Most people don’t realise that becoming a landlord also means needing a background in finances, or at least a crash course. Aside from monthly rent, tenants usually pay what’s known as a security deposit. You might be wondering how much of a security deposit to collect, what it covers, and if it’s necessary. In addition you’ll need to know about tenancy deposit schemes (TDS) and your obligations as a landlord.
Here we’ll answer all of these questions and more. But remember, there are perks and benefits to finding a letting agent or property manager to help you with the particulars.
1. WHAT IS A SECURITY DEPOSIT AND WHAT DOES IT COVER?
A security deposit is a specific amount of money that you, as the landlord, request from the tenant to cover unforeseen costs and expenses when the let is agreed. This amount varies depending on several factors including whether or not the tenant is a pet owner.
Some landlords request between 4 and 6 weeks’ rent as a deposit while others request up to 8 weeks. The Tenant Fees Act of 2019 capped landlords from collecting more than five weeks’ rent if the annual rent is less than £50,000.
You should collect the security deposit before the tenants move in and include the terms in a written contract. If there is extensive damage to the property, or your tenant refuses to pay, you can use this money toward rent and repairs.
This money doesn’t, however, cover general wear and tear from everyday living. Remember, the longer your tenants live on-site, the more wear and tear the property will incur, especially with HMO properties. That means your chances of collecting the deposit are slim.
Deductible damage includes:
- Large holes in the wall
- Broken appliances and fixtures
- Excessive filth (including mould and mildew)
- Missing smoke or carbon monoxide detectors
- Pet messes (including urine stains)
Common wear and tear that doesn’t fall under the category of damage and for which a landlord can’t keep the deposit include:
- Fading or peeling paint
- Floors or carpets that need cleaning
- Doors that stick
- Cracked window panes
- Worn enamel on bathroom fixtures
If you don’t incur any unforeseen expenses and your tenant pays on time every month, you need to return their security deposit at the end of the lease.
It’s also interesting to note that in England, you aren’t required to take a security deposit, however, it’s highly recommended. If your letting agent suggests you take a deposit, you need to protect it in a tenancy deposit scheme (more on this in a second). Property managers can help monitor your property and alert you to any breaches in the contract, late rent, or recent damages.
2. PROPERTY INVENTORY AND CONDITION CHECKLIST
It’s hard to place a value on the property or the items inside it without first taking inventory. This should be done by both the landlord and the tenant. This report records the condition of the property or building as well as any items inside, including furniture.
Take photographs and make detailed notes about specific items and any preexisting visible damage or wear and tear. It’s not a bad idea to perform this inventory check even without a security deposit.
Have your property manager or letting agent perform the walkthrough with you.
3. WHAT ARE TENANCY DEPOSIT SCHEMES (TDS)?
If you have an assured shorthold tenancy in England and collect a security deposit from your tenants, you’re obligated (by law) to protect it using one of these three government-backed tenancy deposit schemes (TDS):
- Deposit Protection Service
- Tenancy Deposit Scheme
Any of the above schemes hold and protect the deposit for the duration of the lease. It is then released at the end of the tenancy.
An assured shorthold tenancy, also known as an AST, is a common agreement among landlords. An AST allows you to let residential property to private tenants. Following the initial lease agreement, you can evict any tenant without a legal reason. As a landlord, it’s your legal obligation to protect the tenant’s deposit, even if you use a letting agent.
4. HOW DO TENANCY DEPOSIT SCHEMES (TDS) WORK?
There are two common types of tenancy deposit schemes available for both letting agents and tenants — custodial schemes and insurance-based schemes. Custodial schemes are most common among landlords.
In this scenario, the tenant pays the deposit directly to the landlord who then deposits it into the scheme. Insurance-based schemes also require the tenant to pay the deposit to the landlord who then holds it themselves, paying a premium to an insurer.
Regardless of the scheme you choose, the security deposit needs to be protected within 30 days of receipt. During these 30 days, the tenant must also receive the following information from either the landlord or letting agent:
- Property address
- The total amount of the deposit
- The type of deposit scheme used
- The name and contact information of the letting agent (if one is used)
- How to apply for the return of the deposit
- How to handle a dispute over the deposit
While asking for a security deposit is a choice, providing this information is not — it’s a requirement by law. Whether you’re handling the tenancy yourself or working with a letting agent, you must adhere to these rules and guidelines.
5. WHEN WERE TENANCY DEPOSIT SCHEMES INTRODUCED?
Tenancy deposit schemes are in place to protect both the tenant and the landlord. Tenancy Deposit Protection (TDP) was first introduced in 2004 as part of the Housing Act. The legislation was put forward as part of a package designed to raise standards in the private renting sector. The Housing Act guarantees that all security deposits are fairly handled.
This means that if the tenant acts appropriately, meeting the terms of the tenancy agreement, the landlord or letting agent cannot legally withhold their deposit. The entire security deposit must be returned at the end of the lease. In turn, the TDP also protects the landlord against property damage and late payments from the tenant.
In this case, you’re legally allowed to apply the security deposit to any incurred expenses. Even with the TDP in place, don’t be surprised if you encounter disputes or resistance from uncooperative tenants.
6. LEGAL OBLIGATIONS
WHO DOES IT APPLY TO?
This legislation applies to all landlords and letting agents in England and Wales. If you take a security deposit from a tenant under an Assured Shorthold Tenancy Agreement, you need to handle the money properly and legally.
SECURING THE DEPOSIT
Once you receive the security deposit, you’re legally obligated to protect it within 30 days. This applies even if you’ve only received a partial payment. The smartest step, in this case, is to pay the remainder yourself and get reimbursed by the tenant at a later date. Partial payments are inconvenient and costly.
SERVING THE REQUIRED INFORMATION
It’s also your obligation to provide important information to the tenant during this same 30-day window. This is known as prescribed information and includes the total amount of the deposit, the property address, and the type of protection plan (deposit scheme) you chose. If you’re using a letting agent, you also need to provide their name and contact information.
THE TENANT’S RESPONSIBILITY
The answer to the question, what is the tenant responsible for is a resounding, nothing! Other than providing you with the security deposit, it’s the landlord’s full responsibility to protect it and provide all the required information to the tenant before the 30-day window closes. If you fail to do so, you’ll face major penalties.
The only responsibility that falls on the tenant’s shoulders is upholding the rental agreement, paying the agreed-upon rent on time, and maintaining the property. If you agree to take a partial payment toward the security deposit, the tenant is required to pay the remainder based on whatever agreement was made.
7. SECURITY DEPOSITS PAID IN INSTALLMENTS
Some tenants will ask to pay their deposit in instalments. Step one in dealing with this situation is to not accept payments or instalments. It’s always best to require the entire deposit upfront to avoid confusion, legal complications or penalties.
If you decide to accept instalments out of the kindness of your heart, you’re still required to protect the deposit. This is true whether you have half the deposit, the whole thing, or a third of it. You still need to secure whatever part of the deposit you have within 30 days of receiving it.
There are a few ways of handling this type of arrangement. You can pay the remainder of the deposit yourself and protect the entire amount but you’ll have to get repaid by the tenant at a later date.
If you choose not to do this, things can get really complicated really fast. When you change the amount of the protected deposit, the original deposit has to be “unprotected” and you need to make an entirely new protection purchase. Not only is this a lot of paperwork but it’s timely and costly. Administration fees are constantly changing and you’ll have to pay the process fees each time you update the protection plan. In short, if you ask your tenant for a security deposit, get the entire amount upfront.
8. WHAT IS THE PROCESS FOR RETURNING A SECURITY DEPOSIT?
As mentioned earlier, security deposits are generally returned to tenants after the lease is over. This only occurs if there are no damages and no missed rent payments for which the deposit was used. It’s recommended that the deposit is returned to the tenant within 10 days of the agreed-upon amount. Both the tenant and landlord must agree on how much of the deposit is owed. The deposit scheme will then process the return.
In the event of a dispute, the scheme will hold the security deposit until a resolution is made. Notify the deposit scheme immediately if you’re facing a dispute. They will look to the property inventory and terms of the rental agreement to make an ultimate decision on how to divide the security deposit fairly.
Although you’re not required to ask for a security deposit as a landlord or letting agent, it’s recommended that you request one. This protects you in the event that a tenant defaults on payments or causes serious, costly damage to your property. A qualified property manager will help monitor the activity and upkeep of your property. A property manager can help navigate you through the security deposit process and all related paperwork.
9. PROPERTY MANAGERS: TENANCY DEPOSIT SCHEME & THEIR FEES
Of course getting a letting agent will incur a fee. Their fees range depending on the level of services you need for your property. Simply finding a tenant and getting the initial deposit setup will incur a lower fee.
However agents charge substantially higher fees for full management of your property.
Although as a landlord you will have to fork out for the fee, in the long run you could save money. Having a secure tenancy deposit scheme (TDS) and the collection of the deposit being managed in the right way, you secure yourself against damage to the property.
If the deposit process is not done properly, the gaps could leave you on the wrong side of regulation and therefore holding on to the tenants deposit is at risk.
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