Tenancy Deposit Schemes - The Facts
Landlords entering into assured shorthold tenancy agreements must safeguard their tenant’s deposit through an authorised Tenancy Deposit Scheme (‘TDS’).
This applies to all assured shorthold tenancies granted since 6 April 2007.
The idea behind a Tenancy Deposit Scheme is that:-
- if there is a dispute, the Landlord and Tenant can use Alternative Dispute Resolution (‘ADR’) to try to reach an agreement between themselves; and
- it safeguards the tenant’s deposit.
On receiving a deposit, the landlord must:-
- deal with the deposit in accordance with an authorised scheme;
- comply with the initial requirements of the scheme; and
- give the tenant the appropriate information in relation to the scheme and the deposit within 30 days (i.e. say what scheme the deposit is held under should a dispute arise).
The tenant is advised to check that their deposit is held by that scheme.
Details of the 2 types of scheme
There are two types of tenancy deposit scheme: a ‘custodial’ scheme, and an ‘insurance-based’ scheme.
A) Custodial scheme
The tenant pays the required deposit to the landlord. The landlord must then pay the whole of the deposit to the Deposit Protection Service (DPS), who hold this throughout the tenancy. At the end of the tenancy the DPS will pay out the deposit to the person(s) entitled to it.
B) Insurance-based Schemes
The landlord receives the deposit from the tenant but holds it himself, only transferring it (plus the interest gained on it) to a scheme if a dispute arises at the end of the tenancy. The scheme then holds the deposit until the dispute is resolved, and will distribute it to the party entitled to it.
Should the landlord fail to pay the deposit to the scheme at the time of a dispute, the scheme will pay out the proportion owed to the tenant by agreement or by court order, and will reclaim this from the landlord.
Should less than the whole deposit plus interest held be agreed or ordered to be returned to the tenant, the scheme will return the remainder of the deposit to the landlord.
Where more than the total deposit plus interest is agreed or ordered by the court to be awarded to the tenant, the scheme must pay the tenant the extra within 10 days, and will reclaim this from the landlord.
On returning any deposit to the landlord following the dispute, the interest gained on the money whilst being held by the scheme administrator will be returned at a rate set by the Government. Any additional interest earned can be retained by the scheme administrator and can be used to pay for the administration of the scheme.
Since this is an insurance scheme, the landlord will have to pay an insurance premium to use it.
Failure to comply with a Tenancy Deposit Scheme
The Tenancy Deposit Scheme is compulsory: a landlord must use either a custodial or an insurance-based scheme and must follow the rules.
If the landlord does not do so, it cannot ask a Court to evict a tenant using the ‘accelerated possession procedure’ following service of a notice (under s21 Housing Act 1988) and so any eviction will be delayed. Although the initial notice to the tenant can be served late, the only way a landlord can evict under s21 if the deposit has not been protected, is to refund the full amount to the tenant.
Even where the deposit is refunded, the landlord is liable to a fine for not protecting it and/or not serving a notice, if the tenant subsequently pursues this. The Court can fine the landlord between one and three times the deposit amount depending on the seriousness of the offence.
The rules relating to tenant’s deposits are very strict and must be complied with.