Tenancy Deposit Protection (TDP)

Essential information for landlords letting property under an assured shorthold tenancy (AST) in England & Wales

Tenancy Deposit Protection (TDP) – From 6th April 2007

As part of the Housing Act 2004 the Government has introduced tenancy deposit protection (TDP), in order to protect the tenancy deposit from unscrupulous landlords*; and to provide an independent (and fairer) service to help resolve disputes over the deposit at the end of the tenancy.

*Shelter (the housing charity) figures for 2004-5, the last time a survey was carried out, say 30% of deposits were returned “in part or not at all”. Of that 30%, more that three-quarters of tenants felt their landlord had ripped them off and kept their money unjustifiably.

From the 6th April 2007 all new tenancy deposits must be protected in a Government-authorised scheme. This rule applies if the tenancy is an assured shorthold tenancy (AST) in England & Wales. Alongside TDP there will be an ‘alternative dispute resolution’ (ADR) service to help resolve disputes – the intention here is to avoid disputes going to court if at all possible.
This legislation will not apply in Scotland or Northern Ireland, although similar provisions could be introduced at some stage in the future.
This legislation will not apply if the landlord is resident in the property, e.g. renting out a room.

If a deposit is taken before the 6th April 2007 and the tenancy commences (i.e. the tenant moves in before the 6th April), it will not need to be protected. However, if the tenancy is subsequently renewed and a new fixed term tenancy is agreed, the initial deposit taken must then be lodged with a TDP scheme. If the tenancy continues with no new agreement being entered into (i.e. a periodic tenancy), the deposit will not need to be lodged with a TDP scheme.

How does Tenancy Deposit Protection work?
At the beginning of a new tenancy, the tenant pays the deposit to the landlord as normal, the landlord must then ensure the deposit is ‘protected’.

There are two types of scheme that the landlord can choose from: a single custodial scheme and two insurance-based schemes:

1. The custodial scheme is free to use and open to all landlords and letting agents. The landlord would pay the deposit into the scheme at the beginning of the tenancy and it is held by the scheme until the end of the tenancy. The scheme administrator is The Deposit Protection Service (The DPS). The running costs of The DPS will be covered by the interest earned on the deposits held. If there is any interest left over (possibly only a small nominal amount), this will be paid in accordance with the terms in the tenancy agreement (if the tenancy agreement does not cover this item, the interest will be paid to the tenant). The DPS is run by Computershare Investor Services Plc, with the Chartered Institute of Arbitrators providing the Alternative Dispute Resolution (ADR) service. See www.depositprotection.com for further information. Computershare runs a similar scheme in Australia, very successfully by all accounts.

2. There are two insurance-based schemes that insure the deposit. Under the insurance-based schemes the landlord retains the deposit and pays a premium to the scheme to insure against failure to repay money due to the tenant. The two scheme administrators are:

(i) Tenancy Deposit Solutions Limited (TDSL), with the Chartered Institute of Arbitrators providing the ADR service. TDSL is a partnership between the National Landlords Association and Hamilton Fraser Insurance. This scheme is designed primarily for landlords. However, letting agents can also join the scheme. See www.mydeposits.co.uk for further information.

(ii) The Tenancy Deposit Scheme (TDS) is run by The Dispute Service, who will also run its own ADR service. The Dispute Service was established in 2003 (as a voluntary scheme) to provide dispute resolution and complaints handling for the lettings industry, including a voluntary deposit scheme for regulated agents which the TDS will now absorb. This scheme is designed primarily for letting agents. However, landlords can also join the scheme. The Dispute Service is run by the Association of Residential Lettings Agents, the National Association of Estate Agents and the Royal Institution of Chartered Surveyors. See www.thedisputeservice.co.uk for further information.

Beginning of Tenancy:
Within 14 days of taking the deposit, the landlord must provide the tenant with full details of how the deposit is being protected.

End of Tenancy:
At the end of the tenancy the deposit, or agreed portion of the deposit, must be returned within 10 days of the landlord and tenant reaching agreement on the deposit amount to be returned, or within 10 days following notification of an ADR/court decision.

Any deductions would need to be agreed with the tenant. If agreement with the tenant cannot be reached over any necessary deductions, e.g. cleaning or damage to the property, a ‘dispute’ between landlord and tenant will have arisen.

Alternative Dispute Resolution (ADR):
Each of the government-authorised schemes offer an alternative dispute resolution (ADR) service. With the custodial scheme, the scheme will continue to hold the disputed amount until the dispute is resolved. With the insurance-based schemes the disputed amount must be handed over by the landlord to the scheme administrator until the dispute is resolved, and the undisputed amount being returned to the tenant.

The use of ADR is not compulsory, the dispute can be taken to court instead if either the landlord or the tenant objects to the ADR procedure being used.

If a dispute occurs and both the landlord and tenant agree to use the ADR service, they will also have agreed to be bound by its decision with no recourse to the courts. Disputes will only go to court if the landlord and tenant do not agree to use the ADR service.

The penalties for non-compliance with TDP are severe:
Membership of a tenancy deposit scheme is mandatory from the 6th April 2007 for all landlords who take a deposit under an AST in England & Wales. The tenant can apply for a court order forcing the landlord to place the deposit under the protection of one of the schemes.

A landlord will lose their automatic right to regain possession of the property at the end of the tenancy (i.e. the landlord will be unable to serve a Section 21 Notice) unless they have protected the deposit in a Government-authorised scheme and given the tenant information about how it is protected.

A non-compliant landlord would also be liable to a fine – three times the amount of the deposit – enforced by the courts (which is a strong incentive for any tenant to shop their unscrupulous rogue landlord).

Must a clause be inserted into the tenancy agreement stating which protection scheme the landlord is subscribing to?
No. The Government-authorised schemes will provide a separate protection certificate, which will provide all the necessary information about the protected deposit. A copy of which will be sent to the tenant.

Interest earned on the deposit:
Previously the landlord retained the deposit for the duration of the tenancy, and any accrued interest.

With the custodial scheme paying interest on the deposit, it is possible that tenants may, in future, demand the interest earned on their deposit. Losing prospective tenants over the deposit interest may be shortsighted. It is worth mentioning that, at the time of writing, the expected portion of interest paid by the custodial scheme administrator is generally understood to be a nominal amount as the running costs of scheme will be covered by the interest earned on the deposits held and IF there is any interest left over this will be paid in accordance with the terms in the tenancy agreement. The actual interest amount earned obviously depends on the size of deposit held of course.

With the insurance-based scheme, the landlord is out-of-pocket as s/he must pay the scheme insurance premium. There is strong argument here supporting the landlord retains any accrued interest.

Having a detailed Inventory & Schedule of Condition is strongly recommended:
Complying with tenancy deposit protection rules may seem tedious bureaucracy to start with, but not taking up any deposit would be ill-advised (though it is another option for the landlord to consider). The deposit is still a useful persuader in ensuring the tenant fulfils their obligations under the tenancy. Many tenants will feel more confidant renting a property knowing that their deposit is protected by an independent third party. Landlords will undoubtedly need to spend more time ensuring their paperwork is up to scratch.

Having an up-to-date detailed Inventory, which also records the condition of the property and its contents (e.g. small scratch to oven door) is strongly recommended in order to prevent disputes arising at the end of the tenancy. The Inventory must be signed and dated by the tenant at the beginning of the tenancy. In addition, a set of clear, dated photographs (e.g. of all floor coverings/windows/doors/kitchen cabinets/etc) taken at the beginning of each tenancy, is also very useful evidence should a dispute arise, as is any receipts or invoices for newly purchased furniture/fittings/work carried out.

NB In essence, any claim on a deposit that is not supported by written evidence is unlikely to succeed.

Non-UK resident landlords:
Landlords who lets a property in England & Wales on an assured shorthold tenancy (AST) but who are permanently resident abroad are not eligible to join the Government-authorised schemes in their own right. They would need to look to their letting agent, for example, to operate a scheme on their behalf.

Disclaimer:
The details contained herein are intended as an overview only, and is based upon the information currently available – this is new legislation and more information will most likely become available over the coming weeks and months.

See the scheme administrator websites for further/changing information:
Custodial scheme: www.depositprotection.com
Insurance schemes: www.mydeposits.co.uk and www.thedisputeservice.co.uk

IMPORTANT:
Do not re-use tenancy agreement forms without first checking that they comply with current legislation.

We have updated our Assured Shorthold Tenancy agreements (England & Wales) to comply with the new rules – see Options 2 and 3 of our Contract Pack.

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