A landlord can request a tenant to pay a tenancy deposit to guarantee the performance of any obligations or discharge any liability arising from the tenancy agreement when letting out residential accommodation. A tenancy deposit is a sum of money held by the property owner or their agent as security against things like non-payment of rent, damage to the property, or unauthorised removal of furniture and other equipment. The deposit is usually returned at the end of the tenancy after deducting any due compensation if any apply.
A tenancy deposit is different from a holding deposit paid to a landlord or agent to reserve a property. Not all landlords take tenancy deposits from their tenants. They do not have to. Many landlords prefer to avoid any risks by carefully selecting their tenants and drafting detailed tenancy agreements that can deal with any damage or rent shortfall in alternative ways.
It is important to note that the amount of tenancy deposit that private residential landlords and letting agents can require is capped by law and cannot be greater than five weeks’ rent, where the total annual rent is less than £50,000, or six weeks’ rent, where the annual rent is £50,000 or more. Any amount above the capped amount is a prohibited payment under the Tenant Fees Act 2019.
Tenancy Deposit Protection Rules
Section 213 of the Housing Act 2004 requires that any tenancy deposit paid in respect of an assured shorthold tenancy (AST) is protected in a government-approved tenancy deposit scheme within 30 days of receiving it, irrespective of who paid it to the landlord or letting agent. Within this time limit, the landlord must comply with the initial requirements of the chosen scheme and give the tenant a set of prescribed information. The landlord must also ensure that the deposit remains protected throughout the tenancy until it ends and the tenant leaves the property.
Article 2 of the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 lists the information that must be given to the tenant and any other person who paid the deposit on the tenant’s behalf. The information includes:
- contact details of the tenancy deposit scheme where the deposit is protected
- information leaflet supplied by the scheme explaining the law on tenancy deposit protection
- scheme’s procedures relating to the repayment of the deposit at the end of the tenancy,
what happens if the landlord or the tenant is not contactable when the tenancy terminates, how will disputes about the return of the deposit be resolved
- rules of the scheme’s out-of-court alternative dispute resolution (ADR) service
- details about the AST and the deposit (amount paid, address of the property to which the tenancy relates, landlord's identity and contact details, tenant's identity and contact details, identity and contact details of the person or organisation who paid the deposit on the tenant’s behalf, circumstances when the deposit can be retained by the landlord under the tenancy agreement, and a certificate signed by the landlord or their agent confirming that the information provided to the tenant and any other relevant person is accurate and that the tenant has been allowed to confirm the accuracy of the information).
It should be appreciated that the certificate in the last bullet is not the same as a copy of any deposit protection certificate issued by the tenancy deposit protection scheme.
Failure to comply with all the initial requirements of the scheme or provide all the prescribed information to the tenant and any other relevant person within 30 days of receiving the deposit renders property owners liable to legal action from the tenant and restricts how they can evict the tenant using the Section 21 no-fault eviction procedure.
Deposit Protection for Joint Tenancies
A deposit received in connection with a joint assured shorthold tenancy (AST) is considered a single deposit made up of individual payments from each joint tenant. Usually, each joint tenant contributes an equal share of the deposit and is jointly and severally liable for the obligations arising from the tenancy. This means that even if only one tenant causes damage to the property or does not pay the rent, the landlord can deduct the outstanding amount from the deposit paid by all joint tenants.
Each tenancy deposit scheme has its own rules about the valid service of the prescribed information to joint tenants; however, the contact details of each joint tenant must be included. The scheme’s rules may provide for service to each joint tenant or, most commonly, to one of them (called lead tenant) on behalf of all the others.
In a claim for breach of the tenancy deposit protection rules against a landlord, all joint tenants must apply to court together unless the court allows otherwise. The claim is made in respect of the entire amount of the deposit, not an individual portion of it.
How Does Tenancy Deposit Protection Work for HMOs?
A house in multiple occupation (HMO) is a building or flat where two or more households share a basic facility, such as a bathroom, toilet, or kitchen. A household is one or more persons living in the same dwelling. They are not joint tenants.
Each household has its own tenancy agreement and pays a tenancy deposit that the landlord must protect in an authorised tenancy protection scheme. Each household has the right to be given the prescribed information. If HMO landlords do not protect the deposit and/or do not give all the prescribed information to each household within 30 days of receiving it they become liable to court action and cannot use a Section 21 notice to evict the tenants.
Can a Letting Agent Be Held Liable for Not Protecting a Tenant's Deposit?
The responsibility to ensure that a tenancy deposit is protected in a government-approved scheme and that the prescribed information is given to the tenant falls ultimately on the property owner.
A letting agent is responsible if the landlord gives specific instructions to collect the deposit and deal with all formalities relating to its protection to the agent. In this case, if the agent does not comply, the tenant can claim against either the landlord or their agent.
The landlord can take the agent to court and claim damages when the agency agreement clearly states that the agent was responsible for protecting the deposit and the deposit was not protected.
Understanding the Consequences of an Unprotected Deposit
If a landlord or their appointed agent fails to comply with all the legal requirements relating to tenancy deposit protection, within 30 days of receiving the deposit, they become liable to sanctions.
Section 21 if the Deposit Is Not Protected
First of all, the tenant is protected from a Section 21 no-fault eviction if the deposit is not protected within the time limit. The landlord cannot serve a valid Section 21 notice if a deposit is not protected in an authorised scheme when the notice is served, or if the deposit was protected late.
In such cases, the landlord or their agent must return the deposit to the tenant or to the person who paid the deposit on behalf of the tenant before they can serve a valid Section 21 notice. However, in such circumstances, the tenant or other relevant person might not accept the return of the deposit and frustrate the landlord’s intention.
The tenant might also be able to resist or delay the landlord’s Section 21 notice eviction by counterclaiming against the landlord and by asking the court to order that the possession action should fail for noncompliance with the tenancy deposit protection legislation.
Tenancy Deposit Claims
Secondly, the tenant or any other person or organisation who paid the deposit on behalf of the tenant can claim compensation under Section 214 of the Housing Act 2004. They can take the landlord and their appointed agent to court and apply for an order imposing financial sanctions if they do not protect the deposit and give all the prescribed information in time.
The county court can order the landlord or agent to pay back the deposit as well as a compensation sum between one and three times the amount of the deposit if the tenancy has ended by the date of the hearing and if it finds that they have not fully complied with their obligations under the tenancy deposit protection legislation. If the tenancy is still ongoing, the court can still order them to pay compensation between one and three times the amount of the deposit on top of paying the deposit into a government-approved custodial scheme within 14 days of the order.
When deciding on the level of compensation award, the court can consider whether the landlord and their agent have acted in bad faith, if they took swift steps to rectify their failure to comply with the legal requirements, and whether it was a single or multiple continuous breach. Landlords and agents cannot avoid these financial sanctions by complying with the obligations after a claim has been issued.
Further Implications for Non-Compliant Landlords
Additionally, failure to comply with all the legal requirements relating to tenancy deposit protection might affect whether a landlord or agent is a ‘fit and proper person’ to hold a House in Multiple Occupation (HMO) or a selective licensing licence under Section 66 and Section 89 of the Housing Act 2004 respectively. It can also affect their suitability to be a member of a tenancy deposit scheme or gain a professional association’s quality mark.
In other words, noncompliance with the tenancy deposit protection legislation might affect a landlord’s and agent's reputation and respectability.
What to Do if You Haven't Protected Your Tenant's Deposit
Landlords might first become aware that they haven’t fully complied with the tenancy deposit protection legislation when their tenants threaten to take court action and claim compensation.
Landlords in such situations must take immediate action to rectify the situation. Expert legal advice will help them to address the problem swiftly and effectively.
It is usually wise to try and avoid reaching court by offering an out-of-court settlement, re-granting the assured shorthold tenancy afresh, and complying with all the tenancy deposit requirements within 30 days of receiving the deposit.
Choosing the Right Protection Scheme
New landlords with one or few rental properties might never have used a tenancy deposit protection scheme so they will need to choose the one most appropriate to their needs. Each scheme’s fees and rules will be an important factor to consider. The frequency of tenants' turnaround and the typology of the dwelling will also be determinant. Opting for a custodial rather than an insurance-based protection arrangement will be the next decision.
There are three government-approved schemes for properties situated in England or Wales:
Separate schemes operate in Scotland and Northern Ireland.
They all offer a free custodial deposit protection service where the scheme retains, protects, and repays the deposit on the landlord’s behalf at the end of the tenancy. Alternatively, they offer an insured-based deposit protection option where the landlord retains the tenant’s deposit and pays a fee to the scheme to protect the deposit during the term of the tenancy and deal with the requirements on termination.
Generally, registration and protection of the deposit are done online, and the schemes have prescribed information templates that landlords and agents can use to meet their legal obligations.
All the schemes have an alternative dispute resolution (ADR) service to help tenants and landlords reach an agreement about the amount of deposit to be returned or retained at the end of the tenancy without going to court. Use of the ADR is not compulsory and tenants can still opt to go to court.
Each scheme has different rules and initial requirements that landlords must comply with within 30 days of receiving the deposit. The requirements may include paying the deposit to the scheme and registering the details of the tenancy, or paying an insurance premium and becoming a member of the scheme.
Can You Evict a Tenant with an Unprotected Deposit?
Landlords might also become aware that they haven’t fully complied with the tenancy deposit protection legislation when they try to use the no-fault Section 21 procedure to evict their tenants and realise they cannot serve a valid notice because they read the guidance notes accompanying mandatory Court Form 6A or the court strikes out their possession claim.
A landlord cannot serve a valid Section 21 notice to evict their tenants if:
- a deposit is not protected in a government-approved tenancy deposit scheme, or
- a deposit was protected more than 30 days after receiving it, and/or
- the prescribed information was not given to the tenants and any other relevant person within the same time limit
In these situations, Section 215 of the Housing Act 2004 dictates that the landlord must serve a new Section 21 notice after giving the tenant and/or any other relevant person the prescribed information and after returning the deposit (in full or subject to any deductions agreed with the tenant), or after any compensation claim taken by the tenant or other relevant person has been determined by the court, or withdrawn, or settled out of court between the parties.
Once a valid Section 21 notice has been given to the tenant, the no-fault possession claim can proceed as usual through the standard or accelerated possession procedure. Depending on the course of action chosen by the landlord and whether there are disputes over the facts of the case, the landlord will need to issue a claim form and ask a court to make a possession order. If the tenant does not move out within the timeframe given by the court, the landlord will need to apply to the court to enforce the possession order by bailiffs.
Using Section 8 if the Deposit is Not Protected
Alternatively, if the landlord has any grounds for eviction of the tenant such as rent arrears or breach of contract, the landlord can try and use the Section 8 eviction procedure instead of a Section 21 notice. A Section 8 notice is not affected by the tenancy protection rules and noncompliance with the tenancy protection requirements will not invalidate the notice.
Landlords facing these circumstances should consult a solicitor or legal expert and seek legal advice tailored to their specific situation. They can advise on the best course of action, anticipate any tenant’s potential defence, and limit litigation risks.
Protecting Yourself as a Landlord
It is important that landlords and letting agents understand and fully comply with the tenancy deposit protection rules.
Within 30 days of receiving the deposit, they must:
- Protect the deposit in one of the government-approved tenancy deposit protection schemes by complying with all the initial requirements of the chosen scheme, and
- Give all the prescribed information to the tenant and any other person or organisation who paid the deposit on behalf of the tenant.
Additionally, landlords and agents must ensure that tenancy deposits remain protected throughout the entire duration of the tenancy, and must stay up to date with changes in legislation that may affect their compliance over time.
They should ensure they keep good records of deposit receipts, scheme details, and correspondence with tenants. This will help to prove their compliance with the legal requirements in case of disputes and successfully defend a compensation claim.
It might be advisable for new and less experienced property owners to delegate their tenancy deposit protection functions to expert letting agents or property management services. This will help ensure compliance with the legislation, though the law is extremely complex and changes frequently as a result of court cases and new legislation requirements so sometimes they also get it wrong.
Different rules and legal requirements apply to assured shorthold tenancies (ASTs) and deposits received before 6 April 2007 when the tenancy deposit protection legislation was first introduced, between 6 April 2007 and 5 April 2012, and after 6 April 2012. These variations have not been discussed in this blog but will be very relevant to determining whether a landlord or letting agent has fully complied with the requirements. For example, it’s worth noting that the time limit for protecting a deposit in the past was 14 days rather than the current 30 days of receiving the deposit.
What Can We Do
It is important that landlords and letting agents fully understand and discharge all their legal obligations in respect of tenancy deposit protection to avoid any associated risks.
Staying up-to-date with constantly changing laws and regulations, and seeking professional advice when facing Section 214 claims or other compensation claims is imperative to the successful management of residential assured shorthold tenancies. Only expert and specialised sector advisers can try and get it right at all times. Ultimately though, only the court can interpret the law and enforce the correct rules.
Instructing an experienced Landlord and Tenant Law Practitioner will guarantee compliance with all the relevant legal requirements and help to decide what a landlord should do if a deposit didn't cover the damage and the tenant is pursuing a claim, or if it is worthwhile for the landlord to file a counterclaim for damages when the tenant takes legal action.
Expert legal advice and assistance will provide clarity about tenants’ rights and landlords’ responsibilities and help resolve any dispute with out-of-court settlements when necessary. It will guide landlords as to what to do before, during and after granting a tenancy, the pros and cons of choosing a tenancy deposit scheme over another, and what steps to take when tenants change or the fixed term of a tenancy comes to an end and a new tenancy arises as a result. As experts in residential property law, we can provide expert legal advice and representation on any matter concerning tenancy deposit protection when letting out residential accommodation. It can help in drafting tenancy agreements and advise on all landlords' and letting agents’ requirements and legal obligations. Contact us on 0330 173 6983 or send us an email for more information.
