Tenancy Deposits and the Housing Act 2004

Position prior to April 2007:

Prior to April 2007 landlords and their agents were free to decide whether to require deposits from their tenants and, whilst the vast majority did require some form of deposit, some did not.  The amount of the deposit was normally between four and six weeks rent.  Where an agent was managing a property this sum would have been held by him either as agent for the landlord or as stakeholder between the parties. 

Professional bodies such as the Royal Institute of Chartered Surveyors (RICS), National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents (ARLA) required their members to hold such monies in a separate client account.  Unless the tenancy agreement specified otherwise, there was no requirement to pay to the tenant any interest earned on the deposit or to hold the monies in a client account.  Landlords might also hold deposits for their tenants and there were no legal requirements as to how such monies should be held.  Unless the agent or landlord was a member of a body that provided dispute resolution for deposits, such disputes ultimately had to be resolved in the County Court.  

There was criticism of this lack of regulation from organisations such as Shelter and having tested a trial deposit scheme in 2000-3, the Government concluded that there is no clear evidence to suggest that the actual incidence of tenants losing their deposits is so high as to require legislative intervention.  A decision was subsequently made to include legislation for the protection of tenancy deposits, and this was duly enacted within the Housing Act 2004. 

Provisions of Housing Act 2004:

The Tenancy Deposit Schemes were introduced in Chapter 4 of the Act, sections 212 – 215 and Schedule 10.  These sections were not in the original draft bill but were added during the consideration of the bill in the House of Lords in May 2004 as a result of pressure from backbenchers and others.  The House of Commons did not consider these provisions in detail.  Much of the provisions for deposit schemes will be contained in the Regulations, which were published in January 2007.

The Act only covers assured shorthold tenancy agreements (section 213) starting on or after 6^th April 2007.  It does not cover assured tenancies or other tenancies such as company lettings excluded from the Housing Act 1988 (see Schedule 1) or pre Housing Act tenancies.

A tenancy deposit is defined  by Section 212(8) of the Housing Act 2004 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'.

This means that any form of money that is taken at the beginning of a tenancy on the understanding that it will be returned to the tenant at the end of the tenancy needs to be safeguarded, whether it is called a ‘deposit’ or not.  The Act only applies where money, either cash or its associated forms, such as a cheque or a banker’s draft, is passed to the landlord or his agent from either the tenant or a third party.  Third party guarantees or ‘promises to pay’ are not deposits for the purposes of the Act and therefore may continue to be used.  Guarantees offered by local rent deposit schemes might continue to be offered.  However, where a rent deposit scheme provides money by way of a loan of the deposit and pays such money to the landlord, this money must be protected by a tenancy deposit scheme under the Act as actual money has passed to the landlord.

In November 2006 the Government awarded contracts to three companies to run tenancy deposit protection schemes from 6 April 2007.  Computershare Investor Services plc who will run the single custodial deposit scheme, with the Chartered Institute of Arbitrators providing the Alternative Dispute Resolution (ADR) service.  The Dispute Service Limited will run an insurance-based scheme directed primarily at letting agents, they will also run the scheme’s ADR service.  My Deposits (formerly Tenancy Deposit Solutions Ltd) will run an insurance-based scheme, sponsored by the National Landlords Association and administered by Hamilton Fraser Insurance, directed primarily at landlords.  The Chartered Institute of Arbitrators will be the principal provider of ADR to this scheme.

Since the introduction of the Tenancy Deposit Protection legislation in 2007 a number of court cases have interpreted its practical effect including Tiensia v Vision Enterprises Ltd (t/a Universal Estates) [2010] EWCA Civ 1224 (where the tenant could not sue as the deposit had been protected prior to the court hearing) and Gladehurst Properties Ltd v Hashemi [2011] EWCA Civ 604  (where a tenant was unable to bring a case against a landlord for his failure to comply with the deposit protection legislation once the tenancy had ended).

Whilst most responsible agents and landlords have continued to protect deposits through one of the three schemes, there has been little to prevent those who do not wish to do so from ignoring it altogether.   The defences raised in the Court of Appeal cases above have now been superseded by the Localism Act 2011, which makes important changes to tenancy deposit protection under the Housing Act 2004.  

Provision of The Localism Act 2011:

The Localism Act received Royal Assent on 15^th November 2011 and the changes to tenancy deposit protection come into effect on 6^th April 2012.   The provisions of the Act are as follows:

• Under previous legislation there was no penalty available for landlords who did not comply within the specified period of time e.g. 14 days (now 30 days).  A penalty could be awarded for non-compliance but where compliance had occurred prior to the court hearing no penalty was available.  The legislation has now been amended and landlords or agents must protect the deposit and provide the prescribed information within 30 days of receipt.  This is an absolute time limit and tenants will be able to make a claim from 31 days after the deposit has been paid if the money has not been protected and the prescribed information not given. 

• Tenants can now make an application to the court after the tenancy has ended under section 214 and where the deposit has been protected after 30 days the courts will take this into account when deciding on the level of penalty.  Prior to 6^th April 2012 the legislation did not allow for a tenant to make a claim after the tenancy had ended.

• Non-compliance within the 30 day period will result in the court ordering the landlord to return the deposit or pay it into a custodial scheme and pay a penalty sum to the tenant.  The court now has discretion to award a penalty of between one and three times the amount of the deposit, instead of the previous fixed amount of three times the deposit.

• Previously where the landlord had failed to meet the initial requirements to register the deposit he could not serve a Section 21 notice.  The Localism Act has amended this provision so that a Section 21 notice can be served but only where the landlord first returns the deposit to the tenant in full or with deductions, as agreed with the tenant, or where any court proceedings have been concluded, withdrawn or settled. 

The transition period is proposed as follows:

• Any new tenancies created on or after 6^th April 2012 will be covered by the new requirements

• Any tenancies already in existence on 6^th April 2012 will have 30 days to comply with the new requirements

• The new requirements will only apply to Court proceedings which started on or after 6^th April 2012

Custodial Deposit Scheme:

In this scheme the tenant pays the deposit to the landlord or agent who must then pay the deposit into the scheme within 30 days (14 days prior to the Localism Act) of receipt, which will be the key difference with the insurance scheme (See below).  The landlord must also give the tenant information about the scheme being used within 30 days of receiving the deposit.  The interest accrued by deposits in the scheme will be used to pay for the running of the scheme and any surplus will be used to offer interest to the tenant, or the landlord depending on the terms of the tenancy agreement.  This scheme will have no direct cost to either the landlord or tenant.

At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, they will tell the scheme, which will return the deposit, divided in the way agreed by both parties.  However, if there is a dispute, the scheme will hold the amount until the dispute resolution service or courts decide what is fair.  The deposit must be returned within 10 days of the end of the tenancy provided the landlord and tenant have agreed the amount.

Insurance based Deposit Schemes:

Here the tenant pays the deposit to the landlord who retains the deposit, and any interest earned on the deposit subject to the terms of the tenancy agreement, and pays a premium to the insurer.  At present it would appear that the cost of using this scheme will be borne by the landlord or his agent in terms of both an annual fee and a per deposit fee.  As with the custodial scheme within 30 days (14 days prior to the Localism Act) of receiving a deposit, the landlord must give the tenant information about the scheme being used.  There are to be two insurance based schemes.

At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, the landlord returns all or some of the deposit.  If there is a dispute, the landlord must hand over the disputed amount to the scheme for safekeeping until the dispute is resolved.  If for any reason the landlord fails to comply, the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.

Alternatives to deposits:

At present not every landlord requires a deposit, this is a brief examination of some possible alternatives.  They should not be seen as a recommendation of any or all of them but the introduction of the compulsory statutory deposit scheme may be a good time to look at what function deposits fulfil and whether there are any acceptable alternatives.

Guarantors
A contract of guarantee, in the context of lettings, is a contract whereby the guarantor promises the landlord to be responsible for the due performance by the tenant of his obligations under the tenancy agreement if the tenant fails to perform these obligations.  This will normally cover the payment of rent and other tenant's obligations. It will be necessary to find an appropriate guarantor.  Similar credit checks and references should be taken on the guarantor as would normally be taken for a tenant in order to establish the guarantor's ability to meet any defaulted rent payments or other costs.  Many landlords and agents insist that a guarantor must own their own home so that, if all else fails, then a legal charge can be registered against that property.  It would be important, if a guarantee is to be used instead of taking a deposit that the guarantee agreement is both comprehensive and binding.  As the courts have held that guarantors can resign from the guarantee, having given a reasonable period of notice that tenancies are granted for the same fixed term as the guarantee.  So after the initial fixed term of, say, six months the tenancy should not be allowed to become periodic but, if continued, should be by way of a new fixed term with a new guarantor agreement.

Insurance
There are a number of providers of insurance to the private rented sector which cover either non payment of rent or breaches of the tenancy agreement which would cover dilapidations issues.  Indeed the new deposit proposals might encourage new policies to be developed by new players to this market.  An example of an insurance provision covering the later situation might be as follows- "An incident or the first of a series of incidents where the Tenant fails to perform his obligations set out in the Tenancy Agreement relating to the rightful occupation of the Insured Property." The costs involved in taking out insurance policies would then become part of the set up costs of the tenancy and could be passed on to the tenant.

Rigorous tenant vetting
Most insurance providers will require tenant vetting either carried out by himself or herself in-house or by an approved provider.  Thorough tenant referencing will not prevent a change of circumstances to the tenant; for example, they may lose their jobs or suffer marital breakdown.  Tenant referencing would probably only protect the landlord's interests when used in combination with another of these alternatives.

Alternative Dispute Resolution Services:

Each scheme will contain an Alternative Dispute Resolution (ADR) service.  When a dispute occurs, and if landlord and tenant both agree to use the service, they will also have agreed to be bound by its decision with no recourse to the courts.  Disputes will only go to the courts if the landlord and tenant do not agree to use the ADR service.  ADR will be free of charge for landlords and tenants.

In the custodial scheme, where a landlord or tenant does not co-operate to release the deposit, for example, by not agreeing to the release of full or part of the deposit and do not agree to resolve the dispute through ADR or a court action, then ADR will be the default way in which to resolve a dispute.  In the insurance-based scheme, where the landlord is in contact with the scheme but is refusing to co-operate with the scheme in terms of choosing ADR or the courts, it will be mandatory for the case to be referred to the scheme for resolution through its ADR service.  The same would not seem to apply to a tenant.

Sanctions:

Where deposits are accepted either by a landlord or agent the following provisions apply:

• they must be protected within one of three statutory schemes within 30 days of receipt;

• tenants and others must be provided with prescribed information within 30 days; and

• landlords and agents will be required to operate strictly according to the scheme rules.

Infringements of these requirements will lead to onerous penalties on the landlord or agent.  These sanctions operate under ss. 214 and 215 of the Housing Act as amended by the Localism Act 2011:

1.They will not be able to regain possession of the propertysection 21 of the Housing Act 1988 (the most common and straightforward mechanism for legally evicting a tenant) where they have failed to protect the deposit within 30 days unless:

  -   the deposit has first been returned to the tenant in full, or with such deductions as agreed with the tenant; or

  -   any court proceedings brought by the tenant for non-compliance have been concluded, withdrawn or settled.

2.Where the correct prescribed information has not been given to the tenant a section 21 notice cannot be served until the correct prescribed information has been provided (but this can be more than 30 days after receiving the deposit).

3.Where the court believes that the landlord or agent has failed to comply with these requirements they will have to pay a fine to the tenant of between one and three times the deposit amount, even where the tenancy has ended.

Sources for Further Information:

• The Letting Centre website: www.letlink.co.uk

• Department of Communities and Local Government website: www.communities.gov.uk

• Custodial scheme website: www.depositprotection.com

• Insurance schemes websites: www.thedisputeservice.co.uk & www.mydeposits.co.uk