Understanding Deposit Protection Schemes & How To Protect Your Tenant’s Deposit
- September 5, 2022
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What Is A Deposit Protection Scheme?
Looking After Your Tenant's Deposit Is A Big Responsibility. A DPS Scheme Is A Great Way To Protect Deposits But How Exactly Do They Work?
As a landlord or renter, you will be aware that before a tenant moves in there is usually an upfront cost for the tenant to pay. Not just the holding deposit the tenant pays to take the property off the market but also, a rental security deposit (usually to cover any damages to the property or unpaid rent or bills during the tenancy)
Whilst it is up to the landlord whether they accept any deposit at all, landlords are now obligated to keep track of any money paid to them as a rental security deposit in an insured deposit scheme. The days of just including a deposit amount on the tenancy agreement signed between both parties or, entrusting it to an agency or any other party managing the property, are now long gone.
In short, this means more responsibility and significant repercussions if we don’t follow the rules. Luckily, in this article, we will explain exactly what each deposit is for, how they should be calculated, paid and protected, as well as the regulations you need to be aware of with regards to receiving and storing payments.
What Is The DPS?
Landlords are not obligated to charge for a deposit on their property but, in the likely event that they do, they are legally obliged to make sure it is processed securely. Landlords have two options for how they can choose to protect the deposit their tenants pay them.
A Deposit Protection Scheme or, DPS, is a deposit holding scheme to ensure that the deposit a tenant pays to the Landlord is protected by being correctly logged, insured and visible to the tenant after they move in. Landlords do have an alternative to using a DPS scheme if they wish to insure the deposit whilst holding the money in their own bank account and many landlords do opt for this approach to retain the deposit themselves.
Essentially, a DPS is a holding service, separate from any bank account of the landlord or property agency managing a property, providing an impartial and transparent third party to prevent a conflict of interest or, the loss of the original deposit under any circumstances.
A DPS should be accessible to both tenants and landlords for them to check that the deposit has been correctly protected. Failure to do so can have serious consequences, including invalidating the tenancy agreement signed between both parties, which might afford more rights to the tenant than the landlord might have wished!
A DPS also guarantees that a tenant will not receive their full deposit back if they violate any of the terms of the tenancy agreement or, cause damage to a property that they do not pay for before they move out. Additionally, any rent arrears will be deducted from the deposit and paid to the landlord, if the tenant has not paid the correct amount of rent before they move out.
Deposit Protection Scheme Requirements For Landlords
It is a legal requirement that all deposits for assured shorthold tenancy agreements be protected in a DPS by a landlord. Even tenancies that have existed from as far back as 1998 must have been placed inside a DPS by now! But you don’t need to place a deposit in a DPS if you’re in a company let agreement or, the person is renting the property under a license to occupy.
After receiving a deposit, a landlord or agency has 30 days to submit and prove that the deposit has been placed in a DPS. This will include the names and details of all applicable parties, the address concerning the property being rented, as well as the full amount of the deposit.
Failure to do this can often lead to serious consequences for a landlord, including having to repay up to three times the amount of the original deposit, as well as a court ruling that your tenant does not have to vacate the property at the end of the tenancy agreement due to your mishandling of the deposit!
If you are in dispute with your tenant regarding the tenancy deposit at any point of the tenancy, then you can make use of a DPS resolution service to act as a mediator in whatever dispute you have. It is usually free, and a good way of settling deposit-related disputes without having to drag things out in court!
In some cases, a landlord may not have to place a deposit in a DPS, such as if a tenant moves in without a deposit or if they give the landlord custody of a valuable item as collateral instead. Expensive jewellery or vehicles have been used in place of a deposit in the past, but this is up to the landlord in question if they wish to accept an arrangement like this!
If you have not protected your tenant’s deposit correctly in a pre-existing agreement where the rules might have changed and you’re now legally required to protect their deposit in a DPS scheme but, have misplaced the deposit, you must act quickly to alert them of this and return their full deposit amount to them before the end of the current tenancy agreement.
Placing the deposit amount into a new DPS scheme is not enough to correct the issue of losing an original deposit, as the last possible date for protecting a pre-existing tenancy before a DPS became mandatory, was 2015!
How To Protect Your Tenant’s Deposit
Placing your tenant’s deposit into a DPS scheme doesn’t require much effort. Your first course of action should be to decide whether or not you wish to:
- Use a custodial scheme where the TDP scheme holds the deposit for you, for free.
- You as the landlord or, the agent hold the deposit yourself and pay for the scheme to insure the deposit for you in case the money is lost, as part of an insured scheme.
Once you’ve made this decision, it’s a simple matter of choosing which DPS scheme you wish to use and then to protect your tenant’s deposit correctly, you should take the following steps after confirming the full deposit amount required form the tenant and include the following prescribed information for the DPS:
- Confirm the address of the property
- Confirm the full amount of the deposit you have received
- Proof of placing the deposit into the scheme and providing the contact details for the selected scheme provider
- Your own and/or your letting agencies’ contact details
- Clearly state all scenarios where the tenant might not receive their full deposit back (such as for fixing damage to the property) and include this in the contract or the scheme introduction letter
- Tell them how they can get their deposit back at the end of the tenancy through the DPS provider
- How to contact the provider and what to do in the event of a dispute with yourself over the property or deposit
Failure to properly inform your tenant of any of the above details can lead to the scenarios discussed earlier, such as invalidated tenancy or lead to the tenant being awarded back a considerable amount of money. But you could avoid all of this though if you used a reliable professional property management service instead.
Available DPS Deposit Schemes
Ah yes, we’ve gone through all of those ins and outs about deposit protection schemes and yet, we haven’t told you where to find any of the best ones! Well, fear not, because we have got you covered!
For properties in England and Wales, use any of the following custodial tenancy deposit schemes;
https://www.tenancydepositscheme.com/
https://www.depositprotection.com/
For properties in Scotland and Northern Ireland, use the following;
https://www.lettingprotectionscotland.com/
Alternatives To Using DPS Schemes
We mentioned earlier that as a landlord, you don’t actually have to take a deposit for your property at all. If you don’t wish to enter into a DPS, self-insured scheme or, even take a deposit, you might be wondering what your options are for letting out your property.
Flatfair, offer a fantastic and reliable service for deposit-free renting which works brilliantly for both tenants and landlords. Instead of paying a deposit, Flatfair tenants pay the landlord a non-refundable check-in fee and are held liable for arrears that need to be paid for at the time they move out, without any effort being required from the landlord -Flatfair take care of everything and are one of the highest-rated services for no-deposit tenancies on the market!
Earlier in the article, we spoke about company let agreements, between landlords and private companies. This is a fantastic opportunity for landlords to partner up with companies like ourselves at Flex Living, to make the most of renting out their property without the need to worry about filing deposits under DPS schemes.
Corporate or company lets, are great ways for landlords to generate better rental income from their property, as well as ensure the property is looked after by a responsible third-party. Our model at Flex Living, goes beyond the traditional corporate letting model to offer guaranteed rent, expert property maintenance and management as well as much, much more!
If you have a property you want to rent out and want to know more about what we offer, why not get in touch with one of our fantastic team members today? If you want to read more about letting agreements, including more information about corporate letting, head over to our blog for more incredible insights and useful information for landlords.
What Is The Difference Between A Holding Deposit & A Tenancy Deposit?
A holding deposit is a fee a potential tenant pays after they view a property to take it off the market. Because this is quite a commitment for a Landlord, property agents and landlords decided it would be a good idea to make sure whoever wanted to take a property off the market had an incentive not to withdraw from the process.
As such, the idea to charge the tenant a holding deposit (which must legally be less than or equal to 1 week’s rent) is to ensure they are committed to taking on that property. A holding deposit is typically paid after viewing a property but before, any background and credit checks take place. The application to rent the property is then processed and the full deposit for the property is paid, along with any upfront rent that is due.
The full tenancy deposit a tenant might pay for a property can legally be no more than five weeks worth of rent. This is usually paid after background checks are completed on the tenant wishing to move into the property and is one of the final steps taken before a tenant moves in, along with signing the tenancy agreement and paying any rent due upfront before they move in.
One common question we hear is “Is a holding deposit refundable?”. Typically, a holding deposit is given back to a tenant by way of deduction from the first month’s rent that the tenant pays in advance before they move into the property. If the tenant decides to back out of renting the property, they fail a right-to-rent or financial credibility check, they can lose their holding deposit and will not receive it back.
Whether the tenant receives the holding deposit back is usually at the discretion of the Landlord or Agent. As the holding deposit is not protected by the DPS it is not subject to the same rigorous process. But there are scenarios where a Landlord is legally obliged to return the deposit, such as if there was an issue with the property which prevented the tenant from moving in or, if the tenant had to pull out of the arrangement for health or personal reasons.