Most landlords will ask tenants to pay a security deposit. This can be paid in a lump sum at the beginning of the tenancy or paid off in instalments. Getting a deposit from your tenants can protect you from any financial loss which you incur as a result of their tenancy. You are responsible for holding the deposit for the duration of the tenancy and should do so in a professional way. Deposits paid on or after 1 April 2013 must be protected in an approved tenancy deposit scheme.
Purpose of a deposit
You take a security deposit to protect yourself against the risk of tenants not paying rent or causing damage to your property. The deposit should always be viewed as the tenants' money, until the tenancy has ended and you inspect the property.
Disputes over security deposits are common. You can only keep some or all of the tenant's deposit if you have suffered actual financial loss as a direct result of your tenant's actions or failure to do something.
You cannot end up better off financially as a result of keeping a tenant's deposit. You cannot, for example, use a tenant's deposit to purchase a brand new table because they have damaged an older table. You can, however, take the cost of the old table from the deposit. It is important to remember that you can only replace "like with like" and that you need to consider the age and condition of the damaged item when retaining any money from the tenant's deposit.
Retaining all or some of the deposit
At the end of the tenancy, you should inspect the property. Compare the condition and cleanliness of the property and any furnishings included as part of the tenancy against the inventory you prepared when the tenants moved in. If there is a significant difference, which can't be attributed to normal wear and tear, you may be able to use some of the tenant's deposit to cover the costs of repairing or replacing items.
Your tenancy deposit scheme paperwork should explain what you need to do if you want to make a claim on the deposit. The steps you take depend on whether you used a custodial or insurance based scheme.
If the deposit was paid before 1 April 2013 and you feel you have a right to keep some of this money you should write to your tenants outlining the items which need to be repaired or replaced and costs for doing so. You can only replace like for like, so you cannot bill your tenants for the cost of a new sofa if the sofa was not brand new when they moved into the property. You can only take the value of the damaged item from their deposit.
Keep copies of any receipts which prove you have paid for goods or services as your tenant may ask to see these, or a court may wish to see them if the tenant sues for the return of the deposit.
Wear and tear
Residential tenancies must allow for reasonable wear and tear. However, it can be difficult to decide what wear and tear is and what damage is. There are a number of factors you should take into consideration when deciding whether or not you can retain some of your tenants' deposit:
- Length of the tenancy: The longer the tenants have lived in the property, the more wear and tear you must allow
- Quality of accommodation and furnishing: If the property was furnished with less expensive materials, you should expect a greater level of wear and tear at the end of the tenancy. You must also consider the age and quality of items as they were when the tenant moved in.
- Household type: The more people who live in the property, the greater the level of wear and tear in communal areas. If you are aware that the tenants had children or pets living in the property, you should also allow for additional wear and tear.
As a general guideline, if something is damaged or needs replaced due to natural use it should be classed as wear and tear, but if a repair is necessary due to the tenants' negligence this should be viewed as damage. The Tenancy Deposit Scheme has produced a useful guide to tenancy deposit disputes which explains how landlords should treat wear & tear.
Betterment and proportionate deductions
A landlord can't end up better off as a result of making deductions from the tenant's deposit. This means that any deductions you make must represent the value of the damaged item at the time you are replacing it. To do this you must
- decide the notional lifespan of an item (this will depend on its quality, hardiness and on what reasonable wear & tear could be expected, considering the type of household you rent to)
- know the replacement cost of the same model or as similar a model as possible (you cannot base your calculation on a better or more expensive item)
- know how old the item was when it was damaged.
Say, for example, your tenant has damaged a washing machine. The washing machine was 4 years old at the time it stopped working and a repair person has determined that the fault is due to misuse or damage, rather than a fault with the machine. If the notional life of the machine you purchase was 6 years and a new machine costs £250, you need to work out what the value of the machine was at the time it broke down.
Divide the total cost, by the notional lifespan to work out how much it costs each year. In this case, the machine is worth £41.66 per year. As the machine only had 2 years of notional lifespan left, you could charge the tenant £83.33 towards the cost of a replacement machine, but the remaining £166.67 would be your business cost. You can't use the tenant's full deposit to pay for the machine or buy a better machine and expect the tenant to pay over the odds for this.
Small Claims Court action
If your tenants believe you have unfairly kept some or all of their deposit they can also take legal action against you through the Small Claims Court. You do not need a solicitor to represent you in the Small Claims Court. If your tenant decides to take action against you in the Small Claims Court, you will be notified by letter.
If the deposit was protected in a scheme, your tenants can also use the scheme's dispute resolution process if they disagree with your decision to keep some of their deposit money.
You can take Small Claims Court action against your tenants if their actions have left you out of pocket and the deposit is not sufficient to cover the losses incurred. It costs between £30 and £100 to lodge a small claims application. The fee depends on the value of your claim.
In court, you will be expected to produce professional records explaining why you are entitled to keep some or all of the deposit or why the tenant owes you money. You will be given an opportunity to put your case to the judge and it will be in your favour to be able to produce detailed documentation and evidence to support your case. If you are unable to produce evidence to support your claim, the judge may rule in the tenant's favour as the burden of proof is often placed on the landlord, as the business person.
If the judge rules in your favour, he may ask the former tenants to pay your application costs. It is unlikely that the judge will order the tenant to pay your solicitor's costs if you choose to instruct one. Where the judge finds in the tenants' favour, you may be ordered to pay their application costs.