Deposit Replacement Schemes; a Landlords Guide

Written By PropertyLoop
September 02, 2021

As can be expected a deposit replacement scheme functions somewhat similarly to a traditional security deposit, offering the landlord monetary protection should their tenant fail to pay rent, or damage the rental property. Not only that but with there being no security deposit being paid to the landlord, there is no need for any sums to be registered with a government approved deposit protection scheme, making the transition into the tenancy that little bit easier for the landlord, whilst also dispelling any risks of incurring court action and having to pay the occupants of the rental property thousands in compensation.

With this being said some landlord’s fear that the lack of a high deposit being paid to them from the start of the tenancy may lead to some renters being more careless in their behaviour and conduct within the property, potentially leading to more repairs and damage to attend to throughout the tenancy. Deposit protection schemes could soon be the favoured option by landlords as it grants them increased protection from damage to their property and missing rental payments. Whereas the traditional tenancy deposit will only allow a landlord to recoup five or six weeks rent, the deposit replacement scheme takes this further, typically granting around eight weeks’ worth of rent as a safeguard.

Many landlords also argue that deposit replacement scheme allow them to recover the costs of repairs far faster than through a traditional deposit protection scheme. This is because the deposit replacement scheme will pay the landlord the appropriate amount, and will then pursue the tenant for payment. Some have rental property owners have even argued that as the deposit replacement scheme make moving into a rental property far more financially practical for tenants, landlords have seen reduced void periods, securing a tenancy with a tenant far faster, whilst increasing the accessibility and appeal of their rental opportunity.

However, the deposit replacement schemes do not exclusively work to the benefit of rental property owners and address longstanding issues that have presented themselves to renters. Naturally when moving into a rental property cost can be a concern to say the least, with recent research showing that the average cost of a security deposit in England and Wales across 2020 was £1,139. Despite government measures being brought in to make the rental sector more accessible, prohibiting many of the upfront costs previously haunting a tenant’s journey, renters are commonly expected to pay five weeks rent as a security deposit before moving in. The issue is further stressed when considering those that are moving between properties that will have to pay this sum without having been refunded their security deposit from the original tenancy, putting them 10 weeks’ worth of rent out of pocket.

Instead, when using a deposit replacement scheme tenants will pay a smaller fee at the outset of the tenancy, making their transition into their new home far less stressing on their immediate finances. Similarly to a traditional tenancy deposit, the associated costs of repairing any damages found throughout the property upon its final inspection will be totalled and paid for by the tenant. However, these fund will not be secured by the landlord through deductions, whilst the tenants will of course still be liable for these costs they will make a lump sum payment at the close of the fixed term.

With this being said it is also important for tenants to consider that whilst a deposit replacement scheme may be a more cost effective solution at the start of a tenancy, it is not uncommon for some to be paid in periodic instalments potentially making them cost far more than five weeks rent over the course of longer tenancies.  Further to this in order for a tenant to qualify for a deposit replacement scheme they must have first passed all of the affordability checks in the referencing process, seeing their current income, employment status and credit history be scrutinized.

Can Tenants Dispute Default Charges?

As can be expected, similarly to a traditional security deposit that is protected by a government approved scheme, renters are able to dispute any “deductions”, or in the case of a deposit replacement scheme, “default charges” the landlord wishes to impose at the end of the tenancy.

Typically if a tenant wishes to make a dispute they are able to contact the deposit replacement scheme and have the landlord provide evidence of the damage being claimed for. In the same way deductions would be challenged through the tenant or the landlord providing evidence from the property inventory collected across each of the rental’s inspections, the same method would be employed when using a replacement scheme. In the instances where both parties of the rental agreement are unable to reach an agreement the services of an impartial adjudicator will be employed to make a final decision on which charges will be upheld.

What Is a Security Deposit?

Before moving into a rental property, to the dismay of many tenants, the landlord commonly requests the aspiring renters provide them with a security deposit.

Whilst it is often said that this deposit only works to contribute a higher financial barrier for those new to private rental sector that are trying to find their next home. With this in mind the Tenant Fees Act was introduced in 2019, in an effort to make the sector more accessible to newcomers, making it easier to rent their first property. To this end the regulations not only abolished common charges and feeds that would be historically passed onto tenants by their landlord for establishing’s the tenancy, seeing them recoup costs for the referencing process, cleaning the property and other administrative fees, but also placed a limit on the amount a tenant can be expected to pay for the security deposit.

In the overwhelming majority of instances a tenant will pay no more than five weeks rent for their security deposit. This is because the maximum amount a landlord is able to request that their tenants pay for this deposit is derived from the amount of rent the occupants must pay to reside within the property. Simply put, if the amount of rental income a landlord receives from a property is up to £50,000 then they are able to ask their tenants for as much as five weeks rent for the security deposit. However, in the cases where the landlords requests the occupants of the property pay more than £50,000 each year in rent, then the landlord is able to ask for up to the equivalent cost of six weeks rent for the deposit.

Deposit Protection Schemes

It is also worth noting that whilst the owner of the rental property is under no legal obligation to take a security deposit from their tenants, if they choose to do so, which is highly likely, the sum must be entered into a government approved deposit protection scheme. Once this is done the landlord must provide each tenant with the details of the scheme their security deposit is protected under, alongside confirmation of the protected amount, reasons the landlord can make deductions from the amount being returned and the address of the rental property the deposit regards.

What Happens if the Landlord Doesn’t Protect the Deposit?

If the landlord has failed to enter the occupant’s security deposit into a government approved deposit protection scheme, the first port of call for the tenants should be the schemes themselves. Contacting each of the three schemes will allow the tenant to confirm if the sums they paid for the security deposit were indeed protected. Providing that the amounts paid to the landlord were not protected the tenant can commence court action against the owner of the rental property to seek compensation. The courts can then legally compel the landlord to either repay the amount paid for the deposit to the tenant or into an approved deposit protection scheme within 14 days.  If appropriate the court may also deicide that the landlord must pay the tenants up to three times the amounts taken for the security deposit in compensation, again within 14 days.

What Can Landlords Deduct From The Deposit?

Although deductions may be synonymous with repairing the rental property and attending to remedial work throughout both the interior and exterior of the property, they can also be made if there are any missing rental payments. As can be expected, come the end of the fixed term if the tenant has neglected to make all of their rent payments to the landlord, the owner of the rental property can recuperate their missing income, returning a reduced amount to the tenant. However, due to the five week threshold placed on most tenancy deposits the landlord will only be able to recover their lost income providing that the amount of rent arrears is minimal, with any amounts taken for the tenancy deposit being largely redundant if the occupants of the property have not only failed to adhere to their obligation to pay rent, but also leave the rental property in a state of disrepair.

Another reason that a landlord is able to make a deduction from the amount being returned from the tenancy deposit is to cover the costs of redecorating. Now this is a rather specific instance and does not mean that the owner of the rental property is able to charge their tenants on a whim, but rather if the residents made alterations to the renal and failed to reverse these changes before vacating the property.

With this being said landlords are not able to make any deductions from the amount of the security deposit that is being returned to the renters due to wear and tear. Generally speaking wear and tear is not considered damage as it is unlikely to be intentionally caused, or been the result of negligent or malicious behaviour.  Whilst there is no hard legal definition for what constitutes fair wear and tear, it is generally accepted by landlords and letting agents to comprise the somewhat expected deterioration of the rental property, its furnishings and appliances after multiple tenancies and prolonged periods of high use.

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DepositLandlord AdviceTenant Advice

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