Tenancy deposit schemes – security for landlord and tenant

by Margaret Stevenson, housing law specialist with Brain Chase Coles solicitors
Email mstevenson@brainchasecoles.co.uk
Web www.brainchasecoles.co.uk

Letting a property can be financially worthwhile, and in today’s property market renting is becoming the favoured option for an increasing number of people. The latest development is the introduction of Tenancy Deposit Schemes.

If you are considering becoming a landlord or tenant, it is more important than ever to take expert legal advice before proceeding. Here are answers to some of the frequently asked questions about the new system to help you make an informed decision:

When did TDS’s come into effect?
Tenancy Deposit Schemes (TDSs) became compulsory under the Housing Act 2004 for all residential Assured Shorthold Tenancies created on or after 6th April 2007.

What are they for?
To protect a tenant’s deposit, and to resolve disputes before they reach the courts.

Do I have a choice?
Landlords can choose between a ‘custodial’ or an ‘insurance’ TDS. Under a custodial TDS the landlord is required to pay its tenant’s deposit to a Scheme Administrator within 14 days of receipt from the tenant who holds the deposit until the end of the tenancy. Under an insurance TDS the landlord retains the deposit but secures it by paying a fee and insurance premium to the Scheme Administrator. The Scheme Administrator will use the premiums to pay the tenant should the landlord default on the deposit.

Are there any other rules I should know about?
For landlords there are several new rules. ‘Prescribed information’ has to be given to both the tenant and to any relevant person - for example, a parent who pays rent on a property to be occupied by a son or daughter. This includes details of the Scheme Administrator and the procedure for repaying the deposit. The actual rules are complicated and require detailed legal advice.

The landlord also has to sign a certificate confirming that the information provided is accurate and that the landlord has given the tenant an opportunity to sign any document containing the prescribed information.

If I own a property in the UK but live overseas do I need a TDS?
Yes, if the property is let on an Assured Shorthold Tenancy in the UK.

What if I let the Assured Shorthold Tenancy before 6th April 2007 for six months and intend to let the same tenant stay?
If you create a new tenancy after 6th April 2007 on substantially the same basis as the previous tenancy, then the initial deposit that was paid before 6th April 2007 must be safeguarded through a TDS. If however you let the old tenancy continue on a periodical basis from month to month with no new agreement, then you will not need a TDS.

What if damage has been caused at the property?
A TDS will have a scheme to be used when there is a dispute. It is good practice for a landlord at the start of the tenancy to create an inventory, including a schedule of the condition of fixtures and fittings, in case a dispute arises over the return of the deposit.

What if I don’t use a TDS?
The landlord may be prevented from recovering possession of the property and may have to repay to the tenant or any relevant person, three times the amount of the deposit.

For further information on the approved schemes, please contact:

1. Custodial scheme
The Deposit Protection Service
www.depositprotection.com Tel: 0870-70171707

2. Insurance-based schemes
Tenancy Deposit Solutions Limited
www.mydeposits.co.uk Tel: 0871-7030552
The Tenancy Deposit Scheme
www.tds.gb.com Tel: 0845-2267837

Update 19th June 2008.

On the 10th March 2008 the case of Stankova v. Glassonbury was heard at Gloucester County Court as a result of which Ms Stankova claimed that her Landlord, Mr Glassonbury, had failed to comply with the requirements of the Housing Act 2004 Section 213 which provide that the Landlord must comply with the initial requirements of an authorized tenancy deposit scheme within fourteen days.

District Judge Singleton expressed his concern that “It goes against the grain” to make the Order sought, but held that the legislation gave the Court no discretion. He ordered Mr Glassonbury to pay £1800 and a £75 Court fee. The original deposit paid by Ms Stankova had been £600.

A press release from www.mydeposits.co.uk in April 2008 stated that they had only dealt with 341 disputes in respect of 200,000 deposits. In the most serious of those, the disputes had been resolved with only 11% resulting in the Landlord retaining the full deposit.

Update 10th March 2010 - First High Court Judgement.

Draycott & Draycott v Hannells Letting Ltd [2001]

This is the first High Court Judgment on the Tenancy Deposit Scheme and was an Appeal by Hannells Letting Ltd from a decision of a Circuit Judge.

On 28th February 2008, Mr and Mrs Draycott had entered into a 12 month Assured Shorthold Tenancy with Derby Build Ltd and paid a £2,700.00 deposit to the agent, Hannells, who held the deposit as Stakeholder.

The deposit was paid on 4th March 2008, but not registered with the DPS until 19th May 2008.

On 27th November 2008, Mr and Mrs Draycott brought a claim under Section 214 of the Housing Act 2004 on the basis that the deposit had not been registered and information given within 14 days of it being received. Interestingly, they brought the claim against the agent rather than against the landlord.

At first instance, the Circuit Judge agreed that the claim could be brought against the agent and also awarded the three times penalty against them.

On appeal, Mr Justice Tugendhat held that where the failure was the agent’s there was no reason why they should not have this type of claim brought against them, therefore agents are potentially liable if they are the ones who handle the deposit and fail to put it into a scheme.

At the time that the deposit should have been paid into the DPS Scheme (March to May 2008) the DPS Scheme did not include a requirement for the deposit to be submitted within 14 days of receipt by the landlord/agent. Mr Justice Tugendhat therefore held that the initial requirements of the Scheme had been complied with as at that time the DPS Scheme did not impose a 14 day requirement.

This still leaves the law in a somewhat uncertain state. Whilst in this case the agent was not required to pay the three times penalty on other facts they may have to and therefore should comply with the Scheme. However, this decision will have made it more difficult for tenants to bring a claim under Section 214 of the Housing Act 2004.