A landlord’s guide to tenancy deposits

guide to tenancy deposits

Although taking tenancy deposits is optional, it is the done thing amongst landlords – not to mention strongly advised. Deposits are your financial safety net if and when problems arise at the end of a tenancy and can be used to offset a number of costs.

However, taking a deposit is not as simple as being handed a lump sum and sticking it in a bank account for a rainy day. There are things to know and processes to follow, so here’s a handy guide to tenancy deposits to ensure that you get everything right.

What is a deposit?

A deposit is a lump sum of money that is taken from your tenant at the beginning of a tenancy. It should be the financial equivalent of 4-6 weeks rent but should be no more than two months rent. This money is held for the duration of the tenancy and returned at the end with any necessary costs deducted.

So, what are these necessary costs? There are only a select few things that you can use your tenants’ deposit to cover. These include unpaid rent, damage to the property, missing items and any professional cleaning costs. Things that you can’t use the money towards are things like the cost of reletting the property or fixing any fair wear and tear.

tenancy agreement

Fair wear and tear is a bit of a grey area and usually where a lot of deposit disputes stem from. It includes things like worn carpets, faded curtains and little scuffs and scrapes on the wall. Basically, it’s any reasonable ‘damage’ that comes with living in a property. The reality is that you won’t receive your property back in the condition that you handed it over to your tenants in – and that’s okay. It’s unavoidable damage that you need to be looking out for, such as nail varnish spills, damaged paintwork and torn curtains. You get the idea. These costs can be deducted from your tenants’ deposit, but only on a like-for-like basis. Unfortunately, you can’t replace things with more expensive items and expect your tenants to cover the cost!

You’ll want to make sure that your landlord insurance covers you for accidental damage and malicious damage by tenants too. Ideally, it should also cover you for loss of rent. Should you be unsuccessful for any reason in deducting necessary costs from your tenants’ deposit, you will always have your insurance to fall back on. If you’re after a more comprehensive policy, then be sure to compare landlord insurance policies and find something that covers all bases.

Keep an inventory

When trying to avoid disputes over fair wear and tear, it’s always a good idea to keep an inventory of everything you supply in your rental with images. This means that you can see the condition of the item at the start of the tenancy to compare with its condition at the end of the tenancy; an easy way of determining between damage and fair wear and tear. 

Go through this inventory with your tenants at the start and the end of the tenancy. Communication is super important. Keep everything open at all times, especially if you are making deductions. Let them know what you’re deducting and keep any invoices for work done to the property or for items you’ve had to purchase. Be sure to justify your costs and of course return any leftover deposit as soon as you can. 

Tenancy deposit schemes

Now, this is probably the most important aspect of taking a tenancy deposit. By law, you cannot simply keep your tenants deposit in one of your savings accounts. It must be stored in a government-authorised tenancy deposit scheme within 30 days of receipt. If you don’t do this, your tenant could actually bring up a claim against you for three times the deposit sum… ouch.

So, why has this process come about? Tenancy deposits can be a huge source of tension between landlords and tenants. Tenancy deposit schemes are designed with the tenant in mind as they essentially protect their money. If a dispute arises for any reason, the deposit is protected until the dispute is resolved. But actually, they are quite beneficial for landlords too. These schemes offer an alternative dispute resolution service which is a free independent adjudication at the end of the tenancy. This is handy if you and your tenant do end up disagreeing about what deductions should be made from a deposit.

There are three different government-approved schemes to choose from when storing a deposit and it’s totally your choice which one you choose. You can either go for the Deposit Protection Service, My Deposits or the Tenancy Deposit Scheme. Once you’ve chosen, you need to let your tenant know within 30 days of receipt. Again, failing to do this can result in a financial sting for you. 

In short, so long as you’re upfront, clear and fair when it comes to tenancy deposits, you’re unlikely to encounter any problems. And if you do, make use of that alternative dispute resolution service. It’s a weight off your shoulders. And do not forget to store that deposit – because failing to do so can have some pretty serious consequences!

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