Residential tenancy deposit schemes

On 6 April 2007, tenancy deposit schemes for assured shorthold tenancies will come into operation under Chapter 4 of the Housing Act 2004.

Despite a long lead time, and strict penalties for default, recent reports suggest that nearly a quarter of residential landlords are unaware of the requirements, while another half have heard of the legislation but do not know the details.

Set out below are the main changes and details of how those changes will impact on landlords of residential premises.

The current system

The way in which deposits are dealt with at present can be very unsatisfactory for tenants as, in general, the tenant’s deposit is paid directly to either the landlord or the landlord’s agent to be held as security for the performance of obligations by the tenant under the tenancy agreement.

Tenants often have difficulty securing the return of the deposit at the end of the tenancy. Their recourse in those circumstances is to issue proceedings at Court which can be both time consuming and costly, as a result of which many tenants simply give up.

The aim of the new provisions

The two main aims of the changes are:

• To safeguard deposits paid at the commencement of a tenancy; and
• To facilitate the resolution of disputes regarding the recovery of the deposit at the end of the term.

An outline of the tenancy deposit schemes

There are a number of different schemes open to a landlord but every landlord must hold the deposit in one of the schemes.

Custodial Schemes

• The landlord pays the deposit he has received from the tenant into a designated account held by the scheme administrator.
• At the end of the tenancy, if the landlord and tenant are in agreement or if a Court or Arbitrator determines how the deposit is to be allocated, the parties can apply to the administrator for the return of the deposit. The administrator must pay out the money (as detailed in the agreement, Court Order or Arbitrator’s award) within 10 days of receiving notification.
• Some of the interest which accrues on the money held can be used by the administrator to fund the scheme.
• There is no fee payable by landlords who join a custodial scheme.