Tenancy Deposits: A Fundamental Guide

There are two types of deposits that tenants may be required to pay when securing a rental property:

Holding Deposit
Security Deposit

Holding Deposit

A holding deposit is a payment made by the tenant to reserve a rental property. It is a single payment that can be shared among all tenants listed on the tenancy agreement.

Purpose of Holding Deposit

The payment of a holding deposit shows the landlord that the tenant is serious about reserving the property.

Timeframe

Once a holding deposit is paid, the tenant has 15 days to enter into the tenancy agreement.

Refund

When the agreement has been signed, the holding deposit is either taken off the security deposit or taken off the first month's rent, depending on the tenant's preference. If the tenant fails referencing or changes their mind about the property, the landlord is within their rights to keep the deposit.

Security Deposit

A security deposit is a sum of money paid by the tenant at the start of a new tenancy. It is held by the landlord or letting agent and used to cover any tenant-inflicted damage to the property or unpaid rent.

Purpose of Security Deposit

Paying a security deposit encourages the tenant to look after the property and pay their rent on time, or they risk forfeiting their money.

Deductions and Damage

A landlord will use inventories at the start and the end of the tenancy to assess any damage that has occurred during the tenancy. Any damage that falls outside of the landlord's responsibility or isn't a result of fair wear and tear should be paid for by the tenant.

List of Deductions

The landlord or their letting agent will produce a list of deductions for the damage, which will be deducted from the security deposit so that the landlord is not out of pocket. Any deposit remaining after deductions is then repaid to the tenant.

Refund

If there is no damage, the tenant should receive their deposit back in full. If the landlord and the tenant disagree on the matter of damage deductions, they can use a deposit resolution or mediation service offered by either The Property Ombudsman or provided by the tenancy deposit scheme used.

Where the Deposit Money Goes

Tenants who have signed an assured shorthold tenancy (AST) receive government-backed deposit protection, as it is now mandatory for each deposit to be lodged with an approved provider. Landlords and letting agents can choose to transfer the deposit funds to an approved deposit protection provider (custodial protection) or hold the deposit in a separate account, with the sum insured (insured protection).

Landlords and letting agents are required to register a tenant's deposit in one of three approved schemes within 30 days of receipt. Failure to do so will invalidate any eviction process. Tenants must also receive written confirmation of which scheme has been used, the amount of the deposit, the deductions process, and how to proceed in case of a dispute.

The three government-approved tenancy deposit schemes are:

Deposit Protection Service (DPS)
Tenancy Deposit Scheme (TDS)
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Deposit-Free Schemes

In this section, we will discuss deposit-free schemes, which are designed to help tenants who cannot afford to pay a security deposit upfront. This can be due to various reasons, such as not receiving their deposit back from a current rental or not having the upfront cash to pay.

Many landlords and letting agents offer deposit-free schemes, which allow tenants to secure a property without putting down a substantial cash deposit. At the end of the tenancy, there is no deposit to return, and the tenant only has to pay for any damages they are liable for. Properties can be let faster using deposit-free alternatives as there is less administration involved.

Tenants still have to pay at the start of a tenancy, but the amount involved is much smaller. Instead of paying 5 or 6 weeks' worth of rent, a tenant will pay one week's worth of rent, a small admin charge, and sometimes an annual subscription to buy a guarantee. This guarantee is essentially an insurance plan that offers landlords protection, replacing the security of a cash deposit.