Two Kinds of Deposit Protection Scheme
There are two kinds of scheme that landlords can use to register a rental security deposit: custodial and insured.
The main difference between them is simple. Under a custodial scheme, the money is held by the scheme provider; under an insured scheme, the landlord can keep the money in their own bank account during the tenancy.
Custodial Deposit Protection Schemes
Under custodial schemes, the landlord (or their agent) collects the security deposit money from the tenant, and then registers the money with a government-approved deposit protection scheme.
Once registered, the scheme provider takes custody of the money. They hold it for the duration of the tenancy, not releasing until either:
- Both parties agree on the amount to release to each party
- A tenancy dispute has been resolved
Either the landlord or the lead tenant can initiate a request to repay the deposit, but they must both agree on the deductions to be made. In most cases, the landlord and tenant will agree to the deductions, and then both confirm the repayment arrangement to the provider.
This can now be done online, via a portal to which both the landlord/agent and lead tenant are given logins.
All government-approved providers of tenancy deposit protection schemes offer a free, impartial dispute resolution service.
This service is an alternative to using the courts, and is therefore an Alternative Dispute Resolution service (ADR). You can refer your dispute to the scheme and their adjudicators will make a decision based on the evidence provided by the tenant and the landlord.
The adjudicator’s decision is final. If you don’t want to use you scheme’s ADR service, you can also take the dispute to court, although this is usually not recommended due to the time and expense this can require.
Insured Deposit Protection Schemes
Insured schemes work differently both before and after repaying the deposit.
Under insured schemes, the landlord (or their agent) collects the security deposit money from the tenant. Instead of paying this money to the scheme provider, however, they can keep it in their bank account, and simply register that they have taken the money with the provider.
This allows the landlord to accrue interest on the money for the duration of the tenant. This makes insured schemes an attractive proposition for landlords with expensive properties, large portfolios or long contract terms.
The trade-off is that landlords have to pay a small premium to the scheme provider. How small? For example, insured deposit scheme provider My Deposit charge landlords £26 for deposits over £500.
The repayment process is also different, since the landlord already has the security deposit in their accounts at the end of the tenancy. With insured schemes, landlords are free confer with the tenant, agree deductions and then return the deposit to the tenant without involving their provider.
If there is a dispute, then the landlord needs to involve the scheme. They must pay the disputed amount to the scheme provider – not the whole deposit. An example to illustrate:
A landlords wants to deduct £200 from a £1,000 deposit registered with an insured scheme. The tenant disputes £100 of the deductions. In this case, the landlord should repay the tenant the undisputed £800, then pay £200 to the scheme. The scheme will then arbitrate and determine the appropriate repayment of the remaining £200.
The dispute then proceeds in the same manner as that described for custodial deposits. The tenancy deposit protection provider will offer both parties their free ADR service. An adjudicator will assess the evidence and determine the appropriate repayment of the disputed sum.
Custodial vs Insured Schemes Comparison Table
|Deposit held by||Scheme provider||Landlord|
|Landlord/Agent must provide prescribed information||Yes||Yes|
|Can return agreed deposit without involved scheme||No||Yes|
|Must involve scheme with disputes||Yes||Yes|
|Free alternative dispute resolution||Yes||Yes|
|Dispute decision is final||Yes||Yes|
A Note about Prescribed Information
In both kinds of scheme, the landlord/agent must supply the tenants with legally prescribed information about their deposit and how it is being protected. You get access to the information pack, and instructions on how to serve it to your tenants, when you register your deposit.
You will have 30 days from when the tenants pay the deposit to register it and provide them with the prescribed information. Both parties must sign the information and you should keep a copy.
In OpenRent’s Rent Now tenancy creation service, we do all of this for you, making sure you set up your tenancy on a sound legal footing!
Which Deposit Scheme Does OpenRent Use in Rent Now?
In Rent Now we protect your deposit in the DPS’s custodial scheme well within the 30-day time period. We send the tenants the prescribed information for them to sign, helping the tenancy start off on a sound legal footing.
Why a Security Deposit Must Be Less than Two Month’s Rent
Security deposits are usually four to six week’s rent. The reason they are never two month’s rent or more is that deposits of this size could be seen as premiums. The payment of a premium would change the rights of the tenant in a way most landlords would not want.
Why Are Premium Tenancies to Be Avoided?
A premium tenancy is different to an assured shorthold tenancy (AST). ASTs are the most common kind of tenancy in the UK and come with all the rights, responsibilities and protections landlords and tenants know and are used to.
Crucially for the modern letting market, ASTs restrict a tenant’s right to assign the contract to other people. A tenant cannot, for example, simply assign their tenancy over to their spouse without their landlord’s consent.
Premium tenancies, however, allow tenants to have this right. The Housing Act (1988) says that if a premium is paid as a requirement of granting the tenancy, then the resulting tenancy does not have the above restrictions on assignment. In other words, if the tenant pays a premium, they have no such restrictions on assigning their tenancy to another person.
What Counts as a Premium Tenancy?
According to the same section of the Housing Act (1988), a premium would include “any sum paid by way of deposit, other than one which does not exceed one-sixth of the annual rent payable under the tenancy immediately after the grant or renewal in question”.
Two month’s equals one-sixth of the rent. Therefore, if you take a deposit of two months’ rent, you could be seen to have taken a premium for the property, and therefore accidentally lifted the usual restrictions on assignment that hold for regular ASTs.
Government-Approved Deposit Protection Schemes in the UK
There are three different government-approved providers for each area of the UK.
England & Wales
What Counts as Evidence in a Tenancy Deposit Dispute?
Landlords can require deductions for a range of reasons, so a range of evidence can be accepted by ADR process. Some common forms of evidence accepted include: the terms of the contract, bank statements, utility & council tax bills, inventory reports, photographs/videos of the property, email correspondences, cleaning charges, witness statements.
Why You Need to Perform an Inventory
An inventory is when you assess the condition and contents of the property at the start and end of a tenancy, and make a record accompanied by photos. It is usually agreed upon and signed by both the landlord and the tenant at the start of the tenancy.
The inventory is the landlord’s key piece of evidence in subtracting deductions from a tenant’s deposit. Without it, it is very hard to prove that any damage was caused by the tenant during their tenancy, or that any items that were present at the start of the tenancy have gone missing.