Tenancy Deposit Scheme
As from 6 April 2007 all deposits paid by tenants in relation to shorthold tenancy agreements must be secured (within 14 days of receipt by the landlord) via a “tenancy deposit scheme”.
If a landlord fails to comply with this scheme he will not be allowed to serve Notice to regain possession of the premises. He will also be at risk of a significant fine.
The legislation permits the use of two types of scheme:
(a) Custodial(b) Insurance
The landlord decides which scheme he wishes to use.
Under this scheme the landlord pays any deposit received into an account set up by a government approved “scheme administrator”. The landlord will be entitled to receive interest on the sum deposited. At the end of the tenancy the parties should seek to agree how the deposit will be paid out – in which case the scheme must pay out the money in a maximum of 10 days. If a court makes a direction as to whom the money shall be paid – the scheme must comply with this.
Under this scheme a landlord may participate in a scheme – for which he must pay a fee. In these circumstances he is permitted to initially retain the deposit. The scheme administrator may direct the landlord to pay the money into the scheme at any time and if the landlord defaults his membership may be terminated. The scheme administrator must maintain insurance – to ensure repayment of the tenant’s deposit in the event of the landlord’s default
CUSTODIAL SCHEMETenant pays deposit to landlordLandlord pay deposit to schemeLandlord gives tenant “prescribed” information about scheme (14 days)Deposit divided between landlord and tenant at end of tenancy by agreement
If landlord and tenant unable to agree deposit held by scheme until directed by court or Arbitrator to pay out.
INSURANCE SCHEMETenant pays deposit to landlordLandlord retains deposit but pays premium to schemeLandlord gives tenant “prescribed” information about scheme (14 days)Deposit divided between landlord and tenant at end of tenancy by agreementIf landlord fails to comply insurance premium will repay deposit to tenant
If landlord and tenant unable to agree landlord must hand over disputed sum to the scheme for safekeeping until dispute resolved
In the event of a disagreement between the landlord and tenant at the end of the tenancy the scheme administrator will direct the landlord to pay the deposit into the scheme account within 10 days. Disagreements may be resolved either through the Small Claims Court or a voluntary alternative dispute resolution scheme.
The landlord must give information to the tenant confirming:-
- The authorised scheme dealing with the deposit.
- Compliance by the landlord with the terms of the scheme.
PENALTY FOR NON COMPLIANCE
If the landlord fails to fulfill his obligations at the outset of the tenancy the tenant may apply to the County Court who may order the immediate return of the deposit to the tenant. The court will also provide that the landlord must pay compensation to the tenant in the sum equal to three times the deposit. As mentioned above, whilst in default of the regulations the landlord may not serve a Section 21 Notice (seeking possession). Remember it may amount to a criminal offence and render the landlord liable to civil sanctions (injunction and compensation) if he seeks to gain possession of residential property by other means.
Landlords should consider: -
- Which option do they wish to adopt?
- Having decided landlords should ensure that they are set up to comply. Non-compliance will attract relatively significant and mandatory penalties. Small-scale landlords may wish to appoint reputable managing agents – and ensure that responsibility for compliance is contracted to that agent! Larger scale operators will wish to revise their management systems.
- We predict more (not fewer) disputes about deposits
Landlords may wish to take particular care about recording condition of the property pre and post tenancy either by contributing with specialist contractors or at least by securing photographic evidence of condition.