Introduction
This article explains how Tenancy Deposit Schemes will affect both tenants and landlords. It summarises the changes that are required and how each party’s rights have been affected by the introduction of the scheme.
From 6 April 2007 a new law governing housing deposits has come into force affecting many thousands of property landlords, letting agents and tenants. Each year residential landlords take deposits worth about £1.2bn from tenants to secure them against damage to the rented property and contents. From April 2007, all deposits (up to the level of £25,000) taken by landlords and letting agents (for Assured Shorthold Tenancies in England and Wales), must be protected by a tenancy deposit protection scheme. The new tenancy deposit law will be introduced to give more protection to tenants by preventing landlords and letting agents from unfairly withholding a tenant’s deposit. The scheme protects all Assured Shorthold Tenancies in England and Wales (covering most tenancies since 1997).
Essentially the change will compel a landlord to hand over deposits to a third party or have an insurance scheme cover it.
Landlords will still be able to make deductions for damage but in the case of a dispute the third party or insurance company will act as the arbitrator and pay out money owed to tenants.
The landlord’s costs of insurance scheme membership and the premium may be passed on indirectly to tenants by means of increased rents. This is obviously not an intended consequence and is the unfortunate price tenants must pay in order for their deposit to be safeguarded.
Key to the success of the scheme will be the preparation and agreement of a full and detailed inventory of the property and contents at the commencement of the tenancy. It is not realistic to expect every landlord and tenant to agree and there will be plenty of work for independent inventory clerks.
What is it?
The Tenancy Deposit Protection ensures:
Tenants get all or part of their deposit back (if they are entitled to it);
Any disputes between tenant and landlord or agent will be easier to resolve;
Landlords and letting agents who do not protect tenancy deposits will have to pay their tenant back three times the deposit.
What is the process?
Start of a new tenancy: at the beginning of a new tenancy agreement, the tenant pays the deposit to the landlord or agent as usual.
Within 14 days the landlord or agent is required to give the tenant details about how their deposit is protected including:
The contact details of the tenancy deposit scheme;
The contact details of the landlord or agent;
How to apply for the release of the deposit;
Information explaining the purpose of the deposit;
What to do if there is a dispute about the deposit.
If you are a tenant, and you don’t receive this information, just ask.
What are Tenancy Deposit Schemes?
The schemes will allow tenants to get all or part of their deposit back (when they are entitled to it) and encourage tenants and landlords to make a clear agreement from the start on the condition of the property.
The schemes will;
Allow tenants to get all or part of their deposit back when they are entitled to it;
Make any disputes easier to resolve;
Encourage tenants and landlords to make a clear agreement from the start on the condition of the property (i.e. an agreed inventory).
There are two types of tenancy deposit protection scheme available for landlords and letting agents (insurance-based schemes and custodial schemes). All schemes provide a free dispute resolution service.
Insurance based schemes
The tenant pays the deposit to the landlord;
The landlord retains the deposit and pays a premium to the insurer
Within 14 days of receiving a deposit the landlord or agent must give the tenant the details about how their deposit is protected including:
The contact details of the tenancy deposit scheme selected;
The landlord or agent’s contact details;
How to apply for the release of the deposit;
Information explaining the purpose of the deposit;
What to do if there is a dispute about the deposit.
At the end of the tenancy:
If an agreement is reached about how the deposit should be divided, the landlord or agent returns all or some of the deposit;
If there is a dispute, the landlord must hand over the disputed amount to the scheme for safekeeping until the dispute is resolved;
If for any reason the landlord fails to comply, the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.
Custodial schemes
The tenant pays the deposit to the landlord or agent;
The landlord or agent then pays the deposit into the scheme.
Within 14 days of receiving a deposit the landlord or agent must give the tenant the details about how their deposit is protected (as for insurance based schemes above) including:
The contact details of the tenancy deposit scheme selected;
The landlord or agent’s contact details;
How to apply for the release of the deposit;
Information explaining the purpose of the deposit;
What to do if there is a dispute about the deposit.
At the end of the tenancy:
If an agreement is reached about how the deposit should be divided, the scheme will return the deposit, divided in the way agreed by both parties;
If there is a dispute, the scheme will hold the deposit until the dispute resolution service or courts decide what is fair
The interest accrued by deposits in the scheme will be used to pay for the running of the scheme and any surplus will be used to offer interest to the tenant or landlord if the tenant isn’t entitled to it.
What if the landlord is not using the scheme?
You can apply to your local county court. The court can order the landlord or agent to either repay the deposit to you or protect it in a scheme. If your landlord or agent has not protected your deposit, they will be ordered to repay three times the amount of the deposit to you.
Moving out
At the end of the tenancy, check whether you are leaving the property and its contents in the condition in which it was let to you - allowing for fair wear and tear- and check that you have paid your rent and any other expenses. Then agree with your landlord or agent how much of the deposit should be returned to you.
Within 10 days you should have received the agreed amount of the deposit.
Information for landlords
The Tenancy Deposit Scheme came into force on 6th April 2007. If you have not protected a tenant’s deposit you will be ordered to repay three times the amount to the tenant.
Why protect deposits?
Deposits are protected to ensure:
Tenants get all or part of their deposit back, when they are entitled to it;
Any disputes between tenants and landlords or agents will be easier to resolve;
Tenants are encouraged to look after the property they are renting.
Who runs the schemes?
The Government has awarded contracts to three companies to run tenancy deposit protection schemes:
The Deposit Protection Service (DPS)
The DPS is the only custodial deposit protection scheme, is free to use and open to all Landlords and Letting Agents. The service is funded entirely from the interest earned from deposits held. Landlords and Letting Agents will be able to register and make transactions online. Paper forms will also be available should internet access be an issue. The scheme will be supported by a dedicated call centre and an independent dispute resolution service.
Tenancy Deposit Solutions Ltd (TDSL)
TDSL is a partnership between the National Landlords Association and Hamilton Fraser Insurance. This insurance-based tenancy deposit protection scheme enables landlords, either directly or through agents, to hold deposits. Letting agents can also join the scheme.
The Tenancy Deposit Scheme (TDS)
TDS is an insurance-backed deposit protection and dispute resolution scheme run by The Dispute Service that builds on a scheme established in 2003 to provide dispute resolution and complaints handling for the lettings industry. The new scheme enables letting agents and landlords to hold deposits.
Resolving disputes If a dispute occurs and no agreements can be reached about how much of the deposit should be returned, there will be a free service, offered by the scheme protecting the deposit to help resolve any disputes – the Alternative Dispute Resolution (ADR) service.
When a dispute occurs, and if landlord and tenant both agree to use the service to resolve disputes offered by their scheme provider, they are agreeing to be bound by its decision.
A landlord or tenant does not agree to the release of full or part of the deposit so ADR will be the default way in which to resolve a dispute. If there is a dispute, the scheme will continue to hold the amount until the ADR or courts decide what is fair.
Penalties for non-compliance Failure to protect deposits in this way will result in the landlord being forced to return the deposit to the tenant and a court can order the landlord to pay up to three times the amount of deposit if he remains in default at the date of any court order. In addition, landlords who break the rules will be unable to regain possession of their properties by the serving of a Section 21 Notice, or to enforce the terms of the tenancy agreement.
Net Lawman advice
Whether you are a landlord or tenant, ensure your lease agreement sets you up for a safe scenario. Make sure the document has provisions dealing with the tenancy deposit and what should happen to it, whether or not there is a dispute. Additionally, make sure the agreement contains a comprehensive inventory, which provide for notes on the state and condition of every item. We recommend both parties sign the inventory to say they have agreed with it.
If by chance you find some error of law or fact in any Net Lawman information page, do please tell us. We should also welcome your suggestions for new subjects for information pages. These notes:
Do not provide a complete or authoritative statement of the law;
Do not constitute legal advice by Net Lawman;
Do not create a contractual relationship;
Do not form part of any other advice, whether paid or free.
