A Look at the Tenancy Deposit Scheme

The Tenancy Deposit Scheme was created for use in England and Wales as a way to properly govern deposit agreements on a lease between landlord and tenant. Prior to the adoption of this scheme, common disputes would arise between the two parties when it came time to return, or not return, the security deposit used to rent a space. When a scheme is in place, the goal is to prevent disputes or at least keep the disputes out of courts.

Forming a Tenancy Deposit Scheme

Upon agreement between a landlord and tenant to rent a property, the landlord presents the tenant with a deposit scheme. The scheme lays out the precise provisions to make a security deposit and the terms of receiving the deposit in return after tenancy. Both parties sign the agreement within 14 days of the tenancy's start. 

Types of Deposit Schemes

The landlord participates in one of the major schemes available to him or her, rather as a doctor participates in a PPO or HMO. The landlord joins up with other landlords, in either an insurance-backed or custodial scheme. When the scheme is insurance backed, the landlord pays a premium to the scheme in order to take part in it. In return, the scheme resolves any dispute between the landlord and tenant outside of the court system. The landlord retains the deposit if the landlord "wins" the dispute. With a custodial scheme, the tenancy still provides the same service to resolve a dispute. If the landlord "wins" the deposit, it is forfeited to the tenancy within 14 days.

Benefits of Deposit Schemes

There are several benefits to landlords, tenants and the rental industry in general thanks to organized tenant schemes. For landlords, there is a greater chance of resolving disputes over security deposits without going to court. There is also a lawful agreement that binds a tenant to a security deposit agreement. For a tenant, the chances a landlord will simply withhold a deposit without legal grounds are greatly reduced. Further, if such an event occurs, the tenant can recover the funds without going to court. This arrangement is then beneficial to the rental market as a whole. Landlords and tenants have formalized, self-regulated agreements that keep them organized and honest. The courts do not get bogged down with minor "small claims" and other disputes.

Deposit Schemes in the US

Unlike the UK, the US does not have a formalized system for deposit schemes nationwide. While deposit schemes are mandatory throughout the UK, each state in the US sets its own regulations for security deposits in its rules for landlord and tenant's rights. If you are about to enter a rental agreement in the US, the principles of a sound deposit scheme can still be applied. Ensure your rental agreement has explicit instructions for return of a security deposit including the terms in which it may be retained. Further, ensure your rental agreement has verbiage governing any dispute that explicitly states which party will pay for legal costs and other expenses incurred if there is a dispute.

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