Considerations For Landlords - Part 5 Tenancy Deposit Schemes
As with the review of the definition and classification of HMO's, the mandatory licensing requirements and reform of over 150 years of local authority regulation on housing standards, the Housing Act 2004 has reviewed and reformed the legal basis upon which deposits are held by Landlords.
From the 6th April 2007, all deposits (and/or monies taken by Landlords if it serves the same purpose of a deposit) taken by Landlords for Assured Shorthold tenancies in England and Wales must be protected by a tenancy deposit scheme (“TDS”) in accordance with Part 6 of the Housing Act 2004 (“the Act”).
There are two types of TDS (1) the custodial scheme or (2) an insurance based scheme. These are fully described later in this article but are Government appointed and self funding from the interest that accrues on the monies held. However, it should be noted at this point that such schemes place further administrative and legal burdens on private Landlords and risks if they fail to comply with the rules.
Part 6 of the Act states that, Landlords and/or their Agents may only take a deposit from a Tenant if the deposit is protected by a TDS. The scheme is the Landlords choice but once that choice has been made the Landlord must comply with all of the legal and administrative requirements some of which apply to both schemes, others are unique to the type of scheme chosen.
In each case, the Landlord must provide the Tenant with prescribed information including how he intends to protect the deposit monies i.e. the scheme he intends to use and the account details within 14 days of receiving the deposit monies. The information provided must enable the Tenant to make enquiries of the Administrator, should he wish to do so.
If the Landlord fails to comply with the legal requirements to safeguard the deposit or to provide the prescribed information about the chosen scheme, the Landlord will lose the right to serve a Section 21 “Notice Only” notice providing the mandatory entitlement to the Landlord to obtain possession of the property after giving 2 months notice following the fixed term expiry date or during a periodical tenancy. If this occurs the Landlord will need to establish one or more of the grounds set out in Schedule 2 of the Housing Act 1988 which could place the Landlord in a precarious position in terms of being able to gain possession of the property. Additionally, the Tenants could apply to the Court for an Order that the Landlord takes immediate steps to safeguard their deposit and/or provides the prescribed information. In doing so, the Court may consider the Landlord's failure to comply with the statutory requirements. As a result, the Landlord could be fined up to 3 times the deposit held.
The types of Scheme available
- A Custodial Scheme
Under this type of TDS the Tenant pays the deposit to the Landlord who must immediately pay the whole amount into the Scheme's designated account. The account must not contain any other monies except interest that accrues on the deposit monies held. At the end of the tenancy, if the landlord and tenant agree the amount of deposit to be repaid to the Tenant, they must both inform the Administrator who must pay out the monies within 10 days of notification. Where a dispute as to the amount to be paid out arises, the funds are held pending an agreement or court order as to the amount to be paid out and upon receipt of such the Administrator has 10 days to do so. Any interest that has accrued over and above that needed to fund the scheme will be distributed to the Tenant, or Landlord if the Tenant is not entitled to it.
- Insurance Based Scheme
Under this scheme the Tenant pays the deposit to the Landlord who retains the monies, paying an insurance premium to the insurer and only transfers it into a scheme if there is a dispute at the end of the tenancy when the deposit will be held until the dispute is settled. If the Landlord fails to pay over the funds, the Scheme will pay out to the tenant leaving the Administrator to deal with the Landlord which could result in punishment under the Scheme and/or the Act. In theory, the risk is with the Scheme as opposed to the Landlord which is why adequate insurance is required to cover the Administrator should the Landlord fail to reimburse it. As with the custodial scheme, the Administrator has 10 days following notification of the Tenants request that the Landlord pay it out and 10 days following an agreement or court order in the case of a dispute arising as to the amount to be repaid.
As can be seen, the purpose of these schemes is to provide tenants deposits with protection and to avoid the situation where a deposit is withheld without justification. Landlords need to seriously consider whether or not to take a deposit and if so, encourages them to adopt best practice from the outset and compliance with the law failing which they can face a hefty fine and face difficulties in regaining possession.
If you intend to hold deposits for Assured Shorthold tenancies created on or after the 6th April 2007, you will need to comply. This includes renewed tenancies after that date but not those created following the expiry of a fixed term after that date i.e. statutory periodical tenancy.
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Nita King or Marianne Johns on 01793 527141 or alternatively by email on Nita.King@lemon-co.co.uk or Marianne.Johns@lemon-co.co.uk.
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<p><strong><a href="http://www.lemon-co.co.uk/article_landlord-part5.php">Landlords tenancy deposit schemes</a></strong><br />
As with the review of the definition and classification of HMO's, the mandatory licensing requirements and reform of over 150 years of local authority regulation on housing standards, the Housing Act 2004 has reviewed and reformed the legal basis upon which deposits are held by Landlords....</p>
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