26-06-2008
Tenancy deposit protection - is it working 1 year later?
by Adfero
It is now just over a year on from the introduction of the UK's tenancy deposit protection scheme on April 6th 2007. Has the scheme been beneficial to both landlords and tenants or has it created unnecessary confusion and stress? It is worth looking back at the scheme's performance over the last year to see whether it has been successful in its objectives and how, if at all, it has affected landlords.
What is Tenancy Deposit Protection?
Created to protect tenant deposits in relation to rent up to an annual total of £25,000, the tenancy deposit protection scheme covers properties in England and Wales that are rented out under assured shorthold tenancy agreements. The scheme was introduced to enable tenants to secure the return of their deposit, and to ensure that any dispute over the entitlement of it can be resolved as easily as possible. It was hoped that the scheme would encourage both parties to develop clear and mutually agreeable terms at the time of signing an agreement.
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Directgov said of the project: "The schemes allow tenants to get all or part of their deposit back when they are entitled to it and encourage tenants and landlords to make a clear agreement from the start on the condition of the property."
The types of scheme available - insurance-based and custodial
According to Directgov, under the terms of an insurance-based scheme, the tenant not only pays the deposit directly to their own landlord but this deposit is then kept by the landlord on the basis that a premium is paid to an insurer. Under the terms of a custodial arrangement, the tenant still makes a direct payment of the deposit to the landlord but the landlord does not retain the deposit; instead, the sum of money is transferred for payment into a custodial scheme.
However, there are elements of both schemes which are the same. For example, within 14 days of a deposit being received, it is a requirement that contact details of the selected scheme are provided to the tenant. Information relating to any deposit-related disputes will also be provided, along with contact details for either the landlord or letting agent and information that outlines exactly what the deposit is for.
The two schemes have different procedures for bringing the tenancy agreement to an end. Under the terms of the insurance-based scheme, if compliance cannot be obtained from the landlord in the event of a dispute, the insurance element can ensure the return of a deposit to the tenant, as long as the return is legitimate and they are entitled to it. Under the custodial scheme, in the event of a dispute over the deposit the sum of money is retained by the scheme until the matter is resolved.
What are the implications?
According to Directgov, under the terms of the scheme, if a tenant’s deposit is not protected, then the deposit amount, multiplied by a factor of three, will need to be refunded to the tenant. However the real implications may lie in the application of the schemes themselves. Tenant deposits should only be refunded only when there is a legitimate entitlement to a return - if entitlement does not exist, it is surely reasonable to assume that a landlord will not be unfairly affected.
However in cases where neither the landlord nor the tenant is willing to give up their claim, the landlord may be the one to eventually lose out. This is because in most cases a landlord will take money from a deposit to cover damages created by the tenant. While the money is held in the scheme waiting for the issues to be resolved, the landlord is losing out.
Geoff Wood, a landlord writing on the landlord law blog, takes a cautionary standpoint on the matter and says that the schemes represent a lot of work for landlords.
"Each has different paperwork and it is a minefield. Don't expect tenants to get their deposits back within ten days - the government's original, worthy objective - because we still want to see utility bills are paid," said Mr Wood.
Whether or not landlords across the board are losing out under the scheme is not entirely clear, although it does appear that there are aspects which are not wholly satisfactory. However, while the aims of the scheme are commendable enough, it is just not necessarily the case that the solution really fits the scale of the problem.
