All deposits taken for tenancies which commenced after 6th April 2007 with an annual rent of up to £25,000 must be protected by a government-authorised tenancy deposit scheme.

There are three schemes with which the deposit can be protected.  The Deposit Protection Service (DPS) is the only scheme which is free to use (custodial-based).  The deposit is paid in and the scheme is funded by interest earned on the deposits they hold.  The other two schemes are insurance-based, meaning that the landlord holds the deposit but pays an insurance premium to guarantee the tenant their deposit back when they are entitled to it.  These schemes are Tenancy Deposit Solutions Ltd. (TDSL) and The Tenancy Deposit Scheme (TDS).

Within 14 days of receiving the deposit, the landlord or agent must supply details ("prescribed information") of how the deposit is being protected, how to apply for its return and what to do if there is a dispute involving the deposit.  At the end of the tenancy, both landlord and tenant must agree how much of the deposit is to be returned to the tenant.  If an agreement is not reached, a dispute is opened, and the disputed amount of deposit, if not already done so, must be handed over to the deposit protection scheme.  The schemes then hold the deposit until the dispute is resolved.

This legislation was introduced in order to encourage landlords and tenants to make clearer agreements at the start of the tenancy including a property inventory check in and check out at the end of the tenancy.  Because both parties are required to agree on any deposit deductions, having an independent third party (an independent inventory clerk) make a full comprehensive inspection of the property, its fixtures, fittings and contents both at the beginning and end of the tenancy has become more important than ever.