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By Faye Schneider, Landlord & Tenant team

Are you a landlord or a tenant of a residential property on a short-term letting (also known as an ‘assured shorthold tenancy’)? Was the tenancy agreement granted on or after 6 April 2007? If so, are you aware of the legal requirements in relation to tenancy deposit schemes?

If you don’t know about tenancy deposit schemes, then you should read the following article, as it contains vital information for anyone letting or renting a property. Even if you are, don’t stop reading yet, as you may learn something new.

What are Tenancy Deposit Schemes?

Tenancy deposit schemes were set up following a change in the law in April 2007, in order to:

  • Protect deposits paid to landlords by tenants; and
  • Deal with disputes relating to those deposits.

The legal requirements only apply to residential properties in England and Wales, which are assured shorthold tenancies and which were signed after 6 April 2007. Therefore, the scheme requirements do not apply to:

  • Tenancies signed before 6 April 2007 (and which have not been renewed since);
  • Commercial tenancies;
  • Company lettings or other tenancies that are not assured shorthold tenancies.

What is a deposit?

A deposit is usually a lump sum payable by a tenant to a landlord before keys to a property are handed over. It usually acts as security for the tenant’s obligations in the tenancy agreement, for example, to repair any damage caused to the property, replace missing fixtures or fittings, or to cover non-payment of rent. Provided a tenant complies fully with the obligations in the agreement, then the deposit should be returned in full at the end of the tenancy.

However, what the law considers to be a deposit may not actually be called a “deposit” (for example, a cleaning fee paid to the landlord in lieu of cleaning required at the end of the tenancy) and so landlords must be careful when requesting money for anything other than the ongoing rent, as they could fall foul of the legal requirements if that money is not protected by a tenancy deposit scheme.

The Schemes
There are three schemes:

The Deposit Protection Services is referred to as a ‘custodial scheme’, which means that the landlord pays the deposit to the scheme provider, who looks after it until the end of the tenancy.

The Tenancy Deposit Scheme and MyDeposits are insurance-based schemes. That means landlords (or their letting agents) keep the deposit, but pay a fee to the scheme providers to protect the deposit and comply with the legal requirements. The Tenancy Deposit Scheme is intended for letting agents and MyDeposits for landlords.

How do they work?

Basically, the law states that when a landlord or letting agent has decided which scheme to use, they must notify the tenant of the choice within 14 days of the beginning of the tenancy. This is referred to as providing the “prescribed information” (sometimes landlords or letting agents will include this in the tenancy agreement), which includes details about which scheme will apply and what to do in the case of a dispute over the deposit. It’s not just the tenant who must receive prescribed information. If a third party paid the deposit for the tenant, they too must receive the information from the landlord or agent within the same 14-day period.

What happens if there is a dispute in relation to a deposit?

If there is a disagreement in relation to whether the deposit will be returned at the end of the tenancy, the landlord or tenant may refer the dispute to the scheme provider to decide the outcome. The providers listed above offer dispute resolution services to landlords and tenants to avoid having to go to court. Court proceedings are often slow and will sometimes cost more that the amount of money in dispute. However, the option of court proceedings is still available to both parties. One point to note is that there are time limits within which a dispute may be referred to the scheme providers and therefore it may be necessary to go to court, if those limits have passed.

What happens if landlords or letting agents don’t comply?

Briefly, if a landlord does not protect the deposit with a scheme provider, the tenant may be entitled to three times the amount of deposit in compensation from the landlord. A further downside for landlords who fail to comply with the tenancy deposit scheme requirements is that they will not be able to serve a Section 21 Notice (i.e. two months’ notice given in writing to the tenant, stating that the landlord wants possession of the property) to end the tenancy.

If a landlord has not protected the deposit and therefore is not able to serve a Section 21 Notice, they can (and should) still protect the deposit and then serve the notice. The fact that the deposit was not protected and the prescribed information not provided to the tenant within the 14-day time period will not prejudice a possession claim by the landlord. The crucial point is that the deposit is now protected.

If the deposit has not been protected, it is unlikely the landlord will obtain possession of their property in reliance on a Section 21 Notice until the deposit has been protected by a scheme. In addition, landlords also risk having to pay tenants compensation. In view of all this, landlords need to ask themselves: is it really worth not complying with the tenancy deposit scheme requirements?

Developments since 6 April 2007

Since the law came into force, there have been a number of court decisions about tenancy deposit schemes. These cases provide guidance as to how courts deal with non-compliance with the requirements.

A summary of some of those decisions is listed below:

  • The tenant’s entitlement to compensation of three times the amount of the deposit will not apply after the tenancy has come to an end;
  • When an old tenancy came to an end and a new tenancy was granted, the court decided that the existing deposit had to be protected by a tenancy deposit scheme, even though no further deposit was paid to the landlord. In some instances, landlords were made to pay tenants compensation of three times the deposit as a result of failure to protect the deposits;
  • Where a section 21 Notice was served on the tenant at the start of a tenancy (but before the deposit was protected), the notice was held to be invalid;
  • Where a section 21 Notice was served on the tenant soon after the tenancy commenced (but before the deposit was paid to the landlord), the notice was valid;
  • Claims can be brought against letting agents as well as landlords. In these circumstances, letting agents will be liable to pay any compensation to tenants in the event that deposits are not protected. Landlords may be able to successfully set off claims for breach of the tenancy agreement against an order to pay compensation to the tenant for failing to protect the deposit;
  • Where the tenant sued the landlord for compensation following their failure to protect the deposit, no compensation was payable to the tenant when the landlord paid the deposit into a scheme before the court hearing;

This is only an overview of cases at the date of this article and court decisions may be overturned or varied in the future. You should always seek up-to-date legal advice before acting: contact [email protected]