Renting protection

A new statutory Scheme for the protection of deposits came into force in England and Wales on 6 April. There have in the past been various attempts at introducing voluntary systems to protect tenancy deposits but what could have been a voluntary system has now become a set of statutory requirements.

The tenancy deposit scheme is one of the measures introduced by the Housing Act 2004. Most of the Act is aimed at improving standards in the private rented sector. It includes new measures such as the new housing health and safety rating system and new ways of improving standards in houses in multiple occupation.

The tenancy deposit scheme (TDS) applies to any assured shorthold tenancy (AST) which: (a) is granted on or after 6 April, and (b) where the landlord takes a deposit. The taking of such deposits is very common: most landlords feel the need to safeguard their position against possible damage to the premises which they might only discover at the end of the tenancy.

And taking a deposit also provides assurance that the final rent instalment will be paid when the tenancy comes to an end. But survey after survey reveals that many private tenants feel that they have been unfairly treated, that some landlords refuse to return the deposit, and the tenant finds it difficult to get any effective redress if the landlord simply refuses to repay the deposit.

Some definitions

A 'tenancy deposit' means money intended to be held by the landlord (or otherwise) as security for the performance of the tenancy obligations or discharge of any liability in connection with the tenancy (s 212(8)) and the reference to 'landlord' includes someone acting on their behalf (such as a managing agent, one presumes).

Section 212 of the Housing Act 2004 requires the Government to set up one or more TDSs to safeguard tenancy deposits paid in connection with shorthold tenancies. A TDS is a scheme which:

• safeguards such deposits and facilitates the resolution of disputes;
• complies with the requirements of Schedule 10 to the Act.

Schedule 10 (which was amended before commencement '“ by the Housing (Tenancy Deposit Schemes) Order 2007 (SI no 796)) provides for the setting up of either a 'custodial scheme' or 'an insurance scheme'. A custodial scheme is one under which the deposits payable to landlords must be paid over into a designated account held by the scheme administrator and kept in that account until they eventually fall to be paid wholly or in part to the landlord or the tenant under the tenancy.

In contrast, under an insurance scheme the landlord retains the deposit but on the basis that at the end of the tenancy amounts representing the deposit as are agreed with the tenants are returned, or if the amounts are not repaid and not agreed they must be paid immediately into a designated account held by a scheme administrator pending the outcome of the dispute. Should landlords fail to comply having joined an insurance scheme the scheme administrator will be able to repay the tenant any sums owing. This is covered by insurance, the premium for which the landlord has to pay on joining the scheme.

Which schemes have been set up?

In November 2006 the Department for Communities and Local Government announced the appointment of three schemes, two insurance schemes and one custodial:

• Deposit Protection Scheme (DPS):

The only custodial scheme, this is free to use and open to all landlords and letting agents. The service is funded entirely from the interest that is earned from deposits held. Landlords and letting agents will be able to register and transact online. Paper forms will be available should internet access be an issue. The scheme will be supported by a dedicated call centre and an independent dispute resolution service. For more information, visit www.despositprotection.com or call 0870 707 1707.

• Tenancy Deposit Solutions (TDSL):

This is a partnership between the National Landlords Association and Hamilton Fraser Insurance. This insurance-based scheme enables landlords, either directly or through an agent, to hold deposits. Letting agents can also join the scheme. For more information, visit www.mydeposits.co.uk.

• The Tenancy Deposit Scheme (TDS):

This is an insurance-backed deposit protection and dispute resolution scheme run by The Dispute Service. It builds on a scheme that was established in 2003 to provide dispute resolution and complaints handling for the lettings industry. The new scheme enables letting agents and landlords to hold deposits. For more information, visit www.tds.gb.com or call 0845 226 7837. (See the announcement by the Department of Communities and Local Government of November 2006.)

What are the TDS requirements?

As from 6 April 2007 when a new AST is granted and a deposit is taken it must be dealt with in accordance with one of the three authorised schemes (s 213(1)). The landlord must deal with the initial requirements of one of the three authorised schemes within 14 days of the date on which the deposit is received. This means, in summary, that the landlord must either pay over the monies if it has joined a custodial scheme to the scheme administrator or must hold the monies having signed up to one of the two insurance-based schemes.

In addition to this, the landlord must give information to the tenant within the same 14-day period. The information that must be given has been prescribed and reference should be made to the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 (SI no 797).

What happens to the deposit at the end of the tenancy?

In the first place, it is for the parties to the tenancy agreement to try to reach agreement on as to how much should be returned. If they manage to reach agreement they must inform the scheme administrator. In the case of a custodial scheme the administrator should then arrange for the relevant amount to be paid in accordance with the agreement within a period of 10 days of the date on which the notification was received by the scheme administrator (Schedule 10, paragraph 4).

In the case of an insurance scheme, if the scheme administrator is notified that the parties have not agreed on what should happen to the deposit it must direct the landlord to pay an amount equal to the deposit into a designated account within a period of 10 days.

Whatever the case, alternative dispute resolution must be offered to the parties.

What happens if the landlord doesn't comply with the TDS?

This is provided for in ss 214 and 215 of the Act. If these sanctions are enforced effectively they should act as major disincentives for landlords to ignore the scheme. There are two sanctions to consider: first, application may be made to the court for an order and second, there is a bar on recovering possessions.

Proceedings in relation to tenancy deposits

Application can be made to the county court either by the tenant (or the person who paid the deposit on their behalf) where either initial requirements of the scheme have not been complied with in relation to the deposit or the tenant having been notified, that the landlord has joined a particular scheme, has been unable to have confirmation of this from that scheme administrator (s 214(1)).

If the court is satisfied that these requirements have not been dealt with it must do two things:

• Either order the person who is holding the deposit (usually the landlord) to repay it to the applicant, or alternatively order that it is paid into a designated account in the custodial scheme within a period of 14 days beginning with the date of making the order.
• The court must also order the landlord to pay to the applicant three times the amount of the deposit within the period of 14 days (s 214(2), (3)).

Surely landlords faced with the prospect of not only having to repay the deposit but effectively being fined an additional sum three times the size of that deposit will find this prospect a sufficient encouragement to comply with the scheme?

Bars on recovery of possession

But there is another important sanction too '“ landlords letting under ASTs have, of course, all the grounds for possession available to a landlord under any kind of assured tenancy (Housing Act 1988, Schedule 2). But in addition they have an important mandatory notice only based ground by giving two months' notice under s 21 of the 1988 Act to the tenant. This will in the ordinary case be accompanied by a claim for possession under the accelerated form possession proceedings. In these ways landlords can usually recover possession from an AST tenant fairly easily.

However, no s 21 notice may be given at any time when the deposit is not being held in accordance with an authorised scheme or where the initial requirements of such a scheme has not been complied with (2004 Act, s 215).

Although there has been some coverage of the TDS in the national press and elsewhere, concerns must remain as to whether the majority of tenants or indeed landlords are fully familiar with the workings of a new scheme.

But if the new scheme works, it should provide effective forms of redress for both landlords and tenants where there are disagreements over how much if any of the deposit should be returned at the end of the tenancy