Deposits and Deposit Schemes

The Renting Homes (Wales) Act 2016 ("the Act") makes some changes to tenancy deposit rules, although nothing too significant to existing.

Form of security

The landlord under an occupation contract may only require money or a guarantor as a form of security for an occupation contract (s.43).

Suppose a landlord seeks security in some other form. In that case, the contract-holder can apply to the court for an order that the landlord return the property constituting security be returned (s.44).

Requiring a deposit

A landlord may require a deposit from a contract-holder before moving into the property. Landlords often feel that holding a deposit means a contract-holder is less likely to abandon and instead terminate the contract correctly. A deposit might ensure the property is properly cleaned and cleared at the end of the contract. Deposits can also help protect landlords against unpaid rent at the end of the contract. The deposit amount to be levied is part of negotiating the contract. The deposit amount can vary significantly and depends on how much 'risk' the landlord perceives they are taking by letting the property to that contract-holder. Large deposits, however, can deter prospective tenants, and there is a considered judgment to be exercised in setting a market-friendly but practical deposit level.

The deposit should be taken after an occupation contract has been agreed on and signed by all parties, but it can be taken before keys are handed over and the tenant moves in.

The requirement to use a deposit scheme and protect the deposit

The rules for protecting a deposit are essentially the same as before the Act and only apply to an occupation contract.

Where the contract-holder under an occupation contract pays a deposit (or another person pays a deposit on their behalf), the deposit must be dealt with by an authorised deposit scheme (s.45).

Before the end of 30 days, from the day the deposit is paid, the landlord must:

• Comply with the initial requirements of an authorised deposit scheme, and
• Give the contract-holder (and any person who has paid the deposit on their behalf) the required information.

The contract term is a fundamental term that cannot be modified, and it must be in all standard occupation contracts, even if no deposit is paid at the time.

The legislation uses the term to comply with the initial requirements of a scheme, but this is commonly referred to as protecting the deposit.

Precisely how to protect a deposit depends on the individual scheme of choice, but essentially, they all require a landlord or agent -

• register with the scheme
• enter details about the property
• enter details about the tenancy and deposit
• enter details about the tenant(s)
• either send the deposit to the scheme or make a payment if an insured based scheme (some agents will use a system that pays per office rather than per deposit).

You must protect the deposit within 30 days of receiving it under the occupation contract. This means the 30 days start might be before the occupation date. For example, a student might get the written contract statement in January and pay the deposit simultaneously. But, the occupation date might not be until the following September. In this example, the 30 days would start from January when the deposit was paid, not September.

A substitute contract on or after 6 April 2007 is the same as receiving a new deposit in connection with an occupation contract and would trigger deposit protection.

Required information

You must give the required information to the contract-holder and any person who paid the deposit on their behalf. You will usually include it in the written statement of the contract. The Renting Homes (Deposit Schemes) (Required Information) (Wales) Regulations 2022 contains the information required-

• the name, address, telephone number and email address of the scheme administrator,
• any information supplied by the scheme to the landlord which explains the operation of the Act,
• the procedures under the scheme in which an amount of deposit may be repaid to the contract-holder at the end of the contract,
• the procedures under the scheme where the landlord or contract-holder is not contactable at the end of the contract,
• the procedures under the scheme where the landlord and contract-holder dispute the amount to be repaid,
• the facilities available under the scheme for enabling a dispute to be resolved without recourse to litigation and
• the following information in connection with the occupation contract-
• the amount of the deposit paid,
• the address of the dwelling,
• the name, address, telephone number and any email address of the landlord,
• the name, address, telephone number and any email address of the contract-holder, including such details that the landlord or scheme administrator should use to contact the contract-holder at the end of the occupation contract,
• the name, address, telephone number and any email address of any person who paid the deposit on behalf of the contract-holder,
• the circumstances when all or part of the deposit may be retained by the landlord, by reference to the terms of the contract, and
• confirmation (in the form of a certificate signed by the landlord) that-
• the information provided is accurate to the best of the landlord's knowledge and belief, and
• the landlord has allowed the contract-holder to sign any document containing the information.

Schemes are not allowed to supply the information, and it must be given (and signed as accurate) by the landlord or agent.

All the information must be present. A link to the scheme rules on their website is not enough, and you must physically give the appropriate rules or information.

Where it asks for the landlord's details, this must be the landlord's name, but if an agent manages the property, it may be the agent's address, telephone, and email.

A lower court has held on appeal that required information given before the landlord received the deposit renders it invalid, and a Section 173 notice cannot be served (it was an England case referencing a Section 21 notice but the wording is similar). It's common for the deposit required information to be included in the written statement of occupation contract so it can be signed by the contract holder at the same time. In that case, it is best to send a copy of the required information (which can be a copy of the signed contract, including the information) after the deposit has been protected, along with the deposit protection certificate.

Converted contracts

Where an existing tenancy converts at the start of the Act, a tenancy deposit only requires protection if the tenancy was an assured shorthold tenancy immediately before conversion (para 13A, Sch. 12).

For a deposit taken before 2007 (and became statutory periodic before the deposit rules started), these should be protected before 1 December 2022 because, under the old rules, there is no penalty for late protection. Still, the new rules have no transitional period and refer to 30 days from receiving the deposit (not from when the Renting Homes Act started).

Substitute contracts (renewals)

Where a contract-holder paid a deposit under the original contract and the landlord, in respect of the deposit:

• dealt with it by an authorised deposit scheme,
• complied with the initial requirements of the scheme, and
• provided the required information

And,

• the original contract is replaced with a substitute occupation contract, and
• the deposit continues to be held within the same scheme.

The landlord is treated as having complied with the protection requirements and required information concerning the substitute contract (para.4, sch.5).

A substitute contract is the term used to describe a renewal and is where:

• the occupation date falls immediately after the preceding contract,
• the landlord and contract-holder(s) are the same, and
• the dwelling is the same (or substantially the same).

Withdrawal or addition of contract-holder

Under the Act, a contract-holder can request consent to add a new contract-holder or a joint contract-holder can withdraw in certain circumstances. However, the occupation contract is not ended when this happens, and no substitute contract exists.

If there's a withdrawal or addition, the names will no longer match the protection, and the prescribed information will be wrong.

As long as the scheme will allow the changing of a name, it would be best if you did that, and updated prescribed information will need to be supplied with the new written statement. Otherwise, there could be issues. It might be the case that a renewal (substitute) contract is issued where all the paperwork is started again, along with new deposit protection for the new composition of contract holders.

Types of Schemes

The schemes are of two types:

• custodial (where the scheme administrators hold the deposit and which is free of charge) or
• insurance (where the landlord holds the deposit but has to pay an insurance premium).

Three schemes are authorised and offer a custodial or insured option.

The custodial scheme is open to all landlords and letting agents and is free to use. The landlord or agent must pay the deposit to the scheme administrator within 30 days of receipt. The scheme is funded by the operator's interest in the deposits they hold.

Landlords and agents pay a fee to join insurance schemes. Insurance schemes operate on the basis that the deposit continues to be held by the landlord or agent during the tenancy. If there is a dispute about the deposit, the deposit-holder must pay the disputed amount to the scheme. The scheme will make an award based on the decision of the scheme's adjudicator, an order by the court, or if the parties can subsequently reach an agreement. The deposit money is insured so that if the landlord or the agent does not pay the correct amount to the scheme when requested, the scheme can claim on the insurance and pay the contract-holders award and then try to recover that award from the landlord or agent. Suppose there is no dispute about the proposed deductions from the deposit. In that case, tenants can often receive their deposits (or the balance due to the contract-holder) more quickly under these schemes because the landlord/agent can pay it back (rather than wait for the custodial scheme to refund the money).

The landlord decides under which scheme the deposit will be held, either a custodial or an insurance-based scheme.

All the schemes have an alternative dispute resolution (ADR) service that seeks to resolve disputes about deposits without going to court. Use of a deposit protection scheme's ADR service is not compulsory. Landlords and contract-holders can still go to court, but they cannot do both. In some cases, the judge ordered landlords who took their case to court to use the ADR service. There is a general obligation in the Civil Procedure Rules (the court rules) to try other means of resolving disputes before going to court – because court proceedings are often time-consuming and expensive.

Authorised Deposit Protection Scheme Providers

There are three authorised schemes:

The Deposit Protection Service (further details from https://www.depositprotection.com).

The Dispute Service (further details from https://www.thedisputeservice.co.uk) and

Mydeposits (further information from https://www.mydeposits.co.uk).

Different membership options are available through the schemes. For example, managing agents may pay a membership fee covering that agent for all deposits. Alternatively, a landlord with only one or two properties who does not use an agent may be able to pay a flat fee per deposit, which may be more cost-effective.

Landlords or their agents should familiarise themselves with the rules of their chosen scheme. The rules may direct landlords and agents to include particular clauses in their standard occupation contracts. If contracts or other documents are not in the form required by the scheme, or if timescales are ignored, the adjudicator may award the full deposit to the contract-holder by default – whatever the merits of the landlord's claim.

The person who paid the deposit on behalf of the contract-holder

Where a third party provides the deposit, that person must be provided with a copy of the required information. This is very common in student letting, where parents often give the deposit, and some local authorities will offer a physical monetary deposit rather than a guarantee. The person should also be provided with a copy of the written contract statement, as it could help avoid or resolve disputes later if they are told upfront what you might use the deposit for. Like contract holders, these persons can claim against landlords or agents if they are not given the required information or if the landlord/agent fails to comply with the chosen deposit protection scheme's initial requirements.

Lead contract-holder

The Deposit Protection Service (DPS) and the Mydeposits scheme use a Lead (or nominated) Contract-holder system. This applies in any situation where more than one person has an interest in the deposit. This could be where joint contract-holders, parents of students, or local authorities provide the deposit. In setting up the lead contract-holder, all parties interested in the deposit must agree on who that will be.

If a local authority had provided the deposit, the lead contract-holder might be the local authority.

Withholding Part of the Deposit

Deposits can cover:

• damaged items
• outstanding debts attached to the property
• failure of the tenant to carry out obligations set out in the contract, such as cleaning
• non-payment of rent
• other breaches.

In assessing any damage, allowance must be made for fair wear and tear, which is not deductible from the deposit. Fair wear and tear is paid for in the rent charged. Wear and tear arise from everyday living in a property. Landlords should not expect to receive a property back in the same condition they let it. Contract holders should be expected to return the property clean and tidy. But after, say, a tenancy of two years of ordinary living, a landlord will have to accept that paintwork might be looking tired, and carpets might be looking worn.

The occupation contract should state when you may withhold part or all of the deposit at the end of the contract.

Suppose the tenant cannot afford the deposit. In that case, the local authority's housing department or housing advice centre may operate a rent or deposit guarantee scheme in the area, guaranteeing rent or damage costs for a specified period.

At the end of the contract, you should check the inventory and an assessment made of the property's condition - the landlord should take into account reasonable wear and tear.

If a claim is being made from the deposit, the landlord should account for this with invoices or receipts and agree to the proposed deposit deductions. The landlord should promptly send any unclaimed deposit balance to the contract-holder. The landlord should not keep the entire deposit to get the contract-holder to agree to deductions about part of the deposit.

Returning the deposit

There is no specified time limit for when a deposit must be returned, and it's acceptable to survey the property to compare the inventory and get quotes for necessary work before it is returned.

However, the contract holder can contact the scheme and request payment if the deposit hasn't been returned within ten days. The landlord will be notified of the request and may be able to submit evidence to delay the process.

To return a deposit, if it is held in a custodial scheme, the landlord or agent will go onto the scheme's online portal and request for the amount to be returned to the contract holder. If the landlord or agent holds it through an insured scheme, they can return the deposit by any agreed means, including bank transfer. Any balance not returned may have to be sent to the scheme to hold during dispute resolution if there is a dispute over the amount returned whilst using an insured scheme.

Failure to protect a deposit or give prescribed information

If the landlord has failed to protect the deposit or provide the required information, the contract-holder may apply to the court. The order varies depending on whether the contract has ended, and there are restrictions on serving a no-reason notice.

The occupation contract has not ended.

Before the occupation contract has ended, the contract-holder (or any person who paid the deposit on their behalf) may make an application to the county court on any of the following grounds:

• the landlord has not protected the deposit (initial requirements of an authorised deposit scheme)
• the landlord has not given the required information
• the contract-holder has been unable to confirm that the scheme is holding the deposit from the scheme administrator.

If the court finds that one of the grounds applies, it must either:

• order the person who appears to be holding the deposit to repay it within 14 days or
• order the person who appears to be holding the deposit to protect the deposit in a custodial deposit scheme within 14 days.

In addition, the court must also order the landlord to pay between one and three times the deposit amount within 14 days (para.2(7), sch.5).

Note: the order of up to three times the deposit is only payable if there is a court order for repayment or protection. The court can make no penalty if no such order is made (must also).

The occupation contract has ended.

Where an occupation contract has ended, the person who was the contract-holder (or any person who paid the deposit on behalf) may make an application to the court on any of the following grounds:

• the landlord did not protect the deposit
• the landlord did not give the required information
• the former contract-holder has not obtained confirmation that a scheme is holding the deposit.

If the court is satisfied with any grounds, it may order the person who appears to be holding the deposit to repay all or part of the deposit to the applicant within 14 days (para.3(5), sch.5).

This is discretionary, presumably allowing a deduction for rent arrears or another breach of contract. Or the landlord may have already repaid the deposit.

However, if any grounds are found (even if an order to repay is not made), the court must order the landlord to pay a sum of money between one and three times the deposit within 14 days (para.3(5), sch.5).

Prohibition on serving notice

You cannot serve a notice under sections 173, 186 or landlord's break clause (landlord's no-reason notice) at a time when the deposit has not been protected or required information given unless the deposit has been repaid in full (para.4, Sch.9A).

The time limit of 30 days appears to be expressly omitted about serving notice, which indicates if the deposit is protected and information is given after 30 days, you can serve notice. However, the penalty of between 1 and 3 times the deposit may nevertheless be payable if the contract-holder applies to the court (see earlier).

In addition, the notices cannot be served when the deposit is not held per the scheme rules, e.g. if an insured scheme requires a new insurance fee that you didn't pay, you cannot serve notice until the breach is rectified.

This is all very similar to rules before the Act about serving section 21, except under the old rules, there was no ability to protect, and the only solution was to repay the deposit in full.

Under the Act, it's now possible to either repay the deposit in full or protect and give information, and afterwards, you can serve a no-reason notice.

Existing deposits before conversion

The Renting Homes (Wales) Act 2016 (Saving and Transitional Provisions) Regulations 2022 contains transitional provisions for existing deposits under previous assured shorthold tenancy agreements.

The new rules for deposits apply to existing deposits taken before the commencement of the Act from when the Act starts. A landlord will require no action for protected deposits as the rules are mostly the same, and there aren't likely to be any material changes to any scheme rules.

Suppose a tenant has claimed a failure to protect or failure to provide prescribed information under the previous rules under section 214 of the Housing Act 2004. That claim will continue under the earlier rules until its conclusion (regulations 8 and 9).