TENANCY DEPOSIT SCHEMES

What are Tenancy Deposit Schemes?

• Tenancy Deposit Schemes, introduced by the Housing Act 2004, are schemes designed to safeguard deposits paid by tenants in connection with Assured Shorthold Tenancies ("AST").
• As from 6 April 2007, all deposits paid by tenants must be protected by a government-authorised scheme. The consequences of non-compliance by landlords and agents are severe!
• The purpose of the schemes is to protect deposits paid by tenants and promote quick and cost effective resolution of disputes that so commonly arise.

If a landlord (or agent) fails to safeguard a deposit with an authorised scheme or fails to give the tenant the appropriate information about the scheme then:

• the tenant can apply to the Court for an order seeking repayment of the deposit or an order compelling compliance.
• the Court must also order the landlord to pay the tenant a fine equivalent to three times the deposit, which must be paid by the landlord within 14 days.
• The landlord's ability to regain possession is also hindered by non-compliance. Currently, a landlord of an AST can regain possession of his property if he serves the requisite notices pursuant to the Housing Act 1988. If a landlord fails to comply, he will be unable to regain possession of the property by serving those notices until he has complied.

The new legislation will apply to any deposit taken from a tenant (by either the landlord or agent) for an AST that either commences or is renewed on or after 6 April 2007.

• An AST is a tenancy granted by a Landlord:
  • to a tenant that is an individual;
  • for exclusive possession of a residential property that the tenant will occupy as his only or principal home;
  • at a rent of not more than £25,000 per annum.
    
• The new legislation will not apply to:
  • periodic tenancies that come into existence after expiry of a fixed term AST, as long as the fixed term commenced prior to 6 April 2007.
  • lettings to companies;
  • lettings of commercial property; and
  • certain lettings of residential property at low rents.
    
• If a landlord wishes to avoid being caught by the new legislation, he can opt either not to take a deposit or alternatively require the tenant to provide a guarantor in place of a deposit. Simply attempting to disguise taking a deposit by, for example, renaming the deposit, will not avoid the legislation.

There are two types of scheme permitted by the legislation: one is a custodial scheme and the other an insurance scheme.

The scheme is administered by The Deposit Protection Service and open to both landlords and agents alike. The key feature of the custodial scheme is that the scheme administrator holds the deposit for the duration of the AST. This allows the scheme to be free because it is funded by the interest earned upon the deposits held by the scheme.

• At the commencement of the AST the tenant pays the deposit to the landlord, who pays the full amount into the custodial scheme. In the case of renewals, the deposit will be paid into the custodial scheme by the landlord immediately upon renewal of the AST.
• Within 14 days of receiving the deposit, the landlord or agent must provide the tenant with prescribed information about the scheme.
• At the end of the tenancy, if the landlord and tenant have come to an agreement about how the deposit is to be apportioned, they notify the scheme and the scheme must, within 10 days of receiving notification, distribute the deposit. It should be noted that the deposit can only be returned electronically or by cheque.
• If the landlord and tenant cannot agree upon how the deposit is to be apportioned, the parties will submit the dispute to the alternative dispute resolution service ("ADR") provided by the scheme. Alternatively, either party may apply to the Court to determine how the deposit is to be apportioned.

The insurance scheme allows the landlord or agent to hold the deposit for the duration of the AST. This is the key difference between the custodial and insurance schemes. There are presently two government authorised providers of the insurance scheme. They are Tenancy Deposit Solutions Ltd (primarily for private landlords) and The Tenancy Deposit Scheme (focussed more for agents).

• At the commencement of the AST the tenant pays the deposit to the landlord. The landlord (or agent) retains the deposit and pays a premium to the scheme.
• Within 14 days of receiving the deposit, the landlord or agent must provide the tenant with prescribed information about the scheme being used.
• At the end of the tenancy, if the landlord and tenant reach agreement about how the deposit is to be apportioned, the landlord must pay the agreed amount to the tenant within 10 days of reaching agreement.
• If there is a dispute about how all or part of the deposit is to be apportioned, the landlord must pay the disputed amount into the scheme. The parties will then submit the dispute to the ADR service provided by the scheme or alternatively, either party may apply to the Court to determine how the deposit is to be apportioned. It should be noted that in the absence of the parties agreeing to submit the dispute to ADR or the Court, ADR will be the default method of resolving the dispute.
• If the landlord fails to pay the disputed amount of the deposit into the scheme, the insurance element of the scheme will pay the deposit to the tenant and the insurer will then seek to recover the deposit from the landlord (or agent).

• The first step is to consider which scheme best suits your requirements. We are happy to assist you with the selection process. Once you decide which scheme is right for you, you should then register with that scheme.
• Your AST agreement will need to be amended to take account of the scheme's requirements. We recommend the agreement contain comprehensive provisions about the tenant's obligations and clearly set out what deductions can be made from the deposit. We also suggest that the agreement make provision for an inventory and schedule of condition to be undertaken at the commencement and termination of the AST.

Should you require any guidance or assistance, please contact me. SANJAY CHANDARANA