Since 6th April 2007 all deposits taken by landlords must be safeguarded by one of three Government approved schemes. Landlords can choose which scheme they wish to use and must safeguard each deposit and inform the tenant which scheme has been used within 30 days of receiving the deposit.
Insurance vs. Custodial
The tenant will pay the deposit to the landlord. The landlord then has a choice of whether to use an insurance based scheme or a custodial scheme.
Under the Insurance based schemes the landlord will retain the deposit and pay a fee to the scheme. At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, the landlord returns all or some of the deposit.
Under the custodial based scheme, the landlord pays the money to the scheme. At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, the scheme will return the deposit to the relevant party. The Deposit Protection Scheme is the only custodial scheme.
If there is a dispute over the division of the deposit at the end of the tenancy then the scheme will resolve this.
Once you have registered a tenants deposit with your chosen scheme, you need to ensure that you provide the tenant with the prescribed information from the scheme. If this information is not provided to the tenant then any notice you serve will not be valid. The tenant can agree to receive this information electronically.