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Tenancy Deposit Protection
A landlord does not have to take a deposit but all those who do so from 6th April 2007 have to join a government-authorised tenancy deposit scheme. Three schemes have been authorised by the Government:
This information sheet tells you more about how each scheme works and what you have to do to comply with the law. Which properties does this apply to? The law applies to all landlords letting residential property in England and Wales on Assured Shorthold Tenancies. Landlords living elsewhere in the UK may have to join one of the schemes if they are letting property in England or Wales. What does a landlord have to do? Within 14 days of receiving a deposit from a tenant the landlord has to:
All the deposit protection schemes give the landlord information to give to the tenant. What happens if I don’t comply? If the tenant (or the person who paid their deposit) does not believe that the landlord is complying with an authorised scheme they can take him to court. If the landlord is found guilty the court can order the person holding the deposit to repay it to the tenant, or pay it into the custodial deposit scheme, within 14 days. The court must also order the landlord to pay the tenant 3 times the deposit amount as a penalty. Furthermore a landlord is not allowed to serve a section 21 notice if he has not complied with the requirements of a deposit scheme or has not given the tenant information about the law relating to deposits and the scheme itself. What about using other items other than money for a deposit? The Housing Act specifically forbids anything other than money to be used as a deposit. If a landlord takes anything else as a deposit it is recoverable by the person who gave it. If the landlord or agent doesn’t return such property they cannot serve a section 21 notice. Landlords can continue to use rent guarantees from third parties (such as local authorities or parent of students). These guarantees do not have to be registered with a deposit scheme. How does the custodial deposit scheme work? At the start of the tenancy the landlord has to pay the deposit into an account under the scheme. The money is kept in that account until it is paid at the end of the tenancy once landlord and tenant have notified the scheme that they have agreed how the deposit should be split. The scheme has to pay out the agreed amounts within 10 days of receiving notification from both parties. If the parties cannot agree on how to split the deposit the scheme has alternative dispute resolution to allow the matter to be settled by mediation without having go to court. The dispute resolution is not compulsory and either party can choose to go to court instead (with the increased associated costs) but if both parties agree to use ADR they have to be agree to be bound by the outcome. They do not have the right to go to court to appeal against the decision reached through alternative dispute resolution. In the event of a dispute, once the problem has been resolved the scheme will pay out the deposit within 10 days of being notified of the outcome. The interest that accrues on the deposit throughout the tenancy funds the running costs of the scheme. If there is any interest left over after the costs have been met it will be returned, in proportion to the amount of the deposit returned, to the tenant. Surplus interest on the landlord’s share will only be repaid to the landlord if the tenancy agreement allows for this. How do the insurance-based schemes work? Under an insurance scheme when the landlord receives the deposit at the start of the tenancy he can keep it, on the basis that at the end of the tenancy an amount agreed between tenant and landlord will be paid to the tenant. The insurance will come into play if this does not happen. At the start of the tenancy the landlord has to notify the scheme he has joined about the deposit he has taken and wishes to protect. The landlord pays a fee to cover the insurance protection. At the end of the tenancy, if the tenant has requested the repayment of part or all of a deposit and the landlord has not paid it back within 10 days, the tenant can approach the scheme administrator. The landlord then has to pay the disputed amount into an account within 10 days of receiving notice from the administrator. Once the tenant and landlord have agreed how the disputed amount should be split they can notify the scheme administrator and the money has to be paid out within 10 days. Both insurance schemes have alternative dispute resolution to enable a solution to be found without the need to go to court. Either party can choose to go to court (with the increased associated costs) instead of using ADR but if both parties agree to use ADR they have to be agree to be bound by the outcome. They do not have the right to go to court to appeal against the decision reached through alternative dispute resolution. In cases where only part of the deposit is disputed, in some cases the ADR or the courts may decide that the tenant is, in fact, owed more than that amount. In such a case the scheme will pay the tenant the extra amount on top of the disputed amount that has been lodged with it and will then chase the landlord for reimbursement from the remaining deposit that he has held. The landlord has to comply within 10 days of receiving notice from the scheme administrator. If he fails to do so then the scheme’s insurance will pay out. If that happens it is possible that the landlord’s membership of the scheme may be terminated. There are membership fees and insurance costs associated with joining an insurance-based deposit protection scheme. However, landlords enjoy the benefit of being able to hold onto the deposit throughout the tenancy. Further details are on the websites of the schemes. What happens if my tenant has disappeared? To release the deposit from the custodial scheme requires the agreement of both landlord (or agent) and tenant. In some cases one of the parties may have disappeared or the landlord may be unresponsive to communications. In such an event the remaining party can make a statutory application to the deposit scheme, explaining the efforts they have made to contact the other party and asking for some or all of the deposit to be released to them. The scheme will then follow a procedure to make its own best efforts to contact the other party and if that fails then the money will be released to the remaining party.
This information sheet is part of a series produced by the NLA. Members can access the index and other sheets in the series via the NLA website on www.landlords.org.uk. Further information and membership application forms may be obtained by contacting the National Landlords Association, 22-26 Albert Embankment London SE1 7TJ (Tel: 020 7840 8900), by e-mail at or by visiting the NLA website at www.landlords.org.uk. Copyright © National Landlords Association Limited 09 January 2007. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written permission of the copyright owner except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd. Any unauthorised reproduction or transmission of any part of this Information Sheet may result in prosecution. This Information Sheet is intended as general guidance only for individual readers and does not constitute accountancy, tax, investment or other professional advice. NLA Limited accepts no responsibility or liability for loss which may arise from reliance on information contained in this Information Sheet. Tax legislation, the law and practices by government and regulatory authorities are constantly changing and the guidance given should be assumed to be correct only as at the date of publication.
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