As a consultation ends on tenants’ deposits, landlords must get ready for a new regime later this year

Aconsultation period on the thorny subject of tenancy deposit protection draws to an end on February 1.

It will be some weeks before the results are known, and these will provide some important detail. For example, one of the most important issues raised in the consultation paper was whether inventories should be mandatory, and if so, should standardised Government forms be used.

However, what we do know is that from October 1 this year, it will be illegal for either landlords or agents to accept tenants’ deposits unless they belong to an approved scheme – either one protected by insurance or a custodial scheme whereby a third party holds the money.

Both types of scheme must offer independent or Alternative Dispute Resolution (ADR) services.

The consultation paper says the average deposit is around £477 and that 17% of tenants feel that all or part of their deposit is unfairly withheld when the tenancy ends. There is evidence that some tenants withhold their final month’s rent in the expectation that they won’t get their deposits back.

Currently, the only redress open to aggrieved tenants and landlords is via the small claims court, which can be a lengthy and expensive business.

The objective of the new Tenancy Deposit Schemes is to handle the resolution of disputes with speed and objectivity.

But how necessary are they? Bodies like the Association of Residential Letting Agents maintain that landlords who withhold deposits unfairly are a big problem. The RLA’s Chris Town disagrees, saying that good landlords are being forced to join tenancy deposit schemes because of a small number of rogue landlords.

Why withhold?

Why withhold? With 11% of all households in England living in private rental accommodation (a total of 2.3 million tenancies) and 9% in Wales (115,000 households), the number of tenants is growing.

Studies show that where deposits are withheld, cleaning is the top reason (35%), then damage (26%), unpaid rent (7%) and tenants’ other unpaid bills (5%). But an astonishing 16% of landlords give no reason for withholding deposits.

Over half (58%) of tenants who had had deposits withheld felt that the landlord had been unfair. However, research also shows that 70% of all deposits are returned in full, 19% are partially withheld and 11% wholly withheld.

Voluntary scheme

Tenancy deposit schemes are not new. A voluntary pilot scheme was launched in March 2000 by the Independent Housing Ombudsman, but there was slow take-up.

The official line is that the Government therefore decided to introduce legislation for the compulsory protection of tenancy deposits, under the current Housing Act.

Currently, a voluntary tenancy deposit scheme is in operation, but it is only open to letting agents who belong to the Association of Residential Letting Agents (ARLA), the National Association of Estate Agents (NAEA) and Royal Institution of Chartered Surveyors (RICS).

It is not open to landlords or to letting agents who belong to the National Approved Letting Scheme or who are outside the three professional bodies. This voluntary TDS is one of the schemes pitching to be ‘recognised’ by the Government, a process which started last summer and is continuing this year.

Shorthold tenancies

Shorthold tenancies The first point is that the law does not require landlords (or agents) to take a deposit. However, if you do, you MUST belong to an authorised scheme.

The second point is that the use of schemes only refers to deposits taken in relation to assured shorthold tenancies.

From October 1

So, what happens to your tenancies on or after October 1? It is clear that when you are taking on new tenants and starting a new agreement, the deposit must be protected by an approved scheme.

If you have existing AST tenants, but create a new shorthold tenancy agreement at the end of their initial term, then you must from that point on ensure that the original deposit is protected.

If, however, a tenancy which began before October 1 continues as a periodic tenancy at the end of the six months, and no new tenancy agreement is created, then the deposit does not have to be protected.

Types of scheme

Custodial schemes will be open to all landlords. They will be free, with all tenancy deposits banked in a single account. The interest will fund the running costs of the scheme. At the end of the tenancy, the landlord (or agent) will have to agree with the tenant if the deposit is to be returned or retained or whether part of it should be retained.

If there is agreement, then the scheme administrator returns the sums involved to the tenant and landlord.

If, however, there is dispute over, say, £200, then this amount is retained by the scheme administrator until resolution.

Resolution can be by the ADR, or, if the parties involved refuse to use this, a court.

In the other type of scheme, which is insurance-backed, landlords will be able to hold deposits.In the event of a dispute at the end of the tenancy, the landlord will have to hand over the disputed sum to the scheme administrator within 10 days, and the administrator will hang on to it until resolution, as above.

Accruing interest

It is worth noting that accruing interest rates may also be paid back to the tenant.

What is not yet clear is at what stage the ADR procedure would be used. Also, if the tenants and landlords did not want to use the ADR, when would they go to court?

Nor is it clear how much it would cost to belong to an insurance-backed scheme.

Much of the consultation focuses on the documentation that will be used. Again, we await guidance. However, it is clear that tenants will have to be given details in writing as to how and where their deposits are being protected within 14 days.

Failure to do so means that the tenant can go to the county court to obtain these details, and the court could order the deposit to be repaid or put into a custodial scheme.

At worst – and it seems this would be when the court finds that the landlord is not a member of any scheme, or has failed to give details of how the deposit was being protected – then the court must order the landlord to pay the tenant a sum equivalent to three times the deposit.

A further sanction is that if a landlord isn’t in a scheme or fails to give tenants details about the scheme, it will not be possible to regain possession using a section 21 notice.