Landlords and deposits
Deposits can often be the cause of dispute between landlord and tenant. Good practice in managing deposits can help avoid these problems. This page looks at the best practice for landlords in managing deposits.
What is a deposit?
A deposit is a payment taken from the tenant at the beginning of the tenancy. It covers possible damage to the property or unpaid bills. Tenants will get all or part of their deposit back, if they have kept the property in good condition. It is important to note that the money legally remains the tenant's throughout the tenancy.
Landlords cannot make tenants pay a holding deposit (sometimes called key money) to secure a property in advance of the tenancy beginning.
The introduction of tenancy deposit schemes means that all private sector landlords must register their tenant's deposits in an approved tenancy deposit scheme within 30 working days of the tenancy starting. To find out how these schemes will affect you, see the page on tenancy deposit schemes.
Tenancy agreements and deposits
A deposit should be covered by specific clauses in the tenancy agreement, the agreement should:
- outline the amount of deposit held (legally this cannot be more than two months' rent)
- make clear in which way the landlord holds the deposit
- state what the deposit covers and what deductions can be made for
- state what the tenant is responsible for
- make any clause fair and reasonable
- refer to the inventory of the contents and conditions
- include how interest will be dealt with (in theory any interest that accrues should belong to the tenant)
- outline the timetable for dealing with the return of the deposit
- state how any disputes will be resolved.
Landlord's should also avoid making the following mistakes with clauses:
- 'silent' clauses: A silent clause is one that makes assumptions rather than being totally clear, for example, you may state in a tenancy agreement that the landlord can retain some or all of the deposit if the tenant does not pay their rent in full. While this would cover you for any rent arrears it would not cover any damage to the property. You cannot simply assume that something is covered, it needs to be explicitly stated in the agreement.
- 'unenforceable' clauses: Unenforceable clauses are those which are unreasonable or which limit the landlord's liability. For example, if you included a clause that stated three months' rent would be held as a deposit, this would be deemed 'unreasonable' as it does not conform with the law (that only two months' rent can be held as a deposit).
Inventories and deposits
Landlords should provide and agree an inventory with tenants. An inventory should be a clear statement of what fixtures, fittings and furnishings are in the property at the beginning of the tenancy and their condition.
An inventory should:
- clearly state the condition of decoration, carpets and fixtures/fittings
- itemise the furniture and condition/location
- give utility readings, meters and providers
- make reference to cleanliness - and ask the tenant to leave it in the same state
- give photographic evidence (at the beginning and end of the tenancy)
When both parties have come to an agreement on the inventory it would be good practice for both to sign the document. You might want to use our inventory template.
At the end of the tenancy you cannot just replace an old item with a new one if the old one has come to the end of its lifespan. Tenancy deposits are to compensate for any damage or loss that cannot be put down to fair wear and tear.
Resolving deposit disputes
Once a deposit is registered in a tenancy deposit scheme, each scheme provider provides a free-to-access dispute resolution service. If a dispute reaches this stage then an independent adjudicator, appointed by the scheme provider, will consider the opinions of both the landlord and tenant and decide how much of the deposit should be returned to each party.
For deposits that don't need to be registered in a tenancy deposit scheme:
Sometimes at the end of the tenancy, disputes arise over the return of the deposit. You should already have made clear in your tenancy agreement how any dispute will be dealt with.
To resolve a dispute you should:
- agree dispute resolution
- consider using a mediation service if one is available locally
- apply test of 'reasonableness'
- discount fair 'wear and tear'
- explain the timescales for returning a deposit to the tenant.
If the tenant is not satisfied with the outcome of the dispute they can go to a small claims court to challenge the decision.
An alternative to deposits is to use a guarantor; this is where a third party agrees to take on liabilities arising from some one's tenancy. Guarantors stand surety. This means that they guarantee rent payments and other tenancy obligations. A guarantor pays the landlord the rent if the tenant defaults, and pays the landlord losses, expenses or damages where the tenant fails to carry out his obligations under the lease. As guarantors' agreements are not technically a sum of money, they will not be covered by the tenancy deposit scheme requirements.
If you decide to ask for or accept a guarantor rather than a deposit you should make sure that the guarantor understands the responsibility they are taking on. You should outline the nature of the guarantee arrangement in a letter or written contract, for example:
'This guarantor agreement creates a binding legal contract. If you do not fully understand the nature of the agreement, then it is recommended that you take independent legal advice before signing.'
Within the agreement you should set a limit for liability. The contract should be signed by both landlord and guarantor at least seven days in advance.
You may wish to extend contract for another fixed term if you renew the original fixed term lease.