Tenancy Deposit Schemes – What do you need to know

Introduction

Since the 6th April 2007 all deposits taken by landlords or letting agents for Assured Shorthold Tenancies (“AST’s”) in England and Wales must be protected by a Tenancy Deposit Protection Scheme.

There are two types of Tenancy Deposit Protection Schemes available for landlords and letting agents, namely insurance-based schemes and custodial schemes.  The schemes are intended to:-

(i)         Allow tenants to get all or part of their deposit back when they are entitled to it and make any disputes easier to resolve; and

(ii)         Encourage tenants and landlords to make a clear agreement from the start on the condition of the property.

The schemes are required to provide a free dispute resolution service.

What is a Deposit?

A deposit for the purposes of this legislation is any money intended to be held (by the landlord or otherwise) as security for the performance of any obligations of the tenant, or the discharge of any liability of his arising under or in connection with the tenancy.

Quite often to try and evade the rules on Tenancy Deposit Schemes, landlords or their letting agents will instead take a payment of rent in advance from the tenant.

On occasions the Court have accepted that this is a payment of rent in advance rather than a deposit, but on other occasions the Court have not accepted the position.  The Court have in effect deemed that the payment of rent in advance is really a deposit and should have been treated accordingly.

If a landlord is going to take a payment of rent in advance then to minimise the risk of a Court determining that it is really a deposit it is essential that the Tenancy Agreement is worded very carefully.  For example the Tenancy Agreement must make it absolutely clear that it is rent paid in advance.  If say there is a payment of three months’ rent in advance, then the landlord should not be allowed to demand or require any other payment of rent during the three month period.  It is also good practice to expressly state that the rent is non returnable (either in full or in part) and that in this example the tenant (provided he has kept up to date with payments of the rent) would not have to pay any rent for the last three months of the Tenancy Agreement.

If these sorts of clauses are included within the Tenancy Agreement, then this will greatly reduce the risk of a Court determining that a payment of rent in advance is really a deposit.

Insurance-based schemes

Here the tenant pays the deposit to the landlord, who retains it and pays a premium to the insurer.  Within 30 days after receiving a deposit the landlord or agent must give the tenant the details as to how their deposit is protected including:-

(i)         The contact details of the Tenancy Deposit Scheme selected.

(ii)         The landlord’s contact details.

(iii)        How to apply for the release of the deposit.

(iv)        Information explaining the purpose of the deposit.

(v)         Information and guidance explaining 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 then the landlord or agent returns all or some of the deposit.  If there is a dispute then the landlord must hand over the disputed amount to the scheme for safe keeping until the dispute is resolved.  If the landlord fails to comply then the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.

Custodial Schemes

Here the tenant pays the deposit to the landlord or agents and the landlord or agent then pays the deposit into the scheme.  Within 30 days of receipt the landlord or agent must give the tenant the details about how their deposit is protected as with insurance-based schemes (see above).

At the end of the Tenancy Agreement if an agreement is reached about how the deposit should be divided then the scheme will return the deposit divided in the way agreed by both parties.  If there is a dispute then the scheme will hold the deposit until the Dispute Resolution Service or Court decides what is fair.

The interest accrued by the 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 is entitled to it.

What happens if the landlord fails to comply with the rules of Tenancy Deposit Schemes?

If the landlord fails to comply, then an application can be made to the Court and possession of the property by the landlord can be barred.

Either the tenant or the party that agrees to pay the deposit, who may be a guarantor or former tenant, may apply to the Court if the landlord:-

(i)         Has not complied with the initial requirements of the scheme or has failed to give the tenant information about the scheme within the 30 day deadline; or

(ii)         Having claimed that a particular scheme applies, the scheme’s administrator has not confirmed this.

If either is proved then the Court must order the party that appears to be holding the deposit to repay it to the applicant (e.g. the tenant) or (where the tenancy has not ended) pay it into a designed account under the authorised custodial scheme within 14 days beginning on the date of the Order.

The 30 day deadline is an absolute time limit and a tenant can make a claim from 31 days after deposit payment if the requirements relating to deposit protection have not been met.

The penalties for non compliance apply even if the tenancy has ended or where the landlord or agent protects the deposit after the deadline.  The Courts will however take into account that protection has occurred when determining the level of penalty.

The penalty is a sum between 1x and 3x the deposit within 14 days of the Order date.

In addition a landlord who has not complied with the rules cannot use the accelerated possession proceedings triggered by serving a Section 21 Notice (two months’ notice) in respect of an AST.  If the landlord fails to provide the prescribed information then it can serve a Section 21 Notice once it has done so.  However failure to comply with the initial requirements cannot be remedied in the same way so that the landlord can serve a Section 21 Notice.  The only options are for the landlord to return the deposit (or an agreed sum) or the bringing and disposal of a claim by the tenant in respect of the landlord’s failure to comply with the scheme (which will obviously involve the landlord having to pay a penalty).

Investor/successor landlords

An investor or successor landlord purchasing a property will not be free from the penalty/sanctions referred to above even if it protects a tenant’s deposit where the seller landlord has failed to do so. In these circumstances it is advisable for the investor/successor landlord to obtain an indemnity from the seller for any loss it suffers as a result of the seller’s non compliance.

If you are either a landlord or a tenant that requires advice about a Tenancy Deposit Scheme and or possession proceedings for a residential property then please contact Daven Naghen on 01775 722261 or email daven.naghen@maplessolicitors.com or visit our offices or arrange an appointment at 23 New Road Spalding Lincolnshire PE11 1DH