Tenant deposit schemes

06 April 2007



From 6 April 2007, landlords requiring deposits from tenants on Assured Shorthold Tenancies, will be required to join an approved Tenant Deposit Scheme. Failure to comply with this requirement may result in a fine of three times the amount of the deposit.

The new scheme was brought into effect to protect tenants' deposits and introduce free Alternative Dispute Resolution services. The provisions were introduced by The Housing Act 2004 (Sections 212 to 215), following a previous pilot scheme by the Housing Ombudsman and research by the Office of National Statistics. Previously, a number of landlords were withholding tenants' deposits as a matter of course and a number of tenants were routinely withholding the last month's rent, in order to avoid this taking place. This often rendered further action by the landlord, to recover sums pursuant to repairs and other breaches of covenant by the tenant, both difficult and uneconomical.

The Housing Act has now introduced two alternative schemes, which the landlord is required to enter into to protect the deposit. These are the "custodial" scheme and the "insurance-based" scheme.

Custodial Scheme

According to this scheme, the landlord would pay the deposit received from the tenant into a designated deposit account held by the Tenant Deposit Scheme administrator. Under this scheme the administration fees and costs would be taken from interest on the deposit sum, with the remainder of this sum being distributed to the tenant or landlord following termination of the lease.

At the end of the lease, the landlord and the tenant should apply for the return of the deposit to either the landlord or the tenant, or according to sums apportioned to each. If this has already been agreed, the Tenant Deposit Scheme administrator should return the relevant sums within 10 days of notification, pursuant to paragraph 4 (3) of Schedule 10 of the Housing Act. Alternatively, in the event of a dispute, the matter may be decided at court or through Alternative Dispute Resolution services. If one party is un-contactable however, it is possible for the other party to make a single claim to the scheme administrator.

Insurance Scheme

Under this scheme, fees are paid to the Tenant Deposit Scheme administrator and the landlord may be required to make a contribution towards the insurance premium. The landlord would also be required to to pay any amount of the deposit, when requested to do so, with the insurance moneys to cover any breach of this undertaking.

At the termination of the lease, the tenant should ask for the return of the deposit which, if not returned within 10 days may result in the tenant notifying the Tenant Deposit Scheme administrator, who can in turn direct the landlord to make relevant payments directly to the tenant. Accordingly, the landlord would have a further 10 days, from receiving a direction from the administrator, in which to return any sums due under the deposit, according to paragraph 6 (3) of Schedule 10 of the Housing Act.

In the event of a dispute, the landlord would be required to pay the full sum into the Tenant Deposit Scheme account, until it is resolved. As stated above, the insurance sums would be used to cover any failure by the landlord to do this and the administrator may also seek to recover sums directly from the landlord pursuant to the undertaking. Following any further court proceedings or Alternative Dispute Resolution, the administrator must return the relevant sums to the tenant or landlord, once they have been notified of the outcome. There are additional provisions under paragraph 8 of Schedule 10 of the Housing Act to avoid the possibility of the tenant seeking to recover sums directly from the landlord as well as the Tenant Deposit Scheme administrator.

For further information please contact Robert Clark, associate in the property litigation practice on 01753 279035.

© Copyright