The tenant is a lodger
- The tenant lives in the same property as the landlord
- The tenant lives in a student dormitory or halls of residence
- The tenancy is offered by a social landlord
Deposit protection procedure
When a lease starts and a landlord receives the bond money from the tenant, the landlord has 30 days to place the money with one of the following government-authorised agencies
In the same 30-day deadline, landlords also need to supply tenants with a Prescribed Information Order that gives detailed information about the protection of their deposit, including:
- Full contact details about the landlord or agent that represents the landlord.
- Full information and contact details about the protection service you used to protect the deposit
- The protection procedure and the Certificate of Protection that signifies the deposit is properly protected
Penalties of non-compliance
The law is very strict regarding the deposit. Landlords that fail to follow the proper procedure and in due time could face court action. This could mean the tenant being awarded between one and three times the deposit sum plus the original deposit. If this occurs, nothing a landlord says or provides as evidence can clear them of the charges. Evidence and facts can only help reduce the penalty.
A case regarding the deposit is separate from any tenancy situation. Even if the tenants are in arrears or have caused damage to the property, they are still entitled to make a deposit protection claim.
Landlords that fail to follow the deposit protection procedure also face penalties that affect their rights over the property in question. These include losing the right to serve a valid section 21 notice and seek possession over the rented property on a no-faults basis. This means that as a landlord you cannot evict a tenant based solely on your will. Any section 21 you serve is rendered invalid and this will be so, until the bond situation is resolved.
Why is the inventory important?
A claim towards the deposit stands a far greater chance of success if it is accompanies by legitimate proof. The inventory report documents the state of the property before a tenant moves in and after they move out. These two pieces of evidence are key in determining whether a tenant has caused any damage to the rental property, has left it in an unhygienic condition, has left any excess or unwanted belongings inside or any other condition that might result in a deduction from the deposit.
The inventory report is a basic checklist that details the contents and conditions of the entire property. It’s not mandatory, but highly recommended that you accompany the report with relevant photographs for each chapter and aspect of the property, especially the questionable parts like existing flaws, damages, surface scars and upholstery condition.
Note: The check-in and check-out reports are the most important pieces of evidence to determine the rights and wrongs when deductions are claimed. They are the first thing an adjudicator will examine, so landlords need to make them as accurate and detailed as possible. This is why handing responsibility for this to an inventory company with good recommendations can be a wise investment.
Landlords can only make deductions based on the tenant misusing, not maintaining or mistreating the property and all appliances listed under the contract.
You can deduct money for…
- Rent arrears
- Damage to the property’s fixtures and fittings that has occurred due to misuse and has lowered the market value of the property
- Costs of repairs due to tenants’ lack of maintenance
- Costs of renovation due tenants’ breach of contract
- Costs end of tenancy cleaning after the tenant has left the property
- Costs of removal services for belongings left by the tenant
When it comes to the check-out inspection, it is wise to have the tenant present. That way, they can see and discuss with you all the details about what and why you are deducting from their deposit. Landlords that choose to carry out this task themselves can follow this leaving tenant checklist .
The most frequent reason landlords make deposit deductions is the hygiene factor. Almost every tenancy agreement has a line or two about the cleanliness in the property when moving in and moving out. However, not all tenants remember, factor in or even have the possibility to clean the entire property top to bottom, including all appliances and furniture.
Remember: Keep all quotes, bills, receipts and any other record provided by the services company. This is vital evidence in cases where the tenant disputes the deductions you want to make. They are the only evidence a landlord has for the exact sizes for each deductions.
You cannot deduct money for the cost of…
- Repairs and maintenance to the structure of the property. This includes plumbing, insulation, electrical and gas networks and systems
- Fair wear and tear of fixtures and furnishings
- Your own business costs like your time, taking time from work, travel expenses and fuel
- Your post-tenancy and pre-tenancy application fees, administration, renewal of documents and certificates
- Re-letting fees (unless the tenancy has ended in result of breach of contract at the side of the tenant)
- Legal costs and consultancy fees
- Unpaid utility bills
How to make deductions
The procedure varies between the different protection services, so it’s best to read the provider’s terms and conditions.
However, all scheme providers require landlords to compile a list with all points and aspect for which they are deducting money from the tenant’s deposit. It is prudent to add a line or two of description in the check-out report explaining why some or all of the deposit is being withheld and also provide photographic evidence. Landlords should also obtain quotes for all the repairs and services that need to purchase and include those next to each point on the check-out report.
Contact your tenant and supply them with this deductions checklist and notify them you’re withholding money from the bond. This needs to happen in the 10 days after the tenancy has ended legally (not when the tenant has moved out). It’s best if you get their approval on the deductions, but this will rarely be the case.