On 6 April 2007 the provisions of the Housing Act 2004 in respect of deposits taken by landlords for Assured Shorthold Tenancies come into force. The new provisions only apply to tenancies entered into on or after the commencement date, which includes renewals of older tenancies.

Whereas before the provisions came into force, the landlord held on to the deposit, under the new provisions the deposit must be protected by a Tenancy Deposit Scheme. There are two types of scheme: a Custodial Deposit Scheme and an Insurance-Based Deposit Scheme. It is the landlord’s choice which scheme will be used.

Custodial Deposit Scheme

• On receipt of the deposit from the tenant the landlord will pay the deposit into the Scheme.
• Within 14 days of receiving the deposit, the landlord must give the tenant prescribed information about the scheme being used.
• At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, the Scheme will return the deposit in the shares agreed by the parties.
• If there is a dispute between the parties the Scheme will hold the amount in dispute until the matter has been decided either by the dispute resolution service or the Courts.
• The Deposit Protection Service will deal with the Custodial Deposit Protection Scheme. The Scheme is free and is funded entirely from the interest earned from the deposits held.

Insurance-Based Deposit Scheme

• Under this scheme the landlord retains the deposit and pays a premium to the insurer.
• Within 14 days of receiving the deposit the landlord must give the tenant prescribed information about the scheme being used.
• At the end of the tenancy, provided the landlord and tenant agree how the deposit should be divided, the landlord will then return whatever proportion of the deposit has been agreed.
• If there is a dispute between the parties, the landlord is required to pay the disputed sum into the Scheme for safe keeping until the matter has been resolved.
• If the landlord fails to do so, the insurer will pay the tenant on the landlord's behalf and pursue the landlord for any sums paid out.

In both schemes the deposit must be returned either within ten days of the parties agreeing the division of the deposit, or within ten days following ADR or Court decision.

The Scheme Operators

The Insurance-Based Deposit Schemes will be run by the Tenancy Deposit Solutions Limited and the Tenancy Deposit Scheme.

Disputes

Each Scheme will contain an Alternative Dispute Resolution Service. However, if the landlord and tenant do not agree to use this service then disputes will go to the Court.

Under the custodial scheme, if either party fails to indicate whether they accept ADR or not, then ADR will be the default method for resolving the dispute.

Under the insurance scheme, if the landlord fails to co-operate in choosing ADR or the Court, then ADR will be the default method for resolving the dispute.

Sanctions for Non-Compliance

If a landlord does not comply with the requirements of the Deposit Scheme then the following sanctions will apply:

1. The landlord will be unable to use the Accelerated Possession procedure under section 21 of the Housing Act 1988.
2. In order to regain possession of the property, instead of serving a simple notice requiring possession, the landlord will be faced with establishing one of the limited grounds allowed under the Housing Act 1988
3. The tenants can apply for a Court Order requiring the deposit to be safeguarded or the prescribed information to be given to them about the Scheme in which the deposit is safeguarded. If the Court considers that the landlord has not complied with the Scheme then it will order the landlord to either repay the deposit or to pay the deposit to the Custodial Scheme Administrator. The Court must also order the landlord to pay the tenant a fine of three times the deposit amount within 14 days of making the Order.

Further Information

If you require any further information or advice in respect of the operation of the Tenancy Deposit Schemes, please contact our team.