TENANCY DEPOSIT SCHEME

Wednesday, 5 September 2007

The Tenancy Deposit Scheme came into effect on 6th April 2007.

This summary of the scheme is intended to assist our Landlords. For further information please refer to the following websites:

* www.communities.gov.uk - Dept. of Communities and Local Government
* www.depositprotection.com - Custodial scheme
* www.tds.gb.com - Insurance scheme
* www.mydeposits.co.uk - Insurance scheme

Position prior to April 2007

Prior to April 2007 landlords and their agents were free to decide whether to require deposits from their tenants. The vast majority did require some form of deposit, the amount normally being between 4 and 6 weeks rent. Where an agent was managing a property this sum would have been held by him as either agent for the landlord or as stakeholder between the parties. Landlords might also hold deposits for their tenants and there were no legal requirements as to how such monies should be held. Unless the agent or landlord was a member of a body that provided dispute resolution for deposits, such disputes ultimately had to be resolved in the County Court

There was criticism of this lack of regulation and a decision was made by the Government to include legislation for the protection of tenancy deposits, duly enacted within the Housing Act 2004. The Government has awarded contract to 3 companies to run tenancy deposit protection schemes from 6th April 2007. Brief details of the schemes are as follows:

Custodial Deposit Scheme

In this scheme, the tenant pays the deposit to the landlord or agent who then pays the deposit into the scheme. This is the key difference with the insurance scheme (see below). Within 14 days of receiving a deposit, the landlord or agent must give the tenant information about the scheme being used. 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 the landlord depending on the terms of the tenancy agreement. This scheme has no direct cost to either the landlord or tenant.

At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, they will tell the scheme, which will return the deposit, divided in the way agreed by both parties. However, if there is a dispute, the scheme will hold the amount until the dispute resolution service or courts decide what is fair. The deposit must be returned within 10 days of the end of the tenancy provided the landlord and tenant have agreed the amount.

Insurance based Deposit schemes

The tenant pays the deposit to the landlord or agent who retains the deposit and any interest earned on the deposit and any interest earned on the deposit subject to the terms of the tenancy agreement. The landlord or agent pays a premium to the insurer. The cost of using the scheme will be borne by the landlord or his agent in terms of both an annual fee and a per deposit fee. As with the custodial scheme, within 14 days of receiving a deposit, the landlord or agent must give the tenant information about the scheme being used. There are to be two insurance based schemes. At the end of the tenancy, if the landlord or agent and tenant agree how the deposit should be divided the landlord 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 or agent fails to comply, the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.

Alternative Dispute Resolution Services

Each scheme will contain an Alternative Dispute Resolution (ADR) service. When a dispute occurs, and if the landlord and tenant both agree to use the service, they will also agree to be bound by its decision with no recourse to the courts. Disputes will only go to the courts if the landlord and tenant do not agree to use the ADR service. ADR will be free of charge to the landlords and tenants.

In the custodial scheme, where a landlord or tenant does not co-operate to release the deposit and do not agree to resolve the dispute through DR or court action, then ADR will be the default way in which to resolve a dispute. In the insurance based scheme, where the landlord is in contact with the scheme but is refusing to co-operate with the scheme in terms of choosing ADR or the courts, it will mandatory for the case to be referred to the scheme for resolution through its ADR service. 

Sanctions

There will be two sanctions that can be used against agents or landlords who do not comply with the requirements of the Deposit Scheme:

1. They will be unable to use section 21 ‘notice only’ in an application for possession. However, under Tenancy Deposit Protection, the landlord is unable to regain possession of the property using the usual ‘notice only grounds’ if the deposit has not been safeguarded and the prescribed information passed onto the tenant within 14 days of the landlord receiving it.

2. Tenants can apply for a court order requiring the deposit to be safeguarded or the prescribed information to be given to him about the scheme in which the deposit is safeguarded. Where the court believes that the landlord has failed to comply with these requirements, or the deposit is not being held in an authorised scheme, the court must either order the landlord within 14 days of the making of the order to repay the deposit; or order the landlord to pay the deposit to the custodial scheme administrator. The court must also order the landlord to pay to the tenant a fine of 3 times the deposit amount within 14 days of the making of the order.