Unfortunately, you have a problem if you did not protect the deposit in a recognised scheme because under section 213 of the Housing Act 2004 as amended by the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 and by the Deregulation Act 2015, any such deposit has to be in a prescribed scheme.
It’s not relevant that they didn’t have a formal agreement and it’s not relevant that they were friends.
Failure to protect the deposit and provide the prescribed information within 30 days is an offence and you are liable to return the full deposit plus pay compensation of up to 3 times the amount of the deposit.
For these reasons, I would advise caution because the last thing you want is this tenant taking legal advice. These are not Small Claims Court matters, the claims are easy to bring an solicitors are crying out for the work because they are easy to bring and they will also get a couple of grand of costs on top of the amount of the deposit compensation.
You are on the hook for 6 years from the date when you should have protected the deposit.
Because of this failure to protect the deposit, depending on the amount of money involved, you might want to drop it rather than them potentially take legal advice which could cost you far more than your claiming from them.
If you had protected the deposit, my advice to you would be completely different.
I’m sorry, I know it’s not the answer you wanted.
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