Tessa's Ten Top Tips landlords on tenancy deposits

Work out what tenancy type is concerned. Most tenancies will be assured shorthold tenancies. If so deposits must be protected under a government authorised tenancy deposit scheme within 30 days or penalties apply. Tenants can claim the return of the deposit plus a 'fine' of between one and three time the deposit sum, and you will not be able to use the section 21 procedure to evict.
If you are using a tenancy deposit protection scheme, make sure you are aware of the scheme rules, and comply with them at all times. You can download the rules from the scheme web-sites.
Make sure you are using an up to date tenancy agreement which provides for the deposit to be held under a tenancy deposit scheme. If you are using the tenancy deposit scheme run by the Dispute Service (TDS or Deposit Guard), note that there are special terms they will require you to use
You will need to have a really detailed inventory/schedule of condition prepared for the property and its contents, and you should go through this with the tenants both when they go in and when they leave. The inventory should also give details of the condition of the items. If you can afford it, get a professional inventory clerk to deal with this for you.
Make sure you give the tenant notice of the deposit scheme being used within 30 days of receipt of the deposit. The notice must give prescribed information to the tenant, otherwise you will be deemed in breach of the scheme rules, and the penalties set out in 1. above will apply. .
Do not agree with the tenant to off-set the deposit against rent arrears unless the tenants have vacated. The deposit should never be used for rent payments while the tenants are in occupation of the property.
When the tenant is about to leave, make sure that you check the property over carefully, preferably in a 'handover' meeting (or arrange for your inventory clerks to do this). Make a careful note of any damage or repairs that need to be done and agree these, if possible, with the tenant. Keep a written record of what was agreed and get the tenant to sign it.
Make sure you obtain and keep safely invoices and receipts for all work done to the property or items purchased, if you are going to want to claim the cost from the deposit. If you think that there is likely to be any dispute, consider taking photographs (preferably with a camera which will date photos), having an independent witness view the damage, and/or taking a video.
Although you are entitled to expect the property to be left in a clean condition (and can justify claiming for cleaning costs if it is not) you must allow for fair wear and tear. This means that you are entitled to receive the property back in the condition that you would reasonably expect it to be in after having been lived in for the period of the tenancy, rather than in the pristine condition if was in at the start of the tenancy.
If there is any dispute with the tenant regarding deductions from the deposit, make sure you comply with the requirements of your tenancy deposit protection scheme within any time limits they may have set.

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Members can read FAQ and articles on the points covered here.