Deposits and the Housing Act 2004

The provisions for the protection of tenancy deposits came into effect in 2007.  These provisions are included in the Housing Act 2004 which provides that since this implementation date, landlords are no longer be able to take a deposit unless it is safeguarded by a scheme.  The Housing Act 2004 was amended by the Localism Act 2011 and the provisions of this Act came into force on 6th April 2012.  See Letting factsheet 24 for more information on the changes.

Tenancy deposit schemes

One or more TDSs will be secured to safeguard tenancy deposits paid by tenants who have assured shorthold tenancies. Once the provisions come into force they will apply to all new tenancy deposits taken in connection with assured shorthold tenancies. The vast majority of tenants in the private rented sector are assured shorthold tenants and will therefore be entitled to the protection offered by a TDS.

Schemes will have two main purposes:

• to safeguard tenancy deposits paid in connection with assured shorthold tenancies; and
• to facilitate the resolution of disputes arising in connection with such deposits.

Arrangements will be made with bodies to set up and manage Tenancy Deposit Schemes on the Government's behalf. These will be scheme administrators. At present the intention is to do this through contractual arrangements with private organisations. Both custodial (where the deposit is paid into a scheme) and insurance-based schemes will be chosen as a result of a competitive tendering process where each proposed scheme will be examined against set criteria.

Schemes are likely to be self-financing, but the Government may provide financial assistance to cover some costs for the schemes. The Government will also be able, if necessary, to provide a financial guarantee for schemes, for example, should they be at risk from becoming insolvent or if a scheme administrator misappropriates the monies in the scheme.

The Government will be able to check the accounts of a scheme (and other information) to ensure the scheme is offering value for money and not misappropriating tenants' deposits.

Any amount of money taken by a landlord or agent acting on their behalf, from a tenant which acts as a security deposit, even if it is not called a 'deposit', will be protected by this legislation. This is to counter the possibility that some unscrupulous landlords may attempt to avoid having to take a deposit in accordance with a TDS by calling it by another name.

Requirements relating to tenancy deposits

A landlord will not be able to take a deposit in respect of an assured shorthold tenancy unless it is to be covered by a TDS.

A landlord will have to:

• deal with a deposit in accordance with an authorised scheme,
• comply with the initial requirements of a scheme within 30 days (previously 14 days) and
• give the tenant the appropriate information relating to the deposit within 30 days (previously 14 days) of receiving the deposit.

Until this is done, the landlord will be unable to regain possession of the property using the usual 'notice only grounds' for possession. Under Section 21 of the Housing Act 1988 a landlord can obtain an order for possession of an assured shorthold tenancy at any point after the first six months of the tenancy providing any fixed term has expired and they give the tenant at least two months written notice.

Preventing a landlord from being able to use this ground will provide the tenant with a much greater security of tenure and will act as an incentive for landlords to ensure deposits are safeguarded by a TDS.

Court proceedings

Where a landlord has not arranged for a deposit to be dealt with in accordance with a scheme or provided the tenant with relevant information within 30 days (previously 14 days) of receiving the deposit, the tenant can apply directly for a court order for the landlord to repay the deposit to that person or pay it into a custodial scheme.

If the landlord has failed to comply with these provisions the court must make the order as requested and order the landlord to pay the applicant an amount of between one and three times the deposit.

Custodial schemes

Under custodial schemes, a tenant pays the deposit to a landlord who is then required to pay the whole of this amount into a designated scheme account. The scheme administrator will hold the deposit until it is paid to the tenant or landlord, in accordance with their agreement or following a court order, after the tenancy has ended.

The designated account must not contain any other monies except deposits and interest accrued on those deposits.

Where a scheme administrator returns a deposit to either tenant or landlord, they should do so with interest added at a rate specified by Government. Any interest additional to this can be retained by the scheme administrator and can be used to fund the administration of the scheme.

At the end of the tenancy, if both the tenant and landlord notify the scheme administrator that they have agreed that either the whole deposit is returned to one party or part of the deposit returned to both parties and the scheme administrator is satisfied that such an agreement has been reached, the scheme must pay out in accordance with the agreement within 10 days of receiving notification.

If no agreement is reached the scheme administrator will retain the deposit until either the tenant or landlord obtain a final court order specifying the proportion of the deposit to which each is entitled. The scheme administrator will then pay out in accordance with the court order within 10 days of receiving notification of the decision.

Insurance-based schemes

Under insurance-based schemes, a landlord retains a deposit and only transfers it into a scheme if there is a dispute with the tenant at the end of the tenancy. The scheme will then hold the deposit until the dispute is settled. When the tenant and landlord reach agreement (perhaps through alternative dispute resolution) or a court decides the amount of deposit to which each party is entitled, the administrator will distribute the deposit amount to the relevant party. The scheme will need to pay the tenant regardless of whether the landlord has transferred the deposit to the scheme as required.

A landlord who retains a deposit in accordance with the terms of the scheme must undertake to reimburse the scheme on the directions of the scheme administrator if the scheme has had to pay out deposit monies to his tenant without receiving the deposit from the landlord.

Schemes must establish and maintain adequate insurance coverage to allow for the scheme to make such payments where a landlord fails to reimburse the scheme. A scheme may require participating landlords to pay contributions towards this or charge any other fees towards the administration of the scheme.

Where participating landlords are also members of the scheme, the landlord's membership may be terminated by the scheme administrator if a landlord fails to reimburse the scheme as directed.

Where there is a dispute at the end of a tenancy, a landlord cannot retain the deposit and generate interest on it. A landlord will be required to transfer the deposit amount to the scheme to hold until the dispute is settled. The landlord must do this within 10 days of being directed to do so by the scheme administrator. When the tenant and landlord reach agreement (perhaps through alternative dispute resolution) or a court decides the amount of deposit to which each party is entitled, the administrator will distribute the deposit amount to the relevant party. Where a tenant has notified the scheme that they have requested that the landlord pay them all or part of the deposit and this has not been paid to them within 10 days, the scheme must direct the landlord to pay the outstanding amount into a designated account within 10 days of being so directed.

Where either a court decision is made as to how much should be returned to either of the parties or the tenant and landlord have reached a decision, the scheme must pay this amount to the relevant party or parties. This payment should be made within 10 days of receiving notification that a decision has been made.

This payment should be made out of the amount held by the scheme, which has been transferred by the landlord as directed. Where the amount to be paid out is less than the amount held, the scheme must return the balance to the landlord. Where the amount to be paid out is more, the scheme must direct the landlord to pay the difference within 10 days. The scheme must still make the payment within 10 days of receiving notification that a decision has been made. The designated account must not contain any other monies except deposits and interest accrued on those deposits.

Where a scheme administrator returns a deposit to either tenant or landlord, they should do so with interest added at a rate specified by Government. Any interest additional to this can be retained by the scheme administrator and can be used to fund the administration of the scheme. A scheme must ensure that the tenant does not wrongly recover sums in respect of the deposit twice, i.e. from a scheme and from the landlord by pursuing a court order directly against them. A scheme can require that it is reimbursed by the tenant for any amounts paid out to them, which they have then recovered from the landlord.

Alternative Dispute Resolution

All schemes (custodial and insurance-based) must make available alternative dispute resolution (ADR) mechanisms so that the parties can try to resolve disputes without resorting to the courts. At present there is very little an aggrieved tenant my do short of taking the matter to court which can be a lengthy and cumbersome process. ADR will not displace the courts or prevent either party from taking the matter to court but it gives the parties another option to try to resolve their dispute.

Frequently asked questions about the new scheme

How do these provisions affect assisted rent deposit schemes?

Some assisted deposit schemes offer a guarantee to landlords of an amount up to the value of the deposit. The scheme promises to pay the landlord if a tenant has been found to cause damage to, or theft from a property. Under these provisions, such guarantees would not count as a deposit so these schemes will continue to operate in the same way they do now. Rent Deposit Loan schemes will be expected to work within the provisions as they involve a transfer of money to the landlord. The provisions take account of situations where a third party has made arrangements with the tenant to pay the deposit on their behalf.

Where do these provisions leave organisations that already have voluntary schemes up and running?

The government's intention is to use these provisions to allow for any private organisation to submit a bid to set-up and manage a scheme as part of the competitive tendering process. We recognise the specialised knowledge that such industry bodies have and fully welcome them to submit bids for tender. Whereas up until now industry organisations have only considered insurance-based schemes, under these provisions there is now potential for an industry body to set-up and manage a custodial scheme. Indeed, there is nothing in the provisions to prevent one organisation from managing more than one scheme.

How does all this fit in with the Law Commission's Review of Tenure?

The Law Commission's Review of tenure which resulted in their 'Renting Homes' report last November is to be followed by a draft Bill early next year. Their proposals will have far-reaching consequences in both the private and social sectors and will need careful consideration. We continue to see linking the safeguarding of tenancy deposits to standard written agreements as sensible. In February this year we asked the Law Commission to draft indicative clauses on tenancy deposits alongside their draft Bill. We will revisit provision for tenancy deposit protection in the context of these draft clauses and the rest of the Law Commission's draft Bill.

How will these provisions affect irresponsible landlords?

The Housing Act 2004 (as amended by the Localism Act 2011) provides that landlords will no longer be able to take a deposit unless it is safeguarded by a scheme. Tenants will need to take some responsibility themselves to ensure that they only use landlords or agents who participate in a scheme. Landlords will be required to tell their tenant which scheme their deposit is held under and the responsible tenant should double-check this with the scheme itself. Where a landlord is found to have lied to the tenant, they will be prevented from evicting them until the money is held in accordance with an authorised scheme, or the deposit is returned.

If the deposit is not held in accordance with an authorised scheme or the tenant has not received the correct prescribed information, the tenant can apply directly for an order for the landlord to repay the deposit or pay it into a custodial scheme.  The court must also order the landlord to pay the applicant an amount of between one and three times the deposit. This will act as a huge disincentive for dishonest landlords to attempt to cheat the new system.

Aren't these provisions unfair on good landlords?

We appreciate that most landlords are good landlords who deal with tenancy deposits fairly. However, these provisions need to be put into place to force the minority of bad landlords to act responsibly by safeguarding tenancy deposits. Good landlords are already acting responsibly by safeguarding tenancy deposits. The provisions put into place a simple process for all landlords to go through to ensure tenancy deposits are safeguarded. This is in the interests of both landlords and tenants.

The future

Implementation of these provisions will consist of a number of steps, the first of which will be a small research project looking at how schemes would work. This would involve discussions with the relevant stakeholders, including the trade representative bodies, tenant representative bodies, financial institutions and insurers to identify possible opportunities and constraints. This will help us to ascertain the baseline criteria that we will need to assess proposed schemes against.

Once a list of criteria is compiled, the competitive tendering exercise can begin. Bodies will be able to put forward bids for proposed schemes that we can examine against the set criteria. As a minimum, we would need to procure one custodial scheme and one insurance-based scheme to give landlords and agents greater flexibility and choice as to how they wish to safeguard deposits.