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DEPOSIT MANAGEMENT A deposit is defined by section 212(8) of the act as being:

‘…any money intended to be held (by the landlord or otherwise) as security for –
a) the performance of any obligations of the tenant; or
b) the discharge of any liability of his;
arising under or in connection with the tenancy’

Failure to pay deposits into an appropriate scheme can give rise to a tenant issuing a claim for the deposit being returned to them or an order to ensure the deposit is paid into a scheme and in addition an order that the landlord pay over a sum equal to three times the amount of the deposit within 14 days. Further and importantly, you are not permitted to serve a section 21 notice bringing the tenancy to an end if the deposit is not held in a statutorily approved scheme.

The Housing Act 2004 prohibits the taking of deposits which are not money, but there are ways to avoid the need to use the schemes. But tread carefully, there are strict penalties for non-compliance.

There are two types of scheme for the management of deposits – A Custodial Deposit Scheme and Insurance Schemes.

CUSTODIAL DEPOSIT SCHEME The custodial deposit scheme works as follows:

  • The tenant pays the deposit to the landlord or agent
  • The landlord or agent pays the deposit into the scheme
  • Within 14 days of receipt of the deposit, the landlord or agent must give the tenant information about the scheme being used.
  • If agreement can be reached as to return of the deposit or part of the deposit it must be repaid within 10 days of the end of the tenancy.

The custodial scheme is free with the interest generated being used to operate the scheme, so there is no direct cost to the landlord or the tenant. Any surplus interest is passed on to the tenant or the landlord depending on the terms of the tenancy agreement.

On conclusion of the tenancy if agreement can be reached between the landlord and tenant as to how the deposit should be divided, the scheme is informed and the funds divided on the agreed basis.

In the event that agreement cannot be reached, the appropriate forum for disputed issues is the dispute resolution service or the County Court.

There is only one custodial scheme available through the Deposit Protection Service Ltd.

INSURANCE SCHEMES Insurance based schemes allow the landlord to keep the deposit and its return is effectively insured against the landlord’s non-return. If the landlord fails to return the deposit by the end of the tenancy, the scheme meets the landlord’s liability to return the deposit and seeks repayment from the landlord. It is a matter for you as to which scheme you find most appropriate, but insurance based schemes will attract a fee. There are currently two providers of insurance based Schemes , they are:

MY DEPOSITS My deposits which is a trading style of Tenancy Deposit Solutions Ltd is partly owned by the National Landlords Association. Their website can be found at www.mydeposits.co.uk and their telephone number is 0844 980 0290 and their fax number is 08456 34 34 03.
Contact Mydeposits direct for full details of their scheme but essentially you will have to:

  • Join the scheme and make payment – this can be done online
  • You take the deposit and pay a one off fee to protect it
  • A deposit protection certificate is issued as proof that the deposit is protected
  • The signed certificate along with the Information for Tenants leaflet provides the majority of all the legal documentation for the deposit protection.
  • You provide all of this information to the tenant within 14 days of receiving the deposit.
  • At the end of the tenancy speak with the tenant and come to an arrangement if possible about the return of all or part of the deposit.
  • In the event that agreement cannot be reached the firm offers a dispute resolution service which is free to all.

THE DEPOSIT PROTECTION SERVICE The Dispute Service Limited can be found on the web at www.tds.gb.com.

TDS is an independent, not-for-profit company established in 2003 to resolve complaints and disputes arising in the private rented sector speedily, cost-effectively and fairly. The Deposit Protection Service (DPS) runs the other insurance based scheme. Information will be required by the service to ascertain what level of subscription will apply to your membership. It is possible for private landlords to join the scheme, but they deal more with agents and commercial organisations than private landlords.

This is the point at which commonly most conflict arises. Within a prescribed period of the end of the tenancy – it varies from scheme to scheme but usually about 10 days – you must notify the tenants whether you intend to apply a deduction in the amount of the deposit returned to them to reflect damage to the property. If agreement can be reached as to the amount of any deduction to monies placed in the custodial scheme, you must inform the deposit company and abide by their procedures. For deposits held under on of the insurance schemes, you should repay the deposit and inform the scheme administrators that the tenancy has come to an end.

Unfortunately disputes concerning deposits are not uncommon. In the event of a dispute, you should follow the rules of the particular scheme that you subscribe to. Under the insurance based schemes you are generally required to pay over to the scheme the part of the deposit that is in dispute and the reminder should be repaid to the former tenant or retained if it is agreed it should be so retained by you.

The matter is then referred to the scheme adjudicators under their rules. All paperwork, including the tenancy agreement, inventory and any supporting photographs are then sent to the scheme adjudicators who will usually take a view based on the papers provided by both sides.

Deposit monies are distributed in accordance with the adjudicator’s decision approximately 10 days following a decision having been taken. Right of appeal are limited but complaints should be made to the scheme operators if you believe a decision to be unjust or taken without regard for the scheme’s published rules.

None of the above affects your recourse to the County Court and you remain at liberty to apply to have the matter looked at by a judge, but the process will be lengthy and if the sum you are seeking is less than £5,000 the matter will be likely to proceed as a small claim and you will be unable to claim any fees you may incur in seeking legal advice from a solicitor to take the matter to Court. Law for Life does provide a guide to issuing a claim for less than £5,000 which you may find very useful in navigating the process and which is available through the website.

AVOIDING THE DEPOSIT SCHEMES As stated above, the taking of deposits which are not money is prohibited. Further if a deposit is taken in any other form than money,
“no s21 notice may be given in relation to the tenancy until such time as the property in question is returned to the person by whom it was given as a deposit”.

Guarantees is one way round the necessity for using one of the schemes, but unless the guarantor is a Local Authority there is no ‘guarantee’ that you will be able to find the guarantor at the end of the tenancy let alone extract payment for damages. Tracing the guarantor may prove difficult and expensive if professional enquiries have to be made although the rules on service of claim forms which are available in the Law for Life Small Claims guide may assist.

Two month’s rent in advance seems like a good solution but monies paid over in rent can only ever be applied to rent. Some any sums to compensate you for damages cannot be taken out of ‘payment in advance’. Further the courts will apply a degree of common sense to any claim before it. If discussions about the need for two month’s rent involve mention of ‘avoiding the need for a deposit’ then the court may well deem the rent in advance as a deposit. If this is the case then it is not beyond possibility that the court may make a finding on the basis that the rent in advance was indeed a deposit and entertain sanction against the landlord for not having protected it as required under the Housing Act 2004.

An increase in rent may seem attractive to the landlord as an alternative to taking a deposit, but this may cause problems particularly if the rental market is not particularly buoyant an may result in the property not being particularly attractive to potential tenants.

Some insurance companies offer insurance against damage, but it is usually linked to the individual tenants. References, credit histories etc may be required and if the insurance company is not satisfied, then this may be unavailable. In terms of paperwork it is possible that this option is every bit if not more onerous than taking a deposit and placing it within a scheme.

You could decide to charge an administration fee for setting up the tenancy which is non refundable, although you must make it clear beyond doubt that the fee is non-refundable. You could get the tenants to sign a note along the lines of:

Tenancy Administration Charge : Explanatory Note
An administration charge of £ is payable. This is a charge which is made for taking
up any references, and preparing and completing the tenancy agreement. It is not
refundable. It is not a tenancy deposit. It and will not be paid back to you when the tenancy ends.

It would be wise to get the tenant’s signature on the document to demonstrate their understanding; but again such a charge may make the tenancy less attractive than others the tenants may come across and making it more difficult to find tenants.

The legislation is quite clear. If the money is paid as a deposit to secure the tenant’s obligations “under or in connection with” the tenancy then it is caught by the Act. The use of the works “in connection with” catches things which are related to the tenancy. Clearly, paying the utility bills, cleaning and repair is something ‘in connection with’ the tenancy.

There are potentially serious consequences of mismanagement of a tenant’s deposit, so we suggest you keep it as simple as possible. We’d also urge you to keep in mind the purpose of a deposit which is to motivate the tenant to keep the property is as good order as possible when they leave. While some of the alternatives considered above may seem attractive, they largely remove the tenant’s incentive to hand back a property in a condition as close to it was at the start of the tenancy to retrieve their deposit.

THE INVENTORY The inventory is not required by law but it such a useful document that it is to be considered essential. It is also to be noted that the deposit schemes do not require you to take an inventory, but we suggest it will be almost impossible to secure an adjudication in your favour in the event of dispute without an inventory signed off by the tenant. It is the ‘yardstick’ against which you can measure how much of the deposit to return. Without an inventory landlords will struggle to evidence any alleged deterioration of condition of the property. We have included an inventory in the documents section and it is fairly self explanatory and its execution largely common sense.

Even if you are letting an unfurnished property, you still need to make a note of the condition of the walls, carpets and fixtures, light fittings, doors and door furniture, windows and ceilings. It is wise to undertake a ‘walkround’ with the tenant at the beginning of the tenancy to get their agreement as to condition. Their signature should be sought on the document and a copy given to the tenant who may need to refer to it when it is time to leave the property.

It is advisable to also take photographs in digital format, burn them onto a disc and leave a copy with the tenant.