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Twelve Ways To Avoid The Tenancy Deposit Scheme (and How To Turn It Into A Marketing and Financial Advantage)

Have you stopped to consider whether the TDS (Tenancy Deposit Scheme) is actually beneficial to tenants? Or whether there are ways of avoiding this Government red-tape, for both yours and your tenants benefit?

Our resident HMO expert Jim Haliburton has some quite heated views on the topic, and suggests 12 loopholes to the TDS.

n.b. these are merely the views of Jim Haliburton and should not be construed as either financial or legal advice, and are for educational purposes only.

1. The Tenancy Deposit scheme in a nutshell

From 6th April 2007 the Tenancy Deposit Scheme (TDS) applied, if you take a deposit, after April 5th or renew a tenancy agreement then the deposit should have been paid, within fourteen days, into the Custodial Scheme run by The Deposit Protection Service (The DPS) which is free to use and you may get interest on the deposit. Alternately, you may keep the deposit but must insure the deposit using one of the two insured schemes.

Tenancy Deposit Solutions Ltd (TDSL) and The Dispute Service Ltd (The DSL) allow the Landlord to hold the deposit but the Landlord has to first register and pay a fee to the respective scheme. The TDSL was set up by the National Landlords Association (NLA) with Hamilton Fraser Insurance and charges by the deposit, at present £30 per deposit and a joining fee of £58.75 and an annual subscription of £14.70 with a small discount for NLA and National Federation of Residential Landlords (NFRL) members. The NLA and NFRL are two very good Landlord Associations which I would urge you to join, them annual membership fee is only about £70. The DSL was set up for letting agents but anyone can join and they have a more complicated charging structure. The DSL charge an annual fee ranging from £560 pa to £1890 depending on which professional body you belong to or whether you are an accredited landlord. (To become an accredited landlord you need to go on a one day training course run by most Local Authorities costing about £80 and agree to operate to a code of standards).

Further and very important, within 14 days the landlord must serve a notice on the tenant, where a deposit has been taken, giving certain information now required by law regarding the deposit. See statutory instrument 2007 no 797 (SI 2007 no 797) The Scheme providers provide this information for the landlord to give to the tenant. Your tenancy agreement must have a clause saying how the deposit will be handled.

The scheme is not retrospective it only applies if you take a deposit after 5th April 2007 or you renew an existing tenancy after that date. Tip do not renew your tenancies let them run on as statutory periodic tenancies from month to month. Note, you do not have to take a deposit when letting, through it was unusual not to do so, but this is now changing. It is up to the landlord to choose which scheme they use, not the tenant.

To start with there was confusion as to what to do and some of the regulations were not published until the 20th March, seventeen days before the TDS started and in breach of the governments own guidelines which states that at least three months should be allowed before new legislation comes into force. Why was this not challenged by one of the landlord organisations?

2. The Penalties

(1) It is not a crime not to comply with the TDS. Should a landlord within two weeks of receiving the deposit not pay the deposit into one of the schemes or provide the prescribed information required by SI 2007 no 797 then the legislation says they will be liable to a penalty of three times the deposit and be unable to evict the tenant using the Section 21 procedure i.e. two months notice.

It is up to the tenant not the Local Authorities to sue using the County Court for the deposit and the penalty of three times the deposit which will incur a court fee of up to £150 and an allocation fee should the landlord defend. My understanding of the TDS is that the judge has no discretion other than to award the penalty of three times the deposit to the tenant for any failure to comply with the TDS. So for example if you were one day late in giving the prescribed information you are liable to the penalty.

(2) As a landlord who is subject to mandatory licensing for his three storey HMO’s I would be reluctant to ignore the TDS as it could be suggested I was not a ‘Fit and proper person’, an essential for licensing purposes, though I can see many landlords not bothering with the TDS. I personally, stopped taking deposits before the scheme even started.

Should licensing be extended to cover properties other than HMO’s as the Housing Act 2004 allows Local Authorities to do, a landlord could risk their future as a landlord by being caught out by evading the TDS. Do not misunderstand me, I am not advocating breaking the law. Landlords have, wrongly, an appalling reputation and they should do everything to try and improve this.

(3) There is also the little known law of illegality which gives the judge wide discretion to refuse to hear a case for a breach of contract and also possibly an action for possession of property were one or both of the parties has broken the law when making or carrying out the contract. A clear case is where the parties have agreed to a cash deal to avoid VAT. The courts will in such circumstances always refuse to handle the case on the grounds of illegality and neither party will be able to claim a remedy. Applying this, there is a remote possibility that some judge will accept this argument where a landlord has failed to comply with the TDS and refuse to grant say an eviction under Section 8 for rent arrears. Thus potentially, a tenant could stay in your property without you being able to evict them and without paying any rent.

It is, therefore, very important that if you take deposits you comply with the legislation.

3. Which scheme should I use?

First consider whether to take a deposit – see the rest of this article, you do not have to take a deposit.
If you want to hold on to the deposit and use it say for working capital then at present the NLA scheme, the TDSL, gives the greatest flexibility and is cost effective for landlords who grant less than 20 to 60 tenancies a year. There is nothing in the legislation to stop the landlord passing the cost of the scheme on to the tenant via an administration fee.

The DSL was set up for agents but individual landlords can join, it requires the deposit to be held in a separate trust account so the landlord will only get the interest and is unable to use the money as working capital. The DSL is cost effective for landlords granting over 20 to 60 tenancies a year. The reason for the variation in the number of tenancies is the wide range of cost for of The DSL scheme.

If you do not use the insured schemes then the custodial scheme must be used and there is provision for interest to be paid at base rate less 2.32%, though this may be after the costs of running the scheme have been deducted. If this is the case then I would not expect to see any interest paid. The interest is paid to the tenant and it is unclear whether the landlord can put a provision in their Tenancy Agreement to claim it instead.

4. Who will Police the Tenancy Deposit Scheme (TDS)?

It is up to the tenant to take action, the Local Authority, Police, Trading Standards Authority and Citizen Advice Bureau etc has no power to get involved apart from in an advisory capacity. The tenant must sue the defaulting landlord in the county court for failure to comply with the TDS. The absurdity of this is that one of the main reasons the scheme was introduced was because tenants would not use the county court to recover their wrongly withheld deposits. So why are they now going to start to use the county court? Another reason was that the landlord could not be traced, this will still be the case. In other words if the landlord takes a deposit and does not use the TDS and cannot be traced then there is still nothing that can be done.

5. What is the use of the TDS from the tenants point of view?

Looking at it from the tenant’s point of view I would be extremely disappointed with the TDS. The scheme does very little for them from the status quo. The TDS makes the following changes:

(1) Provides protection should a landlord go bust. The incidents of landlord going bust are extremely rare, after all, they are sitting on one of the best investment asset you can own. Remember if the agent goes bust which is quite common, the landlord is still liable for the deposit because by law it is the landlords responsibility even if the agent kept it. Most of the problems are where the landlord wrongly or is perceived by the tenant to have wrongly withheld the deposit. In such situations the TDS is of little use to the tenant see (2) below.

(2) Provides a free Alternative Dispute Resolution service (ADR) but nothing is free and the cost of the ADR is going to be passed on to the tenant in increased rent or charges. If I was a tenant I would expect the TDS to champion my cause if my landlord failed to return my deposit. Not so, the TDS providers will only refer a disputed deposit to the ADR if both landlord and tenant so request. Should the landlord refuse to use the ADR the scheme operators will wash their hands and leave the poor tenant to sue in the county court – which brings us back to the main reason why the TDS was introduced in the first place, tenants were reluctant to sue through the courts.

Should both parties agree to use ADR then with the TSDL scheme the tenant has to complete a valid dispute notification form and provide relevant evidence within ten days otherwise the Adjudicator will dismiss the claim (rule 1.3).

The ADR system is a paper based adjudication, no witness or visits are made. If I was a tenant I would expect that the ADR would, as a minimum, require the landlord to provide justification for withholding my deposit and that someone would examine the case to see whether the landlords assertions were credible and fair. Not so, the tenant must prove the landlord has wrongly withheld the deposit and then the landlord must rebut the tenants case. The TDSL have certainly looked after the interests of their landlords with their ADR scheme.

In the County Court the reverse is normally the case, the landlord, in practice, must prove justification for withholding the deposit and the tenant is usually given a sympathetic hearing

I can see Citizen Advice Bureau’s up and down the country advising tenants who wish to claim for withheld deposits not to use ADR even though it is free, unless they have good evidence, which I expect they will not have. Just how many tenants are going to go to the trouble of doing there own inventory and providing photographic or video evidence when they move in and out!

(3) Will provide clarification on wear and tear, A few landlords may have exaggerated or overcharged for damage and repairs and this is probably going to be the benefit, if you could call it that, of the scheme. The Alternative Dispute Resolution (ADR) system which has been set up to deal with disputes about deposits will over time formalise and standardise what is an acceptable charge for repairs and what could be considered fair wear and tear, the standard of evidence required etc but at what cost? This of course assumes that the results of the adjudications will be published.

(4) Will encourage the use of clear inventories for those using the scheme is certain as recourse to the ADR scheme will require this. The cost of inventories in the up market letting sector has for a long time been passed on to the tenant, whether it will filter down to all sectors I very much doubt. At the lower end of the market tenants will not be able to afford it. The TDS is appropriate to a certain sector of the market but has been forced onto the whole sector.

(5) The custodial scheme will, I believe, cause a deteration of relationship between landlord and tenant as it will take at least ten days for the deposit to be returned even if both parties agree. I often have tenants who need their deposit returned, often in cash as they are leaving the country or need the deposit to pay the deposit on their new property. Now this will not be possible unless the scheme will allow the landlord to reimburse the deposit from their own pocket and recover the deposit from the scheme.

Though there are some positive aspects to the TDS from the landlords point of view as I will explain later, it does little for the tenant or for the landlord also. As so often happens with these government schemes to protect the consumer, both parties are worse off!

Come October 2007 when the first deposits into the TDS come due to be returned I can see the mutterings about the TDS growing into a crescendo when tenants realise the scheme has done little to help them and often put them into a worse situation then before the TDS was introduced. See flow chart at the end of the article on how the tenant can recover their deposit.

6. What is the point of the TDS?

As happens time and time again the rogue landlords and agents will just ignore the legislation and the decent landlords get saddled with even more administration and cost. You have to wonder about the legislators. The scheme should have provided for the tenant to put their deposit into the custodial scheme which would provide a certificate to give to the landlord and made it a criminal offence for the landlord to take or handle a deposit directly. You have to ask why this was not done.

The insured schemes do not stand up to logical examination. The idea is that the landlord could hold onto and use the deposit. With the scheme aimed at agents, The Dispute Services Ltd ( the deposit has to be kept in a separate client account. The other insured scheme sponsored by the National Landlords Association, Tenancy Deposit Solutions Ltd ( is reported to require the deposit to be lodged in a ring-fenced client account but I can find nothing in the rules which requires this though I believe that they will in the future require the landlord to hold their deposit in a separate client account.

The only advantages then in using the insured scheme would be that the landlord keeps the interest but more importantly in the case of abandonment, the landlord would be able to keep the money without going through any procedure. With the custodial scheme the landlord will have to prove the tenant had abandoned the property and owed an amount at least equalling the rent. I would expect the custodial scheme will be keen to hold on to such monies for as long as possible. I also believe the cost of the scheme will increase. How efficient the schemes will be we will have to wait and see but I am not confident it will keep its customers happy. Administration is a bottomless pit of expense and an enormous well of inefficiency, just look at the ill fated Child Support Agency.

The worry all the scheme providers have is the cost of arbitration. Each arbitration case is rumoured to costs £130 to £200. It won’t take too many claims on the ADR to bankrupt the schemes. I would have thought they could have resolved the disputes for far less. ‘A’ level and professional exam markers get paid a fraction of that for much more complicated assessments. I believe all the schemes will operate an informal mediation service and put pressure on landlords to avoid the need to go to ADR.

There was no evidence to prove that there is any significant withholding of deposits. The TDS is another unnecessary piece of legislation being thrusted upon the ‘victim’ i.e. the landlord to protect the ‘perpetrator’ the tenant. In a fair world, yes I know I still have not grown up and want things to be fair, real injustices in the landlord and tenant area would be dealt with, to name only a few: delay in obtaining possession for rent or other defaults, tenants who serially default on their rent, damage or steal from their landlords, abandonment, enforcement against landlords but not bad tenants, the county court system, etc etc.
I would guess estimate that there is more than a thousand tenants who default on their rent and ‘flit’ for every one landlord who has wrongly withheld a deposit. Remember it is us the landlords who are providing a valuable service in housing people, not the tenant or the Local Authority officers who hound us. All the evidence show the private landlords do a better job at a fraction of the cost of social landlords.

The ADR system requires the tenant to have collected evidence in order to satisfy the adjudicators that they have a justified case. Thus perversely, the TDS is going to make it harder for the tenant to recover their disputed deposit. Most tenants will not have collected evidence on the condition of the property when they move in and when they left.

The National Landlord Association’s Scheme ‘The Tenancy Deposit Solution Ltd’ charges £30 per deposit and landlords are going to have to register and pay a registration and an annual renewal fee to remain in the scheme, currently about £58.75 and £14.70 respectively. Multiply that by the one to one and a half million tenancies per annum. The TDS is going to involve an enormous amount of wasted money, world hunger could be solved within a few years by spending this amount of money. I know where I would like to spend my money, but who cares it is only the landlords money – or is it, won’t the landlord just pass the cost on to the tenant. Well that’s OK then, teach the buggers a lesson! But what about all the extra administration the scheme will involve.

7. Short stay tenants

I operate at the lower end of the rented market and long ago abandoned trying to tie tenants down to a six month contract. I now say, ‘Please let me know when you are leaving,’ and I have a significant number who only stay a few weeks and I do not believe I am alone in this respect. The creators of the TDS have not thought this through and I doubt the scheme will cope with this transient population. I know that many of my tenants will not take kindly to having to wait for the return of their deposit and often will have difficulty in or will be reluctant to provide a forwarding address.

8. How will disputes be resolved?

The TDS ADR system will use an electronic based dispute scheme, there will be no hearing the adjudicator will not visit premises. Documentary evidence will be needed to be provided electronically i.e. over the net should a dispute arise. This will require precise and exact inventories, and possibly photographic or video evidence, statements, forms to fill in etc. Before you just said for example, the tenant had broken the chest of drawers or not cleaned the property.

Similar evidence was required under the old way if a case ever got to court but in practice very few tenants would bother to sue. The ADR service is free but so bureaucratic that I expect few tenants will use it. Under the old system if a tenant wishes to argue about what they consider was an unreasonably withheld deposit they would have to have used the county court scheme where they would usually receive a sympathetic hearing. The county court scheme has many faults but one is not being anti tenant, the reverse is true, the court is as a whole anti landlord as those of us who have had used it will testify. Even under the TDS landlord and tenant are still free to use the county court if they so wish.

9. Should landlords use the County Court instead of the ADR scheme?

Initially, on principle, I suggested all landlords should have boycotted the ADR system, which they can lawfully do and insist that all disputes go through the county court which brings us back to square one. One of the reasons the TDS was set up was because tenants would not use the county court scheme. My objection is if the county court scheme is good enough for the landlord to obtain possession of their property or sue a defaulting tenant (it is not it is inefficient, slow bureaucratic, unhelpful and blatantly anti landlord) then it should be good enough for the tenant and if the government does not like it, it should sort the county court out, which they seem incapable of doing.

The problem with this approach is we landlords will be more than likely get a rough ride using the County Court compared to the ADR. A bit like cutting off your nose to spite your face. However, it would be to the advantage of the landlord to use the county court if the loss was greater then the deposit as the landlord could get a judgment for the excess.

10. Landlords have nothing to fear from using the ADR.

If the county court system had been more user friendly I doubt there would have been any need for the TDS. Fortunately, the TDS has in one way proved an advantage for the Landlord as I doubt it will be as anti landlord as the county court. That there is no cost in using the ADR will encourage more tenants to use it compared to the County Court is debateable. I think the difficulty most tenants will have is in providing the evidence and keeping to the time limits. The previous voluntary trial tenancy deposit scheme and the agents scheme had very few tenants use the dispute mechanism and most who did, did not produce a case which was acceptable to the adjudicator because the tenant did not have sufficient evidence. The disadvantage with the TDS is that the landlord will need to provide quality evidence should the tenant put up a valid claim and the matter goes to adjudication e.g. detailed inventories, photographic and or video evidence. I also believe that the adjudicator will expect the landlord to be more professional than the tenant in their handling of any case and in the quality of evidence provided but this is yet to be seen.

The scheme initially requires the tenant to prove that the landlord has unjustly withheld the deposit. With the county court, the judges are often inclined to believe everything the tenant says and we as landlords have to have evidence to disprove what the tenant says. The perversity is that the unscrupulous landlord could under the new scheme still refuse to return the tenant’s deposit knowing full well that the tenant is very unlikely to pursue the matter and if they did they would fail because they would not have the evidence. Another own goal by the government!

The ADR schemes also have some nasties in them. For example the TDSL scheme requires the landlord to reply to a claim by the tenant and hand over the disputed part of the deposit within ten days, or risk loosing the case and if they do not pay over the disputed part of the deposit eviction from the scheme. (Rules 2.1, 3.1 & 4.2).
Landlords are not allowed to publish the result of the adjudication (Rule 8.1) Why is the scheme providers frightened of publicity?
Where the deposit is paid by instalments then each instalment will attract a separate fee (Question and answer session on the NLA’s website)

11. How does the landlord reclaim the deposit?

With the custodial scheme, the tenant’s deposit is locked in until both the landlord and tenant agrees it is to be released. With the insured schemes the rules state that any disputed deposit must be paid into the scheme. With both the custodial and the insured schemes the expected path is that if both landlord and tenant cannot agree then the matter will go to ADR and adjudicator will decide and the money is paid out. What both types of schemes are not clear about is what happens if the tenant abandons the property owing rent etc or refuses to take part in the adjudication.

With the insured scheme, I expect, but this is to be seen, if both parties have initially agreed to adjudication and the tenant does not participate then the disputed part of the deposit will automatically be paid to the landlord, hopefully without the landlord being put to any cost or trouble in producing a case to prove they are entitled to it, but as I say this is to be seen though I expect the scheme as it was created by landlords and letting agents, to default in their favour. The only problem being the delay in getting the deposit back.

The problem arises with the insured scheme when the tenant refuses to use arbitration, then will the landlord have to sue the holder of the deposit in the County Court before the insured scheme repays the deposit? Again this does not appear to have been thought through and we will have to wait and see.

With the custodial scheme there is a far greater problem where the tenant abandons the property or refuses to agree to the release of the deposit. The scheme administrators have said they will want proof that the landlord is entitled to the deposit and how long will this take? I expect the custodial scheme will wish to hold on to the money for as long as possible and make it difficult for landlords to get it back, perhaps even requiring a county court judgment. To initiate a county court action will cost about £150 if the landlord does it and far more if a solicitor is involved. I can see many landlords not bothering.

12. Who is standing up for the landlord?

As some landlord associations are involved in the insured method of holding deposits they are very unlikely to criticise the scheme as they are now part of it. My question is who will be highlighting how useless the scheme is and where are you going to get independent advice on whether or not to use the schemes and the alternatives?

I am certain that most of my tenants would rather have me hold their deposit and deal with any dispute rather than put their money into one of the schemes and have to contact the scheme to recover their money. Unfortunately the scheme does not allow the landlord to do this legally.

13. What is the use of deposits?

The idea that deposits covered loss and damage has never stacked up with me, from long experience the tenant who causes loss and damage usually always defaulted on their rent and the decent tenants do not cause problems. Though, I admit, in the past I have been lax about damage putting most of it down to wear and tear. The only benefit I found in using deposits was it helped to identify those who could not manage their money. If a tenant could not pay a deposit and asked to pay it by instalments then they invariably turned out not to be able to pay the rent, never mind their deposit. My experience is dealing with working class tenants and I accept that in other markets things operate differently.

The tenant once in occupation can cause the landlord enormous harm. Eviction takes a minimum of three months and can take years if the tenant knows how to exploit the system. Tenants can destroy or steal with almost impunity. Looking at it from this point of view a deposit is almost insignificant.

Does a tenant behave any differently just because they have paid a deposit? I find it makes only marginal difference. I should guess with only 30% of my tenants the deposit has any effect, the rest would honour their agreement whether they had paid a deposit or not or would default with the rent for the last few weeks and/or abandon.

It comes down to the type of tenant you have, most landlords I know have problems getting good tenants, not getting rid of them, the bad ones usually leave voluntarily and suddenly because debt collectors, nasty people, police etc are after them, court action may in some cases hasten the process.

14. My solution

I personally have opted out of TDS. The introduction of a deposit scheme made me evaluate the use of deposits. The additional cash flow produced by taking deposits was very useful but morally it was the tenants money and should have been kept in a client account and not used in my business. There is a good argument for all deposits, tenancy or not, to be held in an independent trust account. The government missed a trick in this, unfortunately as I believe the TDS will be less than successful no government will attempt to legislate to cover other deposits for a very long time.

15. The taxman

It was not that the tax authorities will now know details of all the deposits I take but it was the thought of all the extra administration in producing precise inventories etc that made my blood run cold. Getting the existing paperwork done is a big enough headache for me as it is. I also, perversely, do not wish to give any credence to those who set up the TDS by being part of it. Imagine the effect if all landlords boycotted the scheme by not taking deposits and opting for the alternatives – what kind of message would that give to the government!

16. Make a marketing and financial advantage of not taking deposits.

I decided to make a marketing and hopefully a financial advantage out of not taking deposits. What would be more attractive to a prospective tenant a rent of £400 pcm + £500 deposit or a rent of £420 or £440 pcm and no deposit? I strongly suspect that £420/£440 and no deposit will win hands down. Instead of taking a deposit I raised my rents and just for good measure added initially a £30 now £75 and soon to be a £100 non refundable administration fee and I put ‘no deposits taken’ on all my advertising. I am surprised at just how acceptable the charging of an administration fee was to tenants and I expected greater resistance. Whether I attract more tenants by not taking deposits and help reduce voids will be almost impossible to assess as I have for years been buying more property to let which has increased the number of units I offer by between 10% to 95% per annum. I believe, a 10% increase in rental income will more than compensate for the odd tenant who defaults or causes damage. The downside is all the tenants now pay more for the bad ones. A note of caution, however, you need to consider your market. The taking of deposits in up market accommodation is expected and you may give the wrong image by saying ‘No deposit taken’ and put off decent tenants and attract the ‘wrong sorts’. A bit like saying ‘DSS welcome!’

17. The alternative to the TDS

I considered varies ways of avoiding having to use the TDS but none proved to be more attractive than not taking deposits, if you have any better ideas please let me know. The ideas I have heard suggested are:

(1) Opt out

As I have just explained, don’t bother taking a deposit. Better still put your rents up and charge an administration fee. It is an ‘on balance argument’ – will you at the end of the day be better off? If yes, then in my view that’s what really matters.

(2) Use the TDS but not the ADR

Not quite ignoring the scheme, take a deposit and use the custodial scheme and charge an administration fee for doing so. I suspect most landlords who use the insured scheme will charge the tenant the cost so tenants will now expect to pay an administration fee. Most letting agents currently charge the tenants an administration fee and I expect it will become more universal. This will go some way to mitigate the lost benefit of holding a deposit if you use the custodial scheme.

Also consider whether it will be cost effective to bother with the additional administration of inventories etc. Where justified, refuse to agree to return all or part of the deposit and if you want to play hard ball refuse to use the ADR so forcing the tenant to use the County Court. If the tenant makes a credible claim, pay up. In other words do as my van insurance company did when a driver made an unjustified claim against me, they paid saying it was cheaper to do that than defend the case. As I said earlier the scheme is so bureaucratic I doubt many tenants will bother to make a claim. The TDS has the advantage of getting ‘the monkey off your back’ by being able to blame the TDS for not repaying the deposit.
I may still do this if my first plan does not work.

(3) Insure

I do not believe in insurance but you may consider instead of taking a deposit to insure, you can even get your tenant to pay for it. There are a number of insurance schemes available who insure you against a tenant defaulting. The premiums are not that expensive about £35-£90. The problem I have found from trying to use one of them is that they will only accept excellent tenants. The insurance schemes also does not usually cover the first lost months rent and / or has an excess. Thus with a six months AST it is only of much use in the early months. Most of the schemes also give cover for the legal costs in evicting a defaulting tenant which is useful.

The schemes I have examined require you to reference the tenant usually through them and this is a separate service and charge. If they pass referencing they are unlikely to default so I question then if it is worth paying for the insurance. The use of insurance depends on which type of tenant you are dealing with. It would be of little use to me as most of my tenants would not be accepted.

(4) Vetting tenants

This is mainly covered in option 3 above ‘Insure’. A tenant who vets well is unlikely to default and will be probably worth suing if they default.

(5) Use credit cards

Just as a hotel and car hire company takes a credit card payment authorisation to cover the cost and damage could the landlord not do the same? I don’t know but I doubt it, as the liability would be for too long a period and exceed most credit card limits. Also you would need to be fairly large scale to be acceptable to the credit card providers. My worries about this and many of the other so called avoidance schemes is that the credit card could be interpreted by an anti landlord judge as an unlimited deposit. It was a non starter for me as most of my tenants do not have credit cards. I have been informed that the Paypal system which is cheap to set up and is used for receiving payments on the web could be used, though I have not checked this out.

(6) Issue Assured Tenancies (AT’s) instead of Assured Shorthold Tenancies (AST’s)

The TDS does not apply to AT’s. The major difference between these types of tenancies is that you cannot issue a section 21 notice requiring the tenant to leave, with AT’s. A section 21 notice is where you give the tenant two months notice to leave, available after the end of 6 months or the length of the AST whichever is longer. The ability to use a section 21 is a very valuable tool when dealing with the occasional difficult tenant and I am not sure I would wish to give it up in return for avoiding the TDS. I think I would rather use the custodial TDS and take the risk on my limited amount of record keeping for inventory purposes.

Most lenders would not accept the use of AT’s and this could harm your ability to get further finance in the future and be a breach of your contract with the lender.

(7) Use licenses

Just as the TDS does not apply to Assured Tenancies, see above option 6, it also does not apply to the granting of licenses. A licence gives the right to occupy. It is a bit like a bed and breakfast and hotels. Their use is fraught with difficulty and disapproved by the judiciary. I would not wish to highlight their use by taking deposits along with them.

(8) Limited company lets

Letting to limited companies instead of individuals is perhaps potentially the most exciting development that may arise from this whole sorry mess. Limited companies have long been used to avoid tax and employment law and in spite of the Treasury and legislators attempts over the decades to crack down on them they are still used. I can see accountancy firms advocating the use of company lets and their services in setting up the companies and some smart letting agents and landlords saying to tenants if you want to rent from us you first must form a limited company. A company only costs £18 to set up and you can buy ready made companies for as little as £26.

Instead of the sign here for you AST agreement and then sign here, sir, to say you have received your section 21 notice to quit it will be sign here to become a director of a company and then sign as the director of the company on the company let agreement and don’t forget to get ‘the director’ to sign a personal guarantee as well! A company let has the little known or understood advantages of avoiding security of tenure issues, (you do not need a court order to evict) and when letting to a ‘trading company’ massive capital gains savings. Manufactured or sham company lets are disapproved by the courts but the worse that can happen is that the let defaults to an AST.

To cover the tenant / director a letter should be sent to Companies House towards the end of the tenancy, or within the first year asking for the company to be struck off as it is insolvent. In practice Companies House rarely take any further action against the Director after that and it avoids the need to do a Company Annual Return or to file accounts.

I get worried at the stupidity of government or what is often referred to as the law of unintended consequences. People and remember some landlords are people as well! when faced with unpalatable things like taxes and the TDS will try and get around them and I can see companies being increasingly used to avoid the TDS. There is some merit in the limited company approach and enormous growth potential for those advocating their use.

Will I be using ‘manufactured’ limited company lets? Well let’s say never say never! But I would rather see someone else try it first.

(9) Use guarantors

Providing you can get a good guarantor this would be an excellent alternative and it is important you reference them and get them to sign a valid guarantee. I still require guarantors with what I call ‘marginal’ tenants, i.e. tenants I would not normally take. In practice that kind of tenant can rarely provide a guarantor.

Many Local Authorities have or are introducing a bonding scheme for tenants who are unable to provide a deposit and providing it is not paid to the landlord in the form of a deposit but claimed at the end of the tenancy if so required, it is outside the TDS.

In my area the bonding scheme is run by a charity and I am loathed to charge them for damage caused by the tenant. I use it more as another way of vetting the tenant and I tell the scheme I will only use them providing they do not send me any high risk tenants. So far it has worked reasonably well.

Another unintended spin off of the TDS will be the growth of companies acting as guarantors similar to insurance for defaulting tenants see option 3 above. Another parasitical cost for the private rented sector.

(10) Two months rent up front

This would mean the rent is collected every two months. The wording of the definition of a deposit under the TDS I believe, includes rent taken and held so you cannot hold a months rent and have the next rent period a month later, it would have to be two months later. There are a lot of advantages I can see in adopting this approach and few disadvantages providing the tenant can afford to pay two months rent up front, but the disadvantage is you still do not have a deposit to return at the end of the tenancy. The main advantage is mainly a practicable one, remember what I said earlier, from my experience a deposit mainly shows ability to manage money.

Remember, I am talking from my tenant profile, your tenants may be different. It is up to you to make an assessment of what will work for you.

The other advantages are based on the little know law regarding rent payment which says where rent is payable in advance the whole rent is payable on the due date so if a tenant is only one day late with the rent you can issue a Section 8 notice or claim direct payments off Housing Benefit on the basis of two months rent arrears. Should the tenant wish to leave and the tenancy is a periodic tenancy then the tenant must give a full two months notice ending on the last day of the rent period and strictly speaking not entitled to any rent refund if they fail to do so, unless otherwise agreed.

(11) Leaving bonus

Charge a higher rent but give the difference back at the end of the tenancy providing everything is OK. You need to be extremely careful about this as the definition of a deposit is so wide that it could include this. I think it would have to worded as a discretionary payment or better not put in writing and we will have to see how the courts will deal with this before committing anything to writing. The approach may be to suggest to the tenant towards the end of the tenancy that as they have been such good tenants you will pay them what you would pay your cleaners providing the property is left clean and in good condition.

The practical problem in giving a leaving bonus is if you attempt to use a section 21 eviction process. A smart lawyer may say the leaving bonus was a deposit and so defeat a section 21 claim. You maybe able to fall back on using section 8 eviction process but see what I said earlier about illegality in paragraph 2 (3), I have on occasions used both but you need grounds for section 8.

(12) Key Deposit

Charge for the keys or any other item e.g. furniture and buy it back at the end of the tenancy. This could be a useful approach especially when only a small deposit is taken but again as in options 10 & 11 above you need to be careful as the wording of the legislation could include the payment for the keys as being a deposit where the tenant is entitled to a refund on returning the keys. As in option 11 above you may need to be subtle about this and mention it in passing.

A key deposit would be useful to me as so many of my tenants abandon their tenancies taking the keys. A deposit for the return of the keys may encourage some to return them and let me know they have left. Again I doubt the taking of small deposit, if a key deposit was a ‘deposit’ for the TDS has been thought through. I may be tempted to try and see how the Custodial Scheme coped with a £20 deposit!

A Bonus

Finally, I am not saying I am superstitious but I try and not chance my luck I have not numbered it, here is another extra idea. Add a term to your tenancy agreement that you will require the payment of say £1000 towards dilapidations, if so required. As you are not taking the money it should be outside the TDS. Possibly the same could be achieved by taking and holding a cheque. The advantage of this over not taking any deposit is that you do not have to prove the damage, you will be claiming for a fixed sum of money and the tenant would have to disprove it was not required. This will only obviously work with financially sound tenants.


Until they have been tried out by someone else and seen to be accepted by the courts I would not try (5) (6) (7) (11) & (12) and do not recommend that the reader does either, they are too risky. With company lets I would restrict it to genuine cases only and all the other methods are a compromise but worth considering
I can think of no other method to avoid the TDS.

Don’t feel guilty about avoiding the TDS. There seems to be a view in some circles that landlords should jump to the orders of the government and voluntarily accept unreasonable legislation. I do not follow that view as you may have already gathered. Most of the landlords, who subscribe to obey every rule philosophy, do not live in the world which I inhabit but the leafy lanes of Surrey or other such places letting to tenants who on the whole also believe the law is there to be obeyed.

Those of us who have tenants who ignore the law except when it is to their advantage when it should be fully exploited using legal aid and sympathetic practioners. Where tenants believe society owes them a living without having to work for it, aided by council officials who see their roles as pro tenant and anti landlord. In that world different rules apply.

I, personally, feel I take enough risks without incurring more in untried TDS avoidance schemes so I would only take a deposit if I was 100% sure I had complied with the legislation or as I have done stopped taking deposits. It is a minefield.

So far as a landlord, I have found every black cloud has had a silver lining, let’s hope the TDS proves so for landlords who use it and for those who avoid it.

Jim Haliburton is a private landlord owning over a hundred properties, mainly HMO’s. He has written a book called ‘How to Become a Multi Millionaire HMO Landlord’ and runs courses on becoming an HMO landlord. His web site is HMODaddy.

25 thoughts on “Twelve Ways To Avoid The Tenancy Deposit Scheme (and How To Turn It Into A Marketing and Financial Advantage)

  1. Karl

    A thorough review of the tenancy deposit issues.
    I particularly liked the way that the non-legal elements were discussed as well as the legal (eg 1. deposits require the tenant to have some degree of fund management, which gives the landlord an idea of their suitability and 2. The psychological advantage of a deposit encouraging tenants to ensure they care for the property, to some extent)
    Useful information on how to deal with tenancy deposits.
    An article certainly worth reading by all landlords.

  2. Pingback: Successful Landlord spills the beans — property investors network

  3. Nicole

    My friend was taken to court by landlord for all of her £5000 deposit for damages, (she was only in the property 5 months) the judge said it should be no more than £1000 and referred them back to the the Deposit resolution to sort it out. 6 months later the Deposit resolution could not decide either, so 2 years on she is still with out her deposit. These schemes are a sham.

  4. paul

    could i take the first and last months rent with no deposit and still get my rent monthly thanks.paul

  5. Julie Forster

    If I didnt register the deposit with a scheme,but let the tenants use it as their last months rent, can they still take me to court, even though they have had their money back in effect?

  6. tim pearce

    hi every one , i had a tenant that gave me 2 k , deposit , she then refused to pay rent as she wasnt happy with the property , the property , was in good order , i asked her to sighn a comon law tenent agreement wich she refused , a common law tenent agreement does not comply with the deposit scheem , she refused to , pay rent so i then , paid morgage out of her deposit , after 2 half months , she still refused to sighn , i then asked her to leave , as she wasnt happy , she left the property , then took me to court , the court said the agreement i tryied to get her to sighn , complied with tenent deposit scheem , this has just cost me , 10 k including cort costs , this is a grey area , a common law tenent agreement is never talked about , as any one , got any ideas how to stop these crook judges and tenents , this is alot of money to me , we should all be more aware of wot we can and carnt do , be carfull tim

  7. tim pearce

    hi every one , i had a tenant that gave me 2 k , deposit , she then refused to pay rent as she wasnt un happy with the property , the property , was in good order , i asked her to sighn a comon law tenent agreement wich she refused , a common law tenent agreement does not comply with the deposit scheem , she refused to , pay rent so i then , paid morgage out of her deposit , after 2 half months , she still refused to sighn , i then asked her to leave , as she wasnt happy , she left the property , then took me to court , the court said the agreement i tryied to get her to sighn , complied with tenent deposit scheem , this has just cost me , 10 k including cort costs , this is a grey area , a common law tenent agreement is never talked about , as any one , got any ideas how to stop these crook judges and tenents , this is alot of money to me , we should all be more aware of wot we can and carnt do , be carfull tim

  8. jim

    if i had a private agreement between a friend no contract no reference checks and a loose arrangement to rent my house. but took £600 deposit and didnt register to use the tds? can the tennant sue me?

  9. Paul

    Hi, I am a private landlord and have been renting my house for well over 11 years now. Its seem that the Gov is trying its hardest to nail down genuine landlords like myself. I have read the above advice by Simon and greatly appreciate some of the options that are available.

    I have had numerous tenants all of whom have been great and there has been no problems when they have left re if any damage etc has been caused.

    My only query is that I have 3 individual tenants (all professional) with once contract between them. All paying different amounts each month.

    2 of my tenants I have given 2 months rent advance when they began their contract some 2/3 years ago and are happy to continue with this scheme, i.e. no form of deposit has been taken from them.

    As for the 3rd tenant who has been in my property for well over 8/9 years, I did take a deposit from him which has been documented on the tenancy agreement, which is refundable at the conclusion of the let whenever that may be. He is an excellent tenant and I am now unsure whether to give him back his deposit and say I would like a new amount as a form of 2 months rent advance towards his rent. This is a stupid idea but would appreciate any views / thoughts.

    Or, I could put his deposit into a new deposit scheme. Which, I am totally against.



  10. mery.dam

    i m planning to leave the property i am renting ast the end of the contract but i am 100% sure my landlord would not give me my deposit back or at lest he would take half of it towards decorating his property by claiming i did damage it , i came to know that my deposit is with the deposit scheme but i have no idea about my ID number… now if i want to move at the end of my tenancy i woud not have ebough money to pay my new deposit until the deposit decide when to give me my money back,can i not pay rent at end and abondan,in that case my landlord would get all the deposit from the sheme and no body will loose !
    what do you think guys ?

  11. Jez

    Lets say as a landlord you don’t put the deposit into a DPS account and the tenant finds out at the end of the tenancy. As long as you have had no problems and refund the full amount as required a judge would be very unlikely to award compensation as there has been no loss incurred by anyone? I read this on a landlords law blog written by a solicitor.

  12. Lesley

    My landlord registered my deposit when I moved in 4 1/2 years ago, then 3 months ago i had a letter from the deposit company telling me that it had been cancelled and my deposit was no longer protected. I have checked the othercompanies and it is not protected at all. Now he will not renew my tenancyat the end of august. I am fighting this all the way as i am happy here and do not want to leave. Now I find out that i dont have to as they have cancelled the deposit protection and i can also claim compensation of 3 times the deposit.

  13. carol

    i didn’t know anything about this deposit scheme, my tennants still have 6 months left of there contract am i too late too deposit it or insure it???

  14. Zack

    Hi, I am tenant, I moved out of the property 2 months ego, my deposit is with the DPS, and my landlord is not returning my deposit.
    I contacted the state agent where i have rented the property, they told me that, the landlord has disputed the return of the deposit.
    it’s a moth now since he disputed, but he didn’t contact me to ask what he wants or anything. i spoke to the state agent. they are saying that they have tried to contact the landlord, but cont get hold of him, they have lift voice messages, they still got no reply. and he is basically holding my deposit for no reason. what should I do? any info will be appreciated.

  15. Simon Zutshi

    Hi Carol,

    New regulations came in about deposit in April 2012. You must register all deposits now. If you have not done so, please do immediately.

    Kind regards


  16. hummer limo arlington

    Hi! I could have sworn I’ve visited this blog before but after looking at some of the articles I realized it’s
    new to me. Anyways, I’m certainly happy I came across it and I’ll be book-marking it and checking back regularly!

  17. J Ann

    I hope you can help. After being in our property for just over 3 years on an Assured Shorthold Tenancy Agreement (is this still valid) , our tenants have handed in their one month’s notice at the end of Oct 2012, to leave by Nov 30 2012. A few days ago with only 12 days left before they move out, they asked if their deposit was with an agency. This was the first we (and they) had ever heard about such schemes, and so we Googled and found out about them. Anyway, they now want us to put the deposit into one of these schemes even though they will be moving out in 9 days time and have said they need their deposit immediatley for their new place.(We suspect they are only worried about their deposit now, because they are likely to leave it in a bad state)
    We will happily do this straight away, if those in the know say it would be best. What are your thoughts ?

  18. anonymous tenant

    Hi- I found this article very informative, and in a way it has given me real insight what to expect of the return of our money. I am not keen to comment on the case details until the ADR process (and by the sound of it the inevitable lawsuit) has been completed. I am ready to sue the agency in question, 5 months after moving out and leaving the property in outstanding condition the matter has moved from requirement to return the money to a case of I want to hurt whoever ‘stole’ my money.

  19. Dee

    I stupidly allowed a friend to let my property on 11/6/2011 and as she said she could not afford a deposit I allowed her to move in without this. She was unwilling/avoidant re signing the original/new contract. I informed her of the need to increase the rent last year which she is refusing to do. I now have issued a Section 21 notice but I don’t know how the court will view the fact that she has refused to sign the original AST or pay a deposit? I could not register the deposit as she did not pay it! I was slow to act as I trusted her and I was very ill in June of last year when the contract needed to be renewed. She has indicated she will move out voluntarily in March 2013 but I am not sure if I can trust her on this as she has reneged on other agreements. She is in arrears in the rent (less than 2 months so I can’t seek to possess under Sec 8) and more significantly in utility bills. Any advice before court proceedings would be welcome