Tenancy Deposit Masterclass

Tenancy Deposits – ESSENTIALS

I’ve recently had a scare over one of my tenants deposits.

No longer are tenancy deposits something that you can play around with. Since the TDS changes came in just over a year ago on the 6th April 2012, landlords have just 30 days to protect their tenants’ deposit. Failure to do so results in them being liable to a penalty of between 1 and 3 times the tenant’s deposit amount.

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Which tenant deposit scheme to use?

Landlords currently have two types of ways of protecting their tenants’ deposit. Either through an insurance scheme, which allows the landlord to hold on their tenants’ deposit or through the one approved custodial scheme the Deposit Protection Service. Have a look at my thoughts on which tenancy deposit scheme is best.

In general for most small landlords it’s a no brainer. With interest rates being so low there is no financial advantage to holding on to your tenants deposit, with returns on cash deposits so low. If interest rates whizz back up to 10% suddenly, the equation will obviously look very different. Until this happens I will continue to use the Deposit Protection Service.

A good property inventory is key

Remember these days, a good property inventory is key to you being successful should any dispute arise between landlord and tenant. The deposit schemes arbitrators are briefed on the fact that the deposit is the tenants. Therefore, it is down to the landlord to justify why they should be able to keep some of it back. It’s no good having a load of photos taken on your phone showing the terrible condition of your once shiny new buy-to-let after the tenants have left, if you have no proof of what it was like when they first moved in. You need to be able to demonstrate with a meticulously put together written inventory of the property, ideally with carefully labeled photos describing the exact state of your property at the time of the rental property handover.
All this documentation needs to also be countersigned by the tenant, to prove that they agree that it represents an accurate record at the time they start their tenancy.

Don’t forget your section 213 notice

Landlords might think that once they have protected their tenants’ deposit, they are ‘home and dry’ – not so. There is also a requirement for the landlord to notify the tenant which deposit scheme they have used and the basic steps they need to go through to get their tenant deposit back.

Should I increase my tenants’ deposit?

Legally there is no limit on the size of a tenants’ deposit you can hold. The real constraint is tenant affordability. If you are charging £500 per month & you try and impose a £5000 tenant bond, you are unlikely to get many tenants.

The most I’ve ever charged as a deposit was a couple of grand on a £500 per month tenancy. This was to a couple of American tenants who were not working at the time and I felt I had to insure myself against an increased risk of non-payment of rent.

My rule of thumb when it comes to the size of my rental deposit is around 1.5 to 2 times the monthly rent. Twice the monthly rent is ideal, because if the tenant stops paying your rent then you are in theory covered whilst you get on with issuing a section 21 notice for possession.

This is because after 2 months of non-payment of rent you can obtain possession on ground 8 which is one of the mandatory grounds for possession and means that you are not at the vagaries of the Judge’s discretion.

However, in these difficult economic times many tenants are struggling to raise effectively 3 times their monthly rent. This means imposing too high a tenancy deposit will restrict the tenants who may want to rent from you. Equally though, you need to protect your interests and do you really want to rent to a tenant who is so financially stretched that they can’t find a decent sized rental deposit. As always, it’s a balance and all comes down to the judgement of an individual landlord.

Repaying your tenants deposit

I have to say that repaying your tenant their deposit is all pretty straight forward these days, particularly where your deposit is protected with the Deposit Protection Service’s custodial scheme. It can all be done online from the comfort of your armchair.

Here is some basic guidance as to how to return your tenants deposit.

An arbitrators view

Where a dispute over a tenant’s deposit does arise the current system relies on the use of arbitrators to make a final decision, as to whether a deposit, or part of it is returned to the tenant. This arbitration system relies on the arbitrator to interpret the law and legislation in respect to the deposit, but also use their own judgment to come to a semi-judicial decision, This decision is binding on both parties.

However, it is not a court of law and I understand any court decision would overide the adjudicators view.

The types of evidence that the arbitrators can use in coming to a view are:

• Tenancy agreement
• Inventory reports & check in/check out inspections
• Photographs/ video evidence
• Invoices, receipts, estimates & quotations
• Cleaning charges
• Rent account statements
• Standard agency charges
• Utility bills/ council tax
• Witness statements/ other evidence

To see a detailed account of how the DPS handles tenancy deposit disputes and damages

TDS success rates

Here are some interesting statistics on the rate of success of tenants in obtaining their rental deposit back.

Winning a dispute

Have a look at this series of blog posts by Tom Derrett for Property Hawk on how to win when it comes to a dispute over a Tenancy Deposit.

Do you have any thoughts on how to hold your tenants deposit?

Please post your comments below or feel free to ask a question about tenancy deposits in our landlord legal forum.

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