Tenancy Deposit Schemes

Our guide to understanding the Tenancy Deposit Scheme and what it means for both landlords and tenants.

Most private landlords demand payment of a deposit by a tenant before or upon entering into a tenancy agreement. This is usually equivalent to one or two months’ rent and is a hefty sum, designed to protect the landlord should the tenant default on rental payments or cause other financial loss to the landlord.

With the risk nowadays, however, of landlords and managing agents entering into bankruptcy and insolvency, it is simply too dangerous for a tenant’s deposit to be held in their personal bank accounts without any protection, as was the practice before 6 April 2007. This practice also exposed landlords to the risk of tenants withholding the last month’s rent so as to retain an amount equivalent to their deposit if deductions were envisaged, leaving the landlord out of pocket.

The government, recognising these risks, introduced provisions in The Housing Act 2004 to ensure that tenant deposits are protected under a Tenancy Deposit Protection Scheme.    

Private residential landlords should therefore now be aware that they must always use a Tenancy Deposit Protection Scheme to safeguard any deposit paid in relation to ‘assured shorthold tenancies’ entered into or renewed after 6 April 2007.

The majority of private residential tenancies are assured shorthold tenancies as these enable landlords to recover possession at any time without cause after the first six months of the tenancy, provided they give tenants two months’ notice and the fixed term of the tenancy has expired. Indeed, from 27 February 1997, a landlord must serve a notice on the tenant before the tenancy is entered into, if s/he does not want it to automatically be an assured shorthold tenancy. The deposit protection provisions do not apply to lettings of commercial property, tenancies where the annual rent is greater than £25,000 or tenancies where the landlord is resident in the property, as these are not assured shorthold tenancies.

The provisions apply to any property rented out in England or Wales, even if the landlord is based overseas.

If the initial deposit was paid before 6 April 2007 but the tenancy is renewed after that date, the landlord must safeguard the initial deposit. If the prior tenancy was not renewed after 6 April 2007 but just continued to roll on as a periodic tenancy after that date, the requirement will not apply, as there has been no new assured shorthold tenancy.

A deposit is any amount of money paid in addition to the rent, as security for the tenant’s obligations. The term catches all such payments, including ‘cleaning fees’ and amounts added to the rent each month but not simply rent paid in advance, provided that the landlord does not use this for repairs/expenses and allows the tenant an equivalent rent free period at the end of the tenancy. Landlords are not permitted to evade the provisions by demanding non-monetary deposits.

There are two different types of Tenancy Deposit Protection Scheme and the government has awarded contracts to three companies to run the schemes. Each scheme is supported by a call centre and some schemes have facilities for administration (e.g. registration, paying in deposits) to be carried out on-line. The landlord has the choice of which scheme to use but this may in practice be dictated by whether he or she chose to use a particular managing agent.

Custodial Tenancy Deposit Scheme

With a custodial scheme, the deposit is held by the scheme itself in a separate designated account. No fees are payable by the landlord or managing agent as the scheme is funded by the interest accruing on the deposit held, or if the interest rate is too low, by the government.
There is only one government approved custodial scheme, called ‘The Deposit Protection Service’ and this may be used by all landlords and agents.

Where several tenants are renting the same property, separate deposits could be submitted to the scheme in respect of each tenant, with each deposit distinguished by the area of occupation i.e. room 1, room 2. This way, each tenant would retain full control over his or her own repayment. Alternatively, a single deposit could be submitted to the scheme for all tenants, with a lead tenant selected for correspondence purposes. The landlord/agent and tenants must agree on who is to act as the lead tenant. The lead tenant will have responsibility for agreeing with the landlord or agent the amount to be returned and for dividing any returned deposit fairly between the tenants. If a single deposit is submitted, it may only be returnable in full, so this option could cause difficulties if any tenants were to leave before the others.

Insurance Based Tenancy Deposit Scheme

Under this type of scheme, the deposit is held directly by the landlord or managing agent. It is secured through the landlord or agent paying a fee and insurance premiums to the scheme administrator, who must maintain adequate insurance to cover a failure by the landlord or agent to repay the deposit.

There are two approved insurance-based schemes; ‘The Tenancy Deposit Scheme’, aimed mostly at agents and ‘mydeposits’ (previously called ‘Tenancy Deposit Solutions Ltd’), aimed mainly at landlords.
The Tenancy Deposit Scheme is open to all landlords, but from 6 April 2009 it may  be used only by regulated agents. The premium is payable by way of an annual fee. There is a condition that an assured shorthold tenancy agreement under this scheme must contain certain stipulated provisions. 
Mydeposits is open to all landlords and agents. There is a one off joining fee and then an additional fee for each deposit, as well as an annual renewal fee.

Penalties and Requirements Under the Tenancy Deposit Schemes

The consequences of a landlord or agent failing to protect the deposit in one of the above schemes and/or failing to comply with any initial requirements of the schemes are severe. The tenant may take the landlord or agent to court to obtain compensation and the return or protection of the deposit.

If the court finds that the landlord or agent is in breach of their obligations, they will be ordered to pay a fine of three times the amount of the deposit to the tenant. Also, the landlord or agent will be prevented from being able to easily remove the tenant at the end of the tenancy by giving the usual two months’ notice (although they can still seek possession under any of the other grounds which apply to assured shorthold tenancies). The landlord or agent may be ordered either to pay the deposit to the tenant within fourteen days of the order or to pay it into a custodial scheme within fourteen days. Any non-cash deposit paid is recoverable from whoever is holding it. If the landlord or agent has corrected the matter by complying with the initial requirements at a later date, they may be let off. However, this is not guaranteed and  it would be very wise to keep within the deadlines stipulated in the Housing Act.

The Act also states that the landlord or agent must provide certain information to the tenant and to anyone who has paid the deposit on behalf of the tenant (e.g. a parent or relative), within fourteen days of the start of the tenancy. If they fail to do this, again they will not be entitled to end the tenancy by notice until the prescribed information has been supplied and the above penalties may apply. The prescribed information comprises:

• the name, address, telephone number, e-mail address and any fax number of the scheme administrator of the authorised tenancy deposit scheme applying to the deposit;
•  any information contained in a leaflet supplied by the scheme administrator to the landlord;
•  the procedures that apply under the scheme by which an amount in respect of a deposit may be paid or repaid to the tenant at the end of the shorthold tenancy;
•  the procedures that apply under the scheme where either the landlord or the tenant is not contactable at the end of the tenancy;
•  the procedures that apply under the scheme where the landlord and the tenant dispute the amount to be paid or repaid to the tenant in respect of the deposit;
•  the facilities available under the scheme for enabling a dispute relating to the deposit to be resolved without recourse to the courts ;
•  the amount of the deposit paid;
•  the address of the property to which the tenancy relates;
•  the name, address, telephone number and any e-mail address or fax number of the landlord;
•  the name, address, telephone number and any e-mail address or fax number of the tenant, including such details that should be used by the landlord or scheme administrator for the purpose of contacting the tenant at the end of the tenancy;
•  the name, address, telephone number and any e-mail address or fax number of any person who has paid some or all of the deposit;
•  the circumstances when all or part of the deposit may be retained by the landlord, by reference to the terms of the tenancy; 
•  confirmation (in the form of a certificate signed by the landlord) that the information s/he provides is accurate to the best of his/her knowledge and belief and s/he has given the tenant the opportunity to sign any document containing the information provided by the landlord by way of confirmation that the information is accurate to the best of his/her knowledge and belief.

The scheme to which the landlord or agent registers the deposit will provide them with some of the above information, which should then be passed on to the tenant.

In addition to the general penalties listed above, an insurance-based scheme has additional powers against a landlord or agent. The administrator can order the landlord or agent at any time to pay the deposit as s/he directs, direct that it can no longer be held under the scheme, direct that the landlord or agent can no longer be a member of the scheme and/or pay the deposit to the tenant and sue the landlord or agent for the amount. If the tenancy continues and the scheme orders that the deposit can no longer be held under an insurance-based scheme, the landlord or agent must quickly transfer it to a custodial scheme or pay it back to the tenant, in order to avoid any of the general penalties.

Return of Tenancy Deposit

If both parties are in agreement as to the amount to be returned, this must be paid to the tenant within ten days of the tenancy ending. A landlord is entitled to set-off any financial losses incurred as a direct result of the tenant having damaged or removed the landlord’s property. This does not include damage caused simply by ‘fair wear and tear’ i.e. normal use by the tenant over a period of time, or redecoration costs where a complete redecoration obligation was not a term of the tenancy agreement. There are rules regarding which costs can be deducted and it is good practice for a landlord to always create an accurate inventory and schedule of condition with ‘before and after’ photographs as evidence of any damage claimed. If the parties cannot agree upon the amount to be returned, or the landlord/agent simply does not return the deposit at all, then each scheme has its own method of resolving the issue.

Custodial scheme

If there is no dispute as to the amount to be returned, this will be repaid to the tenant (and/or the landlord if a deduction is agreed) directly by the scheme administrator upon the parties’ application. The payment must be made within ten days of receipt by the scheme of the notification. The tenant (and/or landlord) may also receive some of the accrued interest on the deposit held, which has not been used to finance the running costs of the scheme. The specified interest rate is a rate equivalent to the base rate of the Bank of England less a certain percentage, currently 2.32 percent.

If the parties cannot agree, they may either both consent to use of the scheme’s Alternative Dispute Resolution (ADR) procedure (see below), or apply to the court to settle the matter. Once a judgment or decision is made, the scheme must pay out within ten days from and including receipt by it of the notification.

If one of the parties cannot be traced or will not communicate with the other, the other party can make a unilateral claim for repayment to the scheme, provided that fourteen days have passed since the end of the tenancy and the following conditions are satisfied. The applicant must have no means of contacting the other party about the proposed split of the deposit or have received no response from them in relation to this. The applicant must believe that he or she is entitled to the amount claimed and for the landlord, this amount must be based on unpaid rent or other amounts due from the tenant or damage to his/her property or the premises by the tenant. The applicant must also submit a statutory declaration containing prescribed information. This must be sworn or affirmed in the presence of a Solicitor/Commissioner for Oaths or Magistrate and must be filled out completely. Therefore, it is advisable to have it prepared by a legal adviser. If the landlord or agent is the applicant, it must also include the basis on which the amount of the deposit claimed is calculated, with particulars of facts relied on to justify that amount. Upon receipt of an application, the scheme must notify the other party and, if there is still no response, refer the matter to ADR or to the court.

Insurance scheme

If both parties are in agreement, the deposit must be paid directly by the landlord or agent to the tenant within ten days of agreement being reached. The tenant is not entitled to receive any interest on the deposit (the landlord or agent is likely to have used this in paying the premiums in any case).

If the parties are not in agreement, the landlord or agent should pay any disputed amount into the scheme and the remainder to the tenant. If s/he does not do this, the scheme will pay out to the tenant but only after a court order is obtained against the landlord or agent, or the issue is resolved through ADR.

If a managing agent is involved, it may well receive and hold the deposit from the tenant instead of the landlord. Landlords should be aware, however, that even if this is the case, they will still retain ultimate responsibility for protecting the deposit. If the agent then goes into insolvency, having spent the deposit, and simply ‘disappears’ overnight, the tenant may have to sue the landlord instead, even though the landlord has done nothing wrong and has never had access to the deposit. (The scheme rules should be checked as to how documents may be served on either party). If judgment is found in favour of the tenant and the landlord fails to honour the court order, the tenant may forward it to the deposit protection scheme for it to pay out. A tenant should be aware that an insurance-based scheme will only cover the initial amount of the deposit paid and not any court fees that the tenant will have incurred in bringing the claim, or interest included in the judgment. The tenant may therefore be out of pocket as a result of this procedure. The scheme will then seek to recover the amount that it has paid out from the landlord so the landlord may also be out of pocket, through no fault of his/her own. The landlord must be careful that the tenant is not wrongly seeking to recover sums in respect of the deposit twice, i.e. from the landlord in accordance with the court order and then from the scheme. It is essential that, if the landlord does want the deposit to be held by an agent, s/he keeps a close watch over its activities and regularly monitors its solvency, for example through conducting searches at Companies House.

Alternative Dispute Resolution

One of the main aims behind the schemes was to enable any disputes to be resolved through Alternative Dispute Resolution (ADR) without going through the courts, thus avoiding court fees and reducing the time and cost involved. Each scheme therefore offers a free impartial ADR procedure (although the parties may still wish to pay for independent legal advice on the best course of action to take). If either party does not agree to the ADR procedure, then there is no option but to go to court. If ADR is chosen, the outcome will be binding and it is not then possible to refer the matter to court. As the tenant is unlikely to be able to recoup any court fees unless the landlord agrees to pay these out, ADR is an attractive option. It will also benefit the landlord, as court fees will not be included in any decision against him/her. Any deposit that is found to be refundable should be paid to the tenant within ten days of the issue being resolved through ADR or a court judgment. If an insurance-based scheme has to pay out, it must do so within ten days of being notified of the judgment.

Whichever method of resolving the dispute is employed, evidence will be required. The burden of proof will be on the landlord to show that he or she is entitled to claim some or all of the deposit so he or she should be especially careful to gather as much evidence as possible to support the claim. Such evidence should include:

• a copy of the tenancy agreement signed and dated by both parties;
• a copy of any letting agent’s terms and conditions of business;
• an initial inventory and schedule of condition (with photographs or DVDs where possible) signed and dated by both parties at the start of the tenancy;
• a further inventory and schedule of condition (with photographs or DVDs where possible) signed and dated by both parties at the end of the tenancy;
• a schedule of cost detailing any works claimed by the landlord together with estimates, invoices and receipts produced by an independent third party;
• a rent book or statement of account, if relevant;
• copies of any correspondence between the parties or notes of any discussions held;
• any other relevant information.
All evidence, including photographs and DVDs, should be signed and dated, preferably by both parties if possible.

Other Points to Consider

If the landlord sells his interest under the tenancy, negotiations should include what is to happen to the deposit and how to apportion any deductions. The seller should ensure that all the details of the scheme are given to the buyer and the buyer or his/her agent should register with the scheme. Then, if an insurance-based scheme is being used, the seller or his agent should arrange for the transfer of the deposit to the buyer or his/her agent. This will enable the seller to obtain a clean break from the property. Both parties should ensure that both the scheme and the tenant are kept well informed about the sale and are provided with all necessary information.

Conclusion

As a landlord, it is imperative that if you require a deposit, you comply with the above provisions of the Housing Act. You should read the terms and conditions for each tenancy deposit scheme carefully, in order to choose the most appropriate one and to ensure that you comply with its terms or rules (these are available on-line from the schemes’ websites). Schemes may also change and update their terms so it is important that you review them periodically. Legal advice is recommended before you enter into the tenancy in order that you fully understand all your obligations, meet all prescribed deadlines and ensure that the documentation that you are required to supply contains all the information that is stipulated under the Act.

A comprehensive, legally drafted tenancy agreement is recommended to protect your property, especially if you are using The Tenancy Deposit Scheme, as this requires certain stipulated clauses to be present in the agreement. You should ensure that the agreement contains adequate obligations as to cleaning and repair and instructions on how the premises should be left at the end of the tenancy. As an alternative, or in addition to obtaining a deposit, landlords could consider obtaining guarantors or insurance to cover unpaid rent and/or the costs of repair or replacement. If guarantors are to be used, adequate credit checks and references should be obtained, to ensure that they will be able to meet any financial obligations as a guarantee is only as good as the person giving it.

If you do find yourself in a dispute, in court or through ADR, it is recommended that you obtain legal advice so that you can properly protect your position.

As a tenant, you should always find out which scheme is being used and request the necessary paperwork. If you do need to go to court to ensure that your deposit is protected or to dispute the amount to be returned, you should obtain legal advice before doing so.