In the UK, a deposit protection scheme is required by law for most rentals starting after April 6, 2007. Landlords must transfer the deposit to a third party or insurer to ensure fair resolution of any refund disputes. Exceptions exist, but non-compliance can result in loss of eviction rights and a fine.
In the United Kingdom (UK), a deposit protection scheme is required by law for most rentals commencing after 6 April 2007. A deposit protection scheme is a means by which a landlord and tenant can be sure that any deposit refund dispute will be fairly resolved. The landlord transfers the deposit to a third party or makes use of an insurer, one of which will refund the deposit to the tenant at the end of the tenant’s stay.
A deposit protection scheme could take one of the forms mentioned above. In the first, the deposit is given to a third party who holds the money in escrow until the lease is terminated. The second option is for the landlord to pay a rental deposit protection insurance premium. In the first case, the deposit protection service invests the funds and keeps a portion of the proceeds as compensation for its efforts.
The law applies to the so-called short-term lease. This is the standard form of tenancy agreement in the UK and is similar to a residential tenancy agreement in the US. Deposit protection schemes were established to ensure that landlords and leasing agents treated tenants fairly and to provide a means of arbitration in the event of a dispute over whether or not a tenant could recover their deposit. Accepted reasons for holding a deposit include late rent due, failure to give notice, failure to collect or return keys after vacating, and damage beyond reasonable wear and tear to the rental unit.
There are some exceptions to the law, including having a resident landlord, the property being used as a holiday or secondary home, annual rent exceeding £100,000 British Pound Sterling (GBP), or a tenant who is a business or commercial entity. For leases commencing before April 2007, the leasing agent or landlord is not required to use a deposit protection scheme, but is encouraged to do so upon renewal of the lease. The landlord has 14 days from receipt of the deposit to elect a deposit protection service and notify the tenant.
A survey conducted by a major deposit protection service in 2008 revealed that 62% of landlords openly admitted to not using a deposit protection scheme, despite legal requirements. Under the law, landlords suffer the loss of their eviction rights and a fine equal to three times the amount of the deposit. Tenants should be aware that their deposits may be at risk if they are not protected by a custodial or insurance service.
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