Tenancy Deposit Schemes Explained

Tenancy deposit schemes were created through the Housing (Tenancy Deposit Schemes) Order 2007, which is an amendment to schedule 10 of the 2004 Housing Act. Under this legislation all landlords have to hand over deposits that are part of an assured shorthold tenancy to a tenancy deposit scheme. This was put in place to stop landlords keeping tenants deposits unfairly at the end of the tenancy. The Housing (Tenancy Deposit Schemes) Order 2007 was created to give protection to tenants' deposit. Placing a deposit in a tenancy deposit scheme can also be a benefit to landlords. If a dispute arises the scheme can offer a mediation service and placing a deposit with a scheme offers piece of mind that the money is safe. There are two types of tenancy deposit scheme, a custodial tenancy deposit scheme and an insurance-based deposit scheme. If using a letting agent, the agent can handle arrangements with a tenancy deposit scheme.

A Custodial Tenancy Deposit Scheme

A custodial tenancy deposit scheme is where a landlord hands over the deposit agreed through the assured shorthold tenancy to the Government appointed custodial deposit organisation The Deposit Protection Service (DPS). This service is free to use and is funded by the interest earned on deposits. Interest can also be paid out to the tenant, or landlord if they are owed part of the deposit due to damage at the property. This custodial scheme hands back the deposit once the tenant and landlord agree how it should be apportioned. The Deposit Protection Service also has a disputes service if the tenant and landlord cannot agree.

An Insurance-based Deposit Scheme

An insurance-based deposit scheme is where a landlord pays a fee into the scheme, which will insure against the landlord unlawfully retaining the deposit at the end of the tenancy. An insurance-based deposit schemes also offers a disputes service. Once a deposit is paid back the landlord informs the scheme that protection for the deposit is no longer needed. The fee to the insurance-based deposit scheme is designed to be absorbed into the landlord's costs, but there is nothing to stop a landlord passing on the fee to the tenant. There are two insurance-based schemes.

• MyDeposits, which is sponsored by the National Landlords Association and is administered by Hamilton Fraser Insurance Services.
• Tenancy Deposit Scheme, which is only open to landlords and letting agents who belong to a professional trade association.

See also: Rental Search, Letting Agent Directory