Tenancy deposit schemes were created after a change in the law to stop tenants being unfairly deprived of their deposits by their landlords, through the Housing (Tenancy Deposit Schemes) Order 2007. All deposits handed over through an assured shorthold tenancy are now protected by law and landlords are required to place the deposit in either a custodial or insurance tenancy deposit scheme. It is particularly important to check this arrangement when you are dealing with private landlords.
A Custodial Tenancy Deposit Scheme
A custodial tenancy deposit scheme is where a landlord hands over the deposit, which is part of 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 is also paid out to the tenant, or landlord who receives the deposit back. This custodial scheme hands back the deposit if the tenant and landlord agree how it should be apportioned. It 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. It also has 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 is designed to be absorbed as part of the landlords 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 body, which requires members to arrange client money protection insurance.