All about tenancy deposits

This is the fifth in a series of 10 articles written by specialist landlord & tenant solicitor Tessa Shepperson, founder of the online Landlord Law Service.

All about tenancy deposits

Most landlords like to take a deposit.  It gives them a fund of money to use for any damage done to the property, and generally it is believed to give the tenants a stake in keeping the property nice.  They want to get their deposit money back!

Background to the tenancy deposit protection scheme

However there were many complaints in the past about landlords making unjustified deductions.  Or even just pocketing the money and refusing to return any of it – even if the property was left spotless.  Not all landlords did this of course; it was probably only a small percentage.  But it tainted the whole landlording profession, so that many tenants would just not pay their last month’s rent, because they had no confidence that their landlord would return their deposit to them, leaving the landlord with no fund for damage.

As a result of all this, a late amendment to the Housing Act 2004 added the requirement for all landlords to protect deposits in a tenancy deposit scheme – and this came into force on 7 April 2007.

How it works

The following are the main points of the scheme as it was designed to be:

• All landlords who take a deposit must protect it with a government authorised tenancy deposit scheme within 14 days of receipt
• The landlord also needs to serve a notice on the tenant giving prescribed information
• At the end of the tenancy the money is paid out, less any agreed deductions
• If the parties cannot reach agreement, there is a free arbitration scheme, or if they prefer, the parties can use the County Court.

The three schemes

As you probably all know there are three schemes:

• The Deposit Protection Service (DPS), website: www.depositprotection.com
• My Deposits, website:www.mydeposits.co.uk
• The Dispute Service (TDS), website: www.thedisputeservice.co.uk

The DPS is the ‘default’ scheme and is the only ‘custodial’ scheme.  It is free to use but the deposit money must be paid over to the scheme administrators to hold until the end of the tenancy.  Their running costs are covered by the interest earned on the money held.

The other two schemes are ‘insurance based’.  My deposits is aimed at landlords (although many agents use it too) and TDS is aimed at letting agents.

Landlords or agents need to join the scheme and then pay the fee to enable the deposit to be protected.  The money is held by the landlord or agent – if they run off with it, the tenant will get paid by the scheme (or rather their insurers).  The scheme will then attempt to recoup their losses by getting the deposit money back from the landlord.

All three schemes have very informative websites and you can find out more about how they all operate and what you need to do to protect a deposit, from their online information and FAQ.

Penalties for non compliance

If the landlord or agent fails to protect the deposit then there are two penalties:

• First, no section 21 notice can be served until the deposit is protected and the notice served
• Second the tenant can go to court and claim a penalty payment of three times the deposit sum, and get an order that the deposit be refunded to them or paid into the DPS.

Problems with the scheme

The tenancy deposit scheme has been running for nearly four years now.  On the whole it has worked well and millions of pounds are now protected by the three schemes.  However needless to say there have been some problems.  The following are a few of the most important.

Problems with agent insolvency

If an agent takes the deposit, both the agent and the landlord are liable irrespective of who caused the problem.  So if an agent fails to protect the deposit and then goes bust, the tenant can claim the deposit from the landlord.

Even if the agent did protect, if the deposit was protected with an insurance based scheme, and the agent has lost the money, the tenancy deposit scheme will expect the landlord to repay them for the cost of the deposit which they have had to pay the tenant, under their insurance.

So far as the landlord is concerned therefore, in this situation it may be better to insist that the money is paid over to the DPS, as then at least it cannot be lost.

TDS – financial and other problem

The TDS scheme which primarily looks after agents has had a few problems.  Part of this was due to the cost of paying out tenancy deposits when agents became insolvent, and as a result of this TDS will now only accept regulated agents as members.

However, they have also suffered due to the high cost of arbitrations (which are free to the user but which the scheme has to pay for), due to some agents using the system inappropriately.  For example, it seems that some have requested arbitrations over sums as small as £5!  Largely as a result of this, TDS have had to increase their prices substantially.

Problems with the 3 x penalty payment

The biggest problems however have been caused by the clauses in the Housing Act 2004 relating to the award of the penalty of three times the deposit sum.  Because of the confusing way it was drafted, many Judges have had difficulties interpreting it.

Last year a case finally reached the Court of Appeal (the case was called Tiensia v Vision Enterprises Ltd (t/a Universal Estates) and they decided that, despite the obvious intentions of the legislators, the only way they could make sense of the wording of the statute was to rule that the landlord can avoid the penalty if he protects the deposit at any time prior to the court hearing.

This of course means that some landlords may decide to only protect the deposit if their tenants challenge them about it.  However this may be unwise.  The case left open the question of what happens if the deposit is still unprotected after the tenancy has ended, and many lawyers have said that in this situation the tenants must be able to succeed in obtaining the award.  However we do not know for sure.

The future

There are a number of test cases working their way through the system and it is likely that one of these will eventually reach the Court of Appeal and then perhaps the Supreme Court so that things can be cleared up.

However it may be that things will be resolved earlier than that. It looks as if the Localism Bill is going to be used to amend the current rules.  However the bill is still in its consultation phase.  We will not know its final form and whether it does amend the regulations for some time.

If you want to keep up with developments, keep an eye on my blog, www.landlordlawblog.co.uk, as I will report any news I hear on this.

OTHER ARTICLES IN THIS SERIES

1. Have you got what it takes to be a landlord?
2. Make sure your property is legal before you rent
3. Check out your tenants or live to rue the day
4. Why you need to have the right tenancy agreement for your letting
5. You are here | All about tenancy deposits
6. How to increase rent the proper way
7. Help!  My tenant has stopped paying rent – what do I do?
8. I think my tenant has left, can I change the locks?
9. What do you do if your tenant won’t leave when their section 21 notice expires?
10. The various and wondrous ways that tenancies end.

Tessa Shepperson is a solicitor specialising in residential landlord and tenant law. She practices online via her web-site Landlord Law www.landlordlaw.co.uk and blogs at the Landlord Law Blog www.landlordlawblog.co.uk.

Share This Article