Landlords or their agents who take a deposit from a tenant must have that deposit protected under one of two schemes:

• A custodial scheme – this is where the deposit is held in an approved scheme during the deposit, and will continue to be held if any legal dispute arises between the landlord and the tenant.
• An insurance based scheme – this is where the landlord keeps the deposit, but the deposit is insured in case of any dispute.

It is for the landlord (not the tenant) to decide which scheme to choose.

The custodial scheme is free to landlords and tenants. Part of the interest generated by holding the deposit in the custodial scheme will be used to administer the scheme. The remainder of the interest will be paid to the tenant or the landlord.

Under the insurance based scheme, the landlord must pay a premium, but keeps the deposit. If a dispute arises between the landlord and the tenant, the landlord must hand over the deposit to the scheme for safekeeping until the dispute is resolved. If the landlord fails to handover the deposit, the scheme will abide by any court order or ADR decision to pay the tenant and recover the money from the landlord.

At the end of the tenancy agreement, the landlord and the tenant must agree on the amount of the deposit which is to be returned to the tenant, and this must be repaid within 10 days of agreement being reached (or in the case of the custodial scheme within 10 days of the scheme being notified of the agreement).

The law applies to all new tenancy agreements from 6th April 2007 where the landlord takes a deposit from the tenant even if the landlord lives overseas. If the property is in England or Wales and the landlord takes a deposit, then they will have to protect the deposit under one of the recognised schemes.

There are currently three bodies approved by the government to administer the scheme:

• Deposit Protection Service (Custodial and Insured)
• MyDeposits – including deposits that were held by Capita
• Tenancy Deposit Scheme

The landlord must inform the tenant of the details of the scheme and how the deposit is protected within 14 days of receipt of the deposit. This is done by serving written details on the tenant. The written details must include specific information (‘the prescribed information’).

If a landlord fails to serve the written information on the tenant, they will not be able to serve a S.21 notice requiring possession of the property at the end of the tenancy (although a landlord can still seek possession under any of the other grounds which apply to assured shorthold tenancies).

A tenant can seek compensation from the landlord for failure to serve the written information and this will be equivalent to three times the value of the deposit.

Both schemes are subject to alternative dispute resolution (ADR). However, the use of ADR is not compulsory. If a landlord and tenant agree to use ADR, then they will be bound by the decision of the ADR service and cannot have the matter settled by the court instead. Where a landlord or tenant is contacted by the scheme administrator and asked if s/he is prepared to consent to ADR and they fail to reply, the scheme can proceed with ADR simply on the basis of the consent of one party.

Instead of ADR, the landlord or tenant can apply to the court to settle disputes about the return of deposits.