This content applies to Scotland only.

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This page looks at the best practice for landlords in managing deposits.

Introduction

A tenancy deposit is a one-off payment taken from the tenant by the landlord 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 and are entitled to get their deposit back. The money legally remains the tenant's throughout the tenancy.

Deposits can not be taken by landlords to secure a property in advance of the tenancy agreement beginning.Tenancy deposits can often be the cause of dispute between landlord and tenant at the end of a tenancy.  Good practice in managing deposits can help avoid these problems between landlord and tenant.

Deposit clauses in tenancy agreements

First of all make sure the tenancy deposit is covered by the tenancy agreement. Surprisingly not everyone remembers to do this. In the tenancy agreement the landlord should:

1. clearly state terms of liability
2. avoid 'unfair terms'
3. avoid 'silent' deposit clauses
4. include how interest will be dealt with
5. state how any dispute will be solved
6. draw up a detailed inventory that all parties agree to.

Let's examine each of these in more detail:

1. The terms of liability 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
• emphasise what the tenant is responsible for
• make terms fair and 'reasonable'
• refer to the inventory of the contents and conditions
• provide for interest payment if applicable
• outline the timetable for dealing with the return of the deposit.

2. You should avoid unfair terms in the tenancy agreement.

The Office of Fair Trading produces guidance on unfair terms in tenancy agreements. Although these refer to English tenancy types the principles of fairness and transparency are applicable to the Scottish situation. Tenancy terms should be both fair and transparent.

For example, a tenancy term dealing with tenant's goods left in the property could be considered unfair if it read:

'In the event that the tenant's belongings are left in the property after the tenant has vacated it, such belongings will be deemed abandoned and the landlord may remove, sell or dispose of these without being liable to pay any compensation.'

This clause is neither clear nor fair, as it does not give clear guidance on how the situation would be dealt with. In order to make it fair, this term could be revised to explain what would happen in this situation. It would then read:

'The tenant will be responsible for meeting all reasonable removal and/or storage charges when items are left in the premises. The landlord will remove and store them for a maximum of one month. The landlord will notify the tenant at the last known address. If the items are not collected within one month, the landlord may dispose of the items and the tenant will be liable for the reasonable costs of disposal. The costs may be deducted from any sale proceeds or the deposit and if there are any costs remaining they will remain the tenant's liability.'

3. You should also avoid:

• '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).

4. You should include a clause dealing with interest.

The tenancy agreement should also have a clause stating how any interest on the deposit will be dealt with. The tenancy deposit legally is the tenant's money throughout the term of the tenancy so in theory any interest that accrues should also belong to the tenant.

5. You should state how any dispute will be solved.

It is important to state right from the outset, and to have it agreed by both parties, how any dispute over the deposit will be solved.

6. You should provide and agree an inventory.

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)
• get all parties to sign agreement.

Resolving deposit disputes

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.

You cannot 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 loss not to gain from it!

Examples of 'lifespan':

• Carpets/furniture: 10-12 years
• White goods: 5-8 years
• Lawnmower: 5-8 years

If the tenant is not satisfied with the outcome of the dispute they can go to a small claims court to challenge the decision.

Guarantors' agreements

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

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.

This article was originally written by John Blackwood and has been amended due to changes in the law.