Deposit Protection: Why is it Important to be Legally Compliant?

The deposit protection scheme is something landlords often ask us about. It does cause some confusion, particularly among new buy to let or accidental landlords. But private landlords have had to protect their tenant's deposit since 2007.

A quick recap of the deposit protection scheme

In case you are in the dark or just need a refresher here are the things you need to know about the scheme.

• All landlords who let their property on an assured shorthold tenancy must protect their tenant's deposit.
• The landlord must protect the deposit within 30 days of receiving it.
• The landlord must use an approved deposit protection scheme.
• The landlord must provide the tenant with full details of the scheme used. This must include full contact details.

Furthermore, as a landlord, you must supply your tenant with information on:

• Why you have taken a deposit.
• How the tenant can apply for its return.
• What happens in the event of a dispute between the tenant and yourself.

Why you must be legally compliant

So we've discussed what you need to do. But do you really need to bother? Isn't this just another bit of red tape landlords can choose to ignore? Unfortunately, it's not. It's the law.

It is so important landlords comply with the rules.

Landlords should view deposit protection in the same way they do energy performance certificates and the gas safety rules. They are rules which landlords must comply with to ensure they are operating within the law. And, as with any laws, there will be repercussions if they are not followed.

In the case of deposit protection, a landlord could face severe financial penalties as well as a loss of some legal rights.

Hit in the pocket

Your tenant can sue you for not protecting their deposit. That's bad enough. What is worse is that you will have no defence. You will lose the case. And the court will award your tenant compensation.

This will be between 100% and 300% of the deposit. It depends on the judge. In addition, you will have to return the original deposit. This will leave you facing a potential financial penalty running into thousands of pounds.

You will also find yourself unable to evict the tenant using Section 21. This could cause further issues and cost even more cash.

Advice for new private landlords

It is obvious that to avoid financial penalties and to comply with the law you must protect your tenant's deposit. And you must use a government approved scheme.

There are three schemes or companies to choose from:

• Deposit Protection Service
• MyDeposits
• Tenancy Deposit Scheme

You also have the choice of two types of scheme. You can choose from either custodial or insured schemes. Both secure the deposit but differ in the way they handle the money.

With a custodial scheme, the landlord pays the deposit to the company who secure it. An insured scheme works differently. In this case, the landlord retains the deposit but pays the scheme a fee to protect it.

Registering the deposit is a straightforward process. You can do it all online. When you register the deposit the scheme will send you all the information you are legally required to give to the tenant.

What happens at the end of the tenancy?

At the end of the tenancy, you will inform the tenant how much, if anything, of the deposit you are withholding. And your reasons for doing so. If the tenant agrees the deposit protection scheme will distribute the funds accordingly.

But if the tenant disputes the amount you wish to withhold the scheme will arbitrate. Though either you or the tenant could opt instead for a court hearing. Whichever method of adjudication is used the deposit protection scheme will pay the funds in accordance with the judgement.

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