Under the provisions of the Housing Act 2004 every landlord or letting agent that takes a deposit for an assured shorthold tenancy in England and Wales must join a tenancy deposit scheme. The new regulations come into effect from April 6, 2007.
It is common for landlords to take a dilapidation deposit from a tenant at the start of the tenancy. The deposit acts as a safeguard should the tenant cause any damage to the property. Some unscrupulous landlords are either very slow to return deposits at the end of the tenancy or make unfair deductions. The purpose of the new regulations is to ensure good practice in this area. The secondary purpose of the new regulations is to try and keep disputes between landlords and tenants out of the courts by encouraging alternative dispute resolution.
The tenant pays over the deposit (commonly one month’s rent) in the usual way when the tenancy agreement is signed. The landlord or letting agency has 14 days from the commencement of the tenancy to provide the tenant with details of the scheme that they are using (known as the prescribed information). If there is no dispute at the end of the tenancy the deposit will be returned to the two parties as agreed. If a dispute has arisen then the parties will be invited to make use of the alternative dispute resolution process that is provided free within the scheme. Should the parties opt for alternative dispute resolution they will be bound by its decision with no redress to the courts.
There are two types of scheme: insurance backed and custodial. Under insurance backed schemes the landlord or letting agency pays a premium to the scheme but retains the deposit. With custodial schemes the deposit is transferred to the scheme within the 14 day timescale and held in escrow.
In November 2006 three companies were awarded contracts by the UK government to run tenancy deposit schemes:
If a landlord or letting agent does not protect a tenant’s deposit and provide the tenant with the prescribed information within the 14 day timescale they will lose their right to regain possession of their property under the Section 21 (notice only) instrument. If the tenant applies to court for their deposit to be protected and it is shown the landlord has not complied with the scheme the court must order the landlord to pay the tenant three times the deposit amount within 14 days.
The new rules do not affect deposits taken before April 6, 2007; however, if a landlord renews with the same tenant for a new fixed term the deposit must be protected.
In June 2008, a case came before the Court in Cardiff where the letting agent failed to protect the deposit. The landlord had to pay the tenants compensation equal to three times the deposit of £900 (total: £2,700 + costs) and also refund the original deposit in full. In Gloucester in March, a landlord was required to take the same action even though there were rent arrears.
There are a number of “no deposit” or “zero deposit” schemes in operation that are provided by insurance companies. These can offer landlords protection without having to take a deposit.