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Most landlords wouldn’t dream of neglecting to ask tenants for a deposit. Deposits for many are a safety net to fall back on should any problems arise at the end of the tenancy, such as damages or unpaid rent. If deposits aren’t part of your tenancy agreements, then they should be. There’s a few processes to follow and things to be aware of when it comes to deposits, so look no further than this handy guide from CIA Landlord Insurance.

So, what is a deposit? A deposit is a sum of money (usually the equivalent of 4-6 weeks rent) that a tenant hands over at the beginning of the tenancy. This money can then be used to cover any costs incurred throughout the tenancy. If the property is handed back to the landlord in good condition and all the rent paid on time, then the full deposit must be handed back to the tenant.

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What costs can a deposit cover?

There are limitations with deposits. Whilst it can go towards things like unpaid rent, property damage, missing items or necessary professional cleaning costs, you can’t put it towards the cost of reletting the property or fair wear and tear.

Fair wear and tear is where many deposit disputes happen, as the ‘rules’ around this are a little vague. The main thing to remember is that even if you luck out with incredibly clean and careful tenants, you won’t get your property back in the same condition you handed it over in. It is being lived in after all, which is why fair wear and tear has to be allowed for. Fair wear and tear includes worn carpets, faded curtains and minor scrapes and scuffs on the walls. Fair wear and tear is not things like burn holes in the carpet, nail varnish spills or damaged paint work caused by hanging pictures on the wall. These are the kind of costs and repairs that can be deducted from a deposit.

A bone of contention

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Deposits can be a cause for disputes between tenants and landlords if not handled correctly. Every tenant wants their full deposit back and if they don’t, they can often get defensive if they don’t agree with the deductions.

To avoid this, it is vital that you set out exactly what you can deduct money for either in the tenancy agreement or in a separate document, signed by both you and the tenant. You might also want to create an inventory with photos of the condition of items within the property before the tenancy, both for your records to refer back to and to use as proof if you end up in a dispute over damage with your tenant. Make sure you also hang on to any receipts and invoices for work done to the property or items you’ve had to replace over the duration of the tenancy.

It’s really important to be careful with your tenants deposit. For example, if they break the kettle within the property and you need to go out a replace it and deduct the cost from their deposit, only replace the kettle for a like-for-like basis. It’s not an opportunity to get in an upgrade! Make sure you also hang on to any receipts and invoices for work done to the property or items you’ve had to replace so that you can be as transparent as possible about where your tenants deposit money has gone, and how much has been used. Communication is key.

Tenancy deposit schemes

Arguably the most important part of taking a tenancy deposit is putting it in a tenancy deposit scheme. It is actually against the law to keep your tenants deposit in your own bank account. If you don’t put it in a government authorised tenancy deposit scheme within 30 days of receipt, then your tenant could bring up a claim against you for up to three times the deposit sum.

Tenancy deposit schemes were predominantly designed with the tenant in mind to ensure that they get their deposit back if they have adhered to the terms of their tenancy agreement. It also means that should they get into a dispute with their landlord over their deposit, the money is held by a third party and protected until the dispute is resolved. The schemes also offer an alternative dispute resolution service which is a free, independent adjudication at the end of the tenancy, which is great news for landlords.

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There are three different government approved schemes for you to choose from when protecting your tenants deposit – Deposit Protection Service, My Deposits or the Tenancy Deposit Scheme. Make sure you inform your tenant of which scheme you’ve chosen and how it will be managed as again, failing to do this could mean you’re faced with penalties.

When it comes to deposits, the most important thing is communication and being clear and up front with your tenant. Respect their money and take all the relevant precautions to ensure that they know exactly what will and won’t get money from their deposit deducted. Your tenancy agreement will be really handy here so make sure it’s detailed and that you take your tenant through it.