There are two main reasons why landlords take deposits:
There is also sometimes the need for a Rent Deposit in the case of commercial tenancies. These are not covered by the Tenancy Deposit Scheme.
The holding deposit shows good faith on the part of a prospective tenant enabling the landlord to take further action in the confident knowledge that the applicant is serious and fully committed to the property:
The holding deposit is particularly appropriate where there is good demand for the property and the landlord may lose other prospective tenants if the applicant causes unnecessary delay or declines the tenancy at the last minute.
In the event of the prospective tenancy falling through, the landlord may well decide to keep this holding deposit as recompense for the inconvenience and cost caused, but this should be pointed out and stated in writing to any prospective tenant at the outset, along with a written receipt for the deposit held - you need a holding deposit agreement - see Holding Deposit Agreement - Free dowload.
The holding deposit should be an appropriate amount of compensation for the landlord's loss should the tenant decline - usuallly no more than one week's rent. The deposit should not be withheld if the tenant fails credit checks or references, as in the eyes of the law it is then the landlord that declines the contract.
Once the agreement is signed the holding deposit would normally then form a part of the Security Deposit, to be protected or held by the landlord or the agent throughout the term of the tenancy where an isnurance protection scheme is in place. If you decide not to take a Security Deposit, the holding deposit should be returned or credited as rent.
The taking of security deposits has come to be accepted by landlords, tenants and the courts as normal practice in residential lettings in the UK.
The taking of these deposits is now governed by the Depsoit Protection Scheme legislation embodied in the Housing Act 2004
The usual items are listed below, all of which should be referred to in the letting agreement.
The letting agreement should state what can be deducted from the security deposit and under what circumstances. For example, if damage occurs during the period of the tenancy then the repair may be funded from the deposit and the tenant would then be required to make the deposit amount up again to its full amount.
Tenants often fail to realise just how much things cost. If a landlord brings in someone to clean a cooker or remove rubbish the charge is often much higher than the average tenant would realise, or is generally be willing to pay.
It's a good idea, when you receive notice from a tenant, to send a "Move out Letter" reminding the tenant/s about cleaning and just what this might cost. For example, you might remind them to pay particular attention to cooker cleaning (professional cleaning will cost you £60, say) and carpet cleaning (might cost £200, say).
The amount of the deposit should be a maximum of two months' rent. If the deposit is more than this amount it could in theory count as a premium and may give the tenant an automatic right to assign the lease without the landlord's consent.
This eventuality of assignment should be precluded by the terms of the tenancy agreement anyway, but as a precaution the deposit should be kept below two months' rent.
One month's rent is a common figure, though some landlords avoid this as it could encourage the tenant to substitute the deposit for the last month's rent - for this reason 5 or 6 weeks is now common.
From 6 April 2007, all deposits (for rent up to £25,000 per annum) taken by landlords and agents for assured shorthold tenancies (AST) in England and Wales have to be protected by a government authorised tenancy deposit scheme. (ASTs are the usual tenancies made between a private landlord and his tenants.)
To avoid disputes going to court, though the schemes won't prevent you going to court if you want to, each scheme is supported by an alternative dispute resolution (ADR) service, whose aim is to make disputes over the repayment of the deposit faster and cheaper to resolve.
If there is a dispute regarding damage or breach of the tenancy terms then the ADR service will become involved, otherwise the tenant's deposit will be returned without delay.
The onus of proof will be on the landlord or agent. They will need to provide reliable evidence, usually in the form of an inventory, or a schedule of condition and photographs, to support their claim for deductions from the deposit.
The court route is still open to the parties to resolve a dispute, and in cases where the damage claim exceeds the deposit.
Now that it is a legal requirement to protect tenant's deposits by registering with one of the government approved Tenancy Deposit Protection Schemes, landlords need to decide:
Following the introduction of the legislation, and it's early days yet, approximately 25% of landlords appear to have decided not to take deposits at all. By far the majority of landlords (around 50%) are using the Custodial Scheme run by the Deposit Protection Service. Around 17% are opting for the insurance based Tenancy Deposits Solutions scheme run by the National Landlord's Association. Finally, a very small percentage have opted for the insurance based scheme run by The Dispute Service, which is really aimed at letting agents.
An alternative to taking a deposit, which means you can completely avoid the Tenancy Deposit Scheme (TDS), is to take out a deposit insurance or warranty alternative.
The deposit insurance alternative provides insurance cover for damage, plus some policies cover a period of rent arrears and basic legal costs for a premium in the region of £100 for 12 months or less for 6 months.
With an deposit insurance alternative there's no need for the tenant to provide a deposit, so they are usually quite happy to pay the one-off cost of the insurance premium.
If there is a claim the insurance company will pay the landlord and then pursue the tenant for the cost of the claim, so there's no sense in which the tenant no longer takes responsibility for taking care.
All the deposit insurance alternatives are dependent on the tenant/s passing a comprehensive tenant check.