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The Housing Act 2004 - Important Changes to the Law Regarding Tenants' Deposits
02 04 2007
Tenancy Deposit Schemes (TDS), will become compulsory for all assured shorthold tenancies created or renewed on or after 6 April 2007.
TDS are a whole new concept created under the Housing Act 2004 and seek to prevent landlords from failing to return a tenant’s deposit at the end of the tenancy, and also to make sure landlords are not left out of pocket if a tenant abandons the property.
1. What is a TDS?
A TDS is a scheme that:
(a) is made for the purpose of safeguarding tenancy deposits paid in connection with assured shorthold tenancies via several means
(b) facilitates the resolution of disputes arising in connection with tenancy deposits.
At the beginning of any new tenancy, the tenant pays their deposit to their landlord or agent as usual. The main objective of the scheme is to ensure that this deposit will be protected and returned to the tenant at the end of the tenancy agreement, except to the extent the lanlord has a legitimate claim on that deposit.
2.What are the Landlord’s options?
Landlords and agents have a choice of three schemes providers, offering two types of scheme to protect the deposit:
(i) Custodial schemes
There is one custodial scheme provider: the Deposit Protection Service (The DPS).
Money is held by the DPS under a custodial scheme until it is time for it to be repaid at the end of the tenancy.
The DPS is the only custodial deposit protection scheme, is free to use and open to all Landlords and Letting Agents. The service is funded entirely from the interest earned from deposits held. Landlords and Letting Agents will be able to register and make transactions online. Paper forms will also be available should internet access be an issue. The scheme will be supported by a dedicated call centre and an independent dispute resolution service.
To use this scheme, the landlord (or letting agent) simply pays the deposit into the scheme at the beginning of the tenancy. This mnust be done within 14 days of receipt of the deposit from the tenant.
(ii) Insuranced based
Unlike the custodial scheme, there is a choice of two insurance-based schemes, The Tenancy Deposit Solutions Ltd (TDSL) and The Tenancy Deposit Scheme (TDS).
Under the insurance based schemes the landlord actually keeps the deposit in the usual way, and pays a premium to the chosen insurance scheme to insure against the landlord failing to repay the tenant any money due to him.
TDSL is a partnership between the National Landlords Association and Hamilton Fraser Insurance. Letting agents can also join the scheme.
TDS is an insurance-backed deposit protection and dispute resolution scheme run by The Dispute Service that builds on a scheme established in 2003 to provide dispute resolution and complaints handling for the lettings industry.
3. What is the difference between the Custodial scheme and the Insurance based scheme?
The key difference between the two types of TDS is who holds the deposit. With custodial schemes, it will be the scheme administrator. With insurance schemes, it will be the landlord. It is for the landlord to choose which scheme to use, not the tenant. A landlord must inform its tenant of the TDS being used within 14 days of receiving the deposit.
4. Prescribed information
Under the Housing Act 2004, within 14 days of taking the deposit, the landlord must provide the tenant with certain details of how the deposit is being protected.
These include:
· the contact details of tenancy deposit scheme
· the contact details of the landlord
· how to apply for the release of the deposit
· information explaining the purpose of the deposit
· what to do if there is a dispute about the deposit
5. How is a deposit released at the end of the tenancy?
Tenants have a responsibility to return the property in the same condition they took it on.
Under the custodial scheme the deposit will only be released by the scheme provider once the scheme provider is notified by the landlord that he and his or her tenant are in agreement on the amount of the deposit to be returned.
Under the insurance based scheme it is the landlord who holds the deposit and so it will remain a matter between landlord and tenant as to how much and when the deposit is returned.
6. Can the Landlord use any of the deposit before the end of the tenancy?
If the deposit is held in the custodial scheme the landlord has no access to the deposit. Under the insurance schemes the landlord does hold the deposit and therefore the landlord is able to use the deposit. However, the deposit remains protected as the insurance scheme insurer will pay out to the tenant if the landlord unlawfully makes any deductions from the deposit.
7. What happens if there is a dispute?
If no agreement can be reached about how much of the deposit should be returned, there will be a free dispute resolution service to help resolve disputes offered by the scheme which is protecting the deposit.
The aim of the dispute resolution is to provide a tenant with a means of resolving a deposit dispute without having to go to court. Both the custodial TDS and the insurance TDS are required to offer dispute resolution to tenants and landlords as an alternative to issuing court proceedings. However, both the landlord and tenant retain the right to go to court.
8. What are the consequences if the Landlord fails to join a scheme?
If a landlord fails to join either a custodial TDS or insurance TDS the landlord may be liable to financial penalties and may be prevented from recovering possession of its property from the tenant.
(a) Financial penalties
It is important that landlords and letting agents adhere to these new requirements as the penalties are very severe.
On the application of the tenant, a court can either order the landlord to pay the deposit to the tenant or it can order that the landlord pay the money into a TDS. In addition (and of more interest to landlords) the court must also order the landlord to pay the tenant anything up to three times the amount of the deposit in compensation
(b) Landlord cannot recover possession of a property
Under section 215 of the HA 2004, a landlord will not be permitted to serve a notice requiring possession on its tenant in any of the following situations:
(i) If a deposit has been paid to the landlord, but either the deposit is not held in accordance with an authorised TDS, or the initial requirements imposed on the landlord under an authorised TDS have not been complied with;
(ii) If the prescribed information is not given to the tenant within 14 days of receiving the deposit
(iii) If the deposit given by the tenant comprised property other than money e.g. valuable personal items
The above notes on the changes in the Law are only intended to be a guide for prospective and existing clients. They cannot be relied on alone and the are intended to highlight some of the more important and relevant changes in legislation. They do not constitute a comprehensive rundown of all the changes made by the Housing Act 2004. The Housing Act 2004 is a complicated piece of legislation and before you embark on any private letting or piece of litigation, you should seek the expert advice of our Landlord & Tenant Department.
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