At the outset of a lease agreement, a landlord will almost always require a tenancy deposit to be paid, which they will retain for the purpose of withholding in the event that disputes arise. This sum normally equates to one or two months’ rent, and if no disputes arise will be returned to the tenant at the conclusion of the tenancy. There is no legal requirement to request a deposit, but if done so, there are procedural rules a landlord must adhere to.
If the lease agreement is an assured-shorthold tenancy (AST), the landlord must place the deposit in a government-affiliated tenancy deposit scheme (TDS). In England & Wales, such schemes include those operated by the Deposit Protection Service, MyDeposits, and the Tenancy Deposit Scheme.
Assured shorthold tenancy
Since the passage of the Housing Act 1988, the AST has become the default residential tenancy in England & Wales. An AST will offer protection from eviction for a tenant for the first six months of its duration. For ASTs agreed following 6 April 2006, all landlords must place deposits received into a TDS.
Handling of deposits
A landlord must place a deposit paid into a TDS within 30 days of receipt. Within this same period, the landlord must provide (1) the particulars of the TDS to the tenant; (2) the grounds for which the deposit can be withheld from return; and (3) the dispute resolution mechanism.
There are two general types of TDS: insurance based and custodial schemes. With insurance based schemes, the tenant will provide a deposit to the landlord, who will keep the deposit but pay a premium to their insurance provider. A custodial scheme, the most commonly used, will involve the landlord transferring the deposit directly to a TDS provider, which holds it for them.
If a tenant believes a landlord has failed to use a TDS, they may apply to the relevant County Court to have the deposit either repaid to them, or have it placed within a TDS.
Grounds for deduction
A landlord can make deductions from the deposit amount where the tenant has failed to meet obligations under the lease agreement. These will commonly include:
- Damage to property. If the tenant damages the landlord’s property, the tenant must repair or replace it. It is advisable for a landlord to create an inventory at the outset of the lease, and present receipts to the tenant where any items on the inventory are damaged. If the inventory is simply affected by ordinary wear and tear, deductions cannot be made from the TDS.
- Cleaning deductions. If the tenant has not left the premises in a suitable condition upon vacating it, the landlord can deduct cleaning expenses.
- Rent arrears. If the tenant has rent arrears, the landlord can use the deposit to balance out sums owed. If the amount owed is in excess of the deposit, the landlord will have to resort to court proceedings to recover.
Return of deposits
At the expiry of a tenancy, common grounds for the withholding of a deposit are failure to meet obligations under the lease agreement, damage caused to the property and default on rent.
If no dispute arises, the landlord has to return the deposit within 10 days. If the landlord is not contactable, the tenant can directly apply to the TDS for the return of their deposit.
ASTs, unprotected deposits and Section 21 Notices
If a deposit for an AST was not placed by a landlord in a TDS, a landlord must return any deposit paid before seeking to issue a Section 21 Notice requiring the tenant to vacate the premises at the end of the lease period. This can have financial consequences for a landlord who believes the tenant will be unable to meet future rent obligations and is forced to bear the financial risk of them remaining beyond expiry of the lease term.
Dispute resolution mechanisms
All TDS providers will also offer a no-fee dispute resolution service, which the tenant and landlord must agree to utilise. This service can be used to contest both withholding of the deposit and any deductions to the deposit that the tenant feels was unwarranted. Decisions issued by the despite resolution service are final.
Taking a claim to court
If the landlord does not agree to the use of the dispute resolution mechanism, the tenant may have to resort to court action. Prior to commencing court action, the tenant is required to issue a formal letter to their landlord, called a “letter before action”. If the landlord refuses to comply with the letter, court proceedings can be applied for.
In the event the landlord fails to respond to a court summons, the court can award repayment of the deposit in their absence.
If the tenant is in arrears with regards rent, or has damaged the landlord’s property, the landlord is entitled to counter-claim for damages or rent owed in the same court proceedings.
Offer to settle
Upon initiation of court proceedings, but prior to a hearing, a landlord may make an offer to settle to the tenant. If the tenant is satisfied with the terms of settlement, they can withdraw their claim and lodge a consent order.
Penalties for failure to use a TDS
A landlord who does not pay a deposit into a TDS where required may be liable to pay the tenant up to three times the original amount within a 14 day period.
Contact our Property Litigation Solicitors Mayfair and throughout London Today
The implications for improper handling of a tenant’s deposit can be significant for a landlord, and it is important to consult with a Property Solicitor at the outset of a lease agreement to ensure that legal requirements are being met.
At Lewis Nedas, our team of Property Litigation Solicitors have broad experience in both commercial and residential property litigation. We have successfully advised clients with highly complex and multi-faceted cases. To speak with one of our Property Lawyers, please contact us on 020 7387 2032 or complete our online enquiry form.