Tenancy Deposit Protection

Introduction

TDP will apply to all assured shorthold tenancies (ASTs) in England and Wales, where a deposit is taken. Virtually all new contracts to let a property are ASTs. It will start on 6 April 2007, and be valid for all new tenancy agreements from this date.

There are two main aims:

1. To ensure good practice in deposit handling, so that when a tenant pays a deposit, and is entitled to get it back, they can be assured that this will happen.
2. To assist with the resolution of disputes by having an alternative dispute resolution service (ADR). It will also encourage tenants and landlords to have in place, from the outset, clear agreement on the condition of the property through best practice, such as the use of inventories, and agreement on the condition of the property.

Tenancy Deposit Protection in summary

• Landlords will be required to join a statutory tenancy deposit scheme, if they take deposits
• This will mean that deposits are safeguarded
• Tenants will get all or part of their deposit back, if they have kept the property in good condition and are entitled to get their deposit back
• The scheme offers alternative ways of resolving disputes which aims to be faster and cheaper than taking court action

How does Tenancy Deposit Protection work?

Landlords will be able to choose between two types of scheme: a single custodial scheme and two insurance-based schemes.

Custodial scheme

• The tenant pays the deposit to the landlord;
• The landlord then pays the deposit into the scheme;
• Within 14 days of receiving a deposit, the landlord must give the tenant the prescribed information about the scheme being used and the tenancy;
• At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, they will tell the scheme which returns the deposit, divided in the way agreed by both parties;
• If there is a dispute, the scheme will hold the amount until the dispute resolution service or courts decide what is fair;
• 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 landlord if the tenant isn't entitled to it.

Insurance-based schemes

• The tenant pays the deposit to the landlord;
• The landlord retains the deposit and pays a premium to the insurer - the key difference to the custodial scheme;
• Within 14 days of receiving a deposit, the landlord must give the tenant prescribed information about the scheme being used and the tenancy;
• 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.

Example: a tenant pays a deposit of £1000. At the end of the tenancy, the landlord says he wishes to keep £200 to pay for replacing damaged furniture. The remaining £800 will be returned to the tenant. The tenant disagrees, claiming the furniture was damaged when they moved in. Both agree to go to ADR, so the disputed £200 will be transferred to the scheme administrator until the dispute is settled.

In each scheme, the deposit must be returned within 10 days of the landlord and tenant agreeing how the deposit should be divided, or within 10 days following notification of an ADR/court decision.

The implementation of Tenancy Deposit Protection

The government awarded contracts to three companies to run its tenancy deposit schemes.

The Deposit Protection Service (The DPS)

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 be available should internet access be an issue. The scheme will be supported by a dedicated call centre and independent dispute resolution service. www.depositprotection.com

Tenancy Deposit Solutions Ltd (TDSL)

This is a partnership between the National Landlords Association and Hamilton Fraser insurance. The insurance-based tenancy deposit protection scheme is designed primarily to enable landlords to continue to hold deposits. www.mydeposits.co.uk

The Tenancy Deposit Scheme (TDS)

This is an insurance-backed deposit protection and dispute resolution scheme run by The Dispute Service. It was established in 2003 to provide dispute resolution and complaints handling for the lettings industry, including a voluntary deposit scheme for regulated agents which TDS will now absorb. It is designed primarily to enable letting agents to continue to hold deposits.

Penalties

Landlords and Agents must follow two important steps:

1. They must protect the deposit with one of the schemes outlined above
2. They must give the tenant information about which scheme it is protected with, within 14 days of the receipt of the deposit

If a landlord or agent has failed in either of these two steps, a tenant can go to court. Where there is sufficient evidence the courts will:

1. Order the landlord to either pay back the deposit or protect it with a scheme; AND
2. Pay the tenant three times the value of the deposit

In addition to this a landlord or Agent will not be able to serve a section 21 notice to quit if they have not protected a deposit.

If you would like further information on TDP, go to the website www.communities.gov.uk/tenancydeposit