Tenancy deposit schemes for residential tenancies

Landlords usually require a deposit from a new tenant as security to protect them from the risk that the tenant fails to comply with their obligations under the terms of their tenancy. For example, if a tenant fails to pay their rent and leaves the property with no forwarding address, the landlord can use the deposit to cover some or all of the unpaid amount outstanding.

As a result of concerns raised about the possibility for landlords to misuse monies paid by tenants by way of deposit, most landlords are now required to pay any deposit monies they receive into a government-backed tenancy deposit scheme which aims to protect tenants by safeguarding their position and helping in the resolution of any disputes.

The rules surrounding tenancy deposits are now extremely complex. Landlords and tenants are strongly advised to take independent legal advice before entering any scheme or agreement.

Rajea Sultana, property law solicitor at Miles & Partners Solicitors in the City of London, provides a brief overview of the rules.

Which tenancies are affected?

A landlord who rents out a property on an assured shorthold tenancy that started on or after 6 April 2007 must ensure any deposit they receive is paid into a tenancy deposit protection scheme. In England and Wales there are three possible schemes that can be used:

• Deposit Protection Service.
• My Deposits.
• Tenancy Deposit Scheme.

A landlord who does not rent out on an assured shorthold tenancy, or who does rent out on an assured shorthold tenancy but which pre-dates 6 April 2007, does not need to use a deposit scheme unless, in so far as pre-6 April tenancies are concerned, the tenancy is extended or renewed after that date on substantially the same terms as before, in which case any deposit monies received must similarly be paid into a tenancy deposit scheme.

Types of deposit scheme

There are two types of tenancy deposit scheme:

• a custodial scheme where the deposit is paid over to the administrator of one of the three scheme providers detailed above; or
• an insurance scheme which enables the landlord or their agent to hold on to the deposit on the understanding that if a dispute arises a sum equivalent to the deposit will immediately be paid to the administer of the insurance scheme selected, and for which the landlord is required to pay a premium.

Time limits

Where a landlord elects to use a custodial scheme, they must pay the deposit to the scheme administrator within 30 days of receipt. Where the landlord elects to use an insurance scheme the deposit must be secured by the payment of a fee and insurance premium within the same 30-day period.

With both custodial schemes and insurance schemes, certain information must also be provided to the tenant within 30 days following the deposit being paid, including how the deposit is being handled, if it has been placed with a third party who that third party is and what their contact details are, and how any disputes about return of the deposit will be dealt with.

Returning the deposit

At the end of a tenancy the landlord should agree with their tenant whether part or the whole of the deposit is to be returned. If the landlord has chosen a custodial scheme, and the amount of the deposit to be returned has been agreed, the scheme administrator must arrange to return the agreed sum within 10 days of being notified that this needs to be done. If the landlord has chosen an insurance scheme, and the amount of the deposit to be returned has likewise been agreed, the landlord will become obliged to return the agreed sum to the tenant within 10 days of notifying the scheme administrator that agreement has been reached.

If the landlord and tenant cannot agree what proportion of the deposit monies should be returned, either of them may refer the matter to a scheme adjudicator or to the court. Once an adjudicator or court has made a decision, any amount of money that has been ordered to be returned to the tenant must be repaid within the following 10 days.

Penalties

There are quite severe penalties if the landlord either fails to pay the deposit into a scheme or to take out the necessary insurance within the prescribed time-frame. For example, a landlord could be prevented from recovering possession of the property and be ordered to pay the tenant between one and three times the amount of the deposit by way of compensation. For higher rental properties, this could be very costly.

Tenants’ perspective

While the onus is on landlords to safeguard the deposit, it is important that tenants make enquiries of their landlord about which scheme they have elected to use so that they are aware of their rights under that particular scheme when their tenancy comes to an end.

For further advice contact Rajea Sultana on 020 7426 0400 or email rs@milesandpartners.com.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.