A deposit is arguably the most important element when renting out a property. Taking a deposit is a vital part of the compliance package and assures landlords there is a form of recompense should the let incur costs.
These costs can include unpaid rent and bills, damage that’s beyond fair wear and tear, cleaning, missing items and the expense of remedial work if a tenant made unauthorised property alterations.
In this LandlordBuyer article, we will explain
- The current law surrounding tenant deposits
- What happens to a deposit when a buy-to-let is sold with sitting tenants
- How a landlord can be punished if they don’t protect a deposit
A more reckless approach to deposits
Before 2007, a tenant’s deposit could be held by a landlord or their letting agent in any way they saw fit. While some professionally-minded landlords put deposits into a bank account and ringfenced the amount, there was nothing stopping others from spending upon receipt. In fact, it is totally possible no deposit was taken by the original landlord at all (they may have relied on a guarantor or an insurance policy).
Deposit protection schemes: from 2007
Due to systemic abuse of deposit funds and a reluctance to refund a deposit at all, the Housing Act 2004 was changed. The amendment made it a legal requirement for landlords in England and Wales to protect a tenant’s deposit using a Government-backed scheme, applicable to assured shorthold tenancies created on or after 6th April 2007. Protecting a deposit and telling the tenant the protection provider is part of the ‘prescribed information’ package that keeps tenancies compliant.
There are three Government-backed deposit protection suppliers:
- The Deposit Protection Service (DPS)
- The Tenancy Deposit Scheme (TDS)
- Mydeposits
Usually a landlord can choose from two types of protection schemes: a custodial scheme (where the deposit is held by the provider) and an insured scheme (where the deposit is held by the landlord but they pay a protection scheme to insure it). How a deposit is transferred or retrieved can differ, which we will explain later in this article.
Landlords must remember the 2019 Tenant Fees Act set a cap on the value of deposits: no more than five weeks’ worth of rent, or 6 weeks’ worth if the annual rent exceeds £50,000.
Action points for new landlord inheriting sitting tenants
A new landlord purchasing a buy-to-let with tenants in situ must ensure the deposit continues to be protected. Failure to place a deposit in a Government-backed scheme may make settling rent arrears impossible and scupper future eviction plans. A deposit that’s not protected can also leave the landlord open to prosecution or a claim for compensation (up to three times the deposit amount).
A new buy-to-let owner must ensure the deposit is transferred, protected and lodged with a provider within 30 days. The new landlord must also tell the tenant who the deposit provider is, in writing.
Action points for landlords who are selling with sitting tenants
Landlords who are selling with sitting tenants must transfer the deposit or they will continue to be responsible for protecting the sum. If the original landlord fails to keep protecting the deposit – even though a new landlord owns the property - they can be the subject of a compensation claim.
Action points if the tenancy was created before 6th April 2007
In the case of long-term sitting tenants, it is possible the tenancy was created before it became mandatory to protect the deposit. If the original landlord did take a deposit but it is not held in a protection scheme, it should be transferred to the new landlord or refunded to the tenant, less deductions. If refunded, the new landlord must take a replacement deposit and protect it within 30 days.
If the sitting tenant can verify they did not pay a deposit, the new landlord must adhere to the rules by taking a deposit and protecting it within 30 days.
How to transfer deposits held in protection schemes
Custodial scheme to custodial scheme
If the original landlord used a custodial scheme and the new landlord would like to continue this, the simplest course of action is to transfer the deposit between landlords, using the same provider. This request needs to be initiated by the original landlord, or their letting agent, by contacting the provider. The new landlord will need to create an account with the provider, if they don’t already have one, after which a member-to-member transfer can take place.
Insured scheme to insured scheme
The process for insured schemes is similar to that of custodial schemes, providing the new landlord wants to stay with the same scheme type and provider. The new landlord will need to create an account with the provider, if they don’t already have one. Once the new landlord provides proof that they have registered the tenancy deposit details under their new membership and paid the relevant deposit protection fee, the original landlord can transfer the deposit monies to the new landlord.
Switching scheme types or protection providers
It is possible to swap from an insured to a custodial scheme with the same provider. The new landlord would need to set up a custodial account and register the details of the deposit under their new membership. Once complete and bank details have been supplied, the provider will recall the deposit sum from the original landlord and hold it in its custodial scheme.
A landlord who wants to switch a deposit between providers should contact the business development team at both providers.
If you would like to discuss your buy-to-let, perhaps with a view to exiting the market, contact LandlordBuyer. Alternatively, you can start future planning with our online cash offer form.