Tenancy Deposit Scheme Q&A
Tenancy
Deposit Scheme Q&A
Q.1 When does tenancy deposit schemes start?
It commences on the 6th April 2007 but only in respect
of deposits received on or after that date. If you receive a deposit before
that date then you do not have to deal with it under the scheme (except where a
tenancy agreement is expressly renewed after that date).
However, it is understood that preliminary Government
legal advice is that where the deposit is paid before 6th April 2007 and the
tenancy commences (i.e. the tenant moves in) after that date, the deposit will
be subject to Tenancy Deposit Scheme.
Q.2 Do I have to take a deposit?
No – you are not obliged to take a deposit. If you do
so, however, then you will have to deal with it in accordance with the tenancy
deposit scheme. Otherwise you can suffer penalties.
Q.3 What sort of tenancies will deposit protection apply
to?
All deposits taken by landlords in relation to assured
shorthold tenancies (ASTs) in England and Wales. It only applies where an AST
is entered into.
Q.4 Are there are types of tenancy to which the tenancy
deposit scheme does not apply?
Yes – If your tenancy is not an assured tenancy at all
or if it is a non shorthold tenancy even though you take a deposit then you can
legally deal with it outside the tenancy deposit scheme.
Q.5 I am and owner/occupier wanting to let my own home.
Can I take a deposit and avoid the Tenancy Deposit Scheme?
Yes this is possible but you have to be very careful
about what you are doing and you would be well advised to take legal advice.
Unless you take particular steps, when you let your own home, the tenancy will
be an Assured Shorthold Tenancy so any deposit taken by you needs to be
protected under one of the Tenancy Deposit Schemes
However, provided you have been living in your home and
it has been your only or (if you have more than one home) your main you can
take a deposit without protecting it under a Tenancy Deposit Scheme by taking
the following steps:-
1.Your Tenancy Agreement must contain a Ground 1 Notice.
This is a Notice to the tenant in the following format:-
“The Landlord hereby notifies the
Tenant that the provisions of Ground 1 in Schedule 2 to the Housing Act 1988
apply to the tenancy created by this Agreement. This means that the Court must
make an order for possession in favour of a landlord who has lived in the
property as his or her only or main home at some time prior to the grant of
this tenancy or a landlord who is seeking possession of the property in order
to occupy the same as his or her only or main home”.
2. You must opt out the Assured Shorthold Tenancy regime
and make your tenancy a non shorthold tenancy. You do this by including a
clause in the Tenancy Agreement as follows:
“This tenancy is not an
Assured Shorthold Tenancy”.
3. You should either let the property on a monthly tenancy or for a
fixed term of no more than 12 months. If you let on a fixed term tenancy you
will not be able to get your property back until this fixed term has run out,
unless the Tenancy Agreement includes a break clause allowing you to end the
fixed term early.
You must do all of these things. As a result, what you are doing is
to make your tenancy a non shorthold tenancy but it is then subject to the
Ground 1 provisions. This means that you can rely on ground 1 to regain
possession but (if it is a fixed term tenancy) only once any fixed term of the
tenancy has come to an end. To do this you have to serve a Section 8 Notice
relying on Ground 1 (as opposed to the usual Section 21 Notice which applies
for Assured Shorthold Tenancies). This is a 2 month Notice. You cannot however
use the accelerated possession procedure and would go to a Court Hearing to
obtain possession.
Q.6 What happens if the tenancy is called an assured shorthold
tenancy when, in fact, it is not?
Often unwittingly properties are let to companies on a tenancy which
is described as being an assured shorthold tenancy or a tenancy where the rent
payable is over £25,000 is mis-described as being an assured shorthold tenancy.
This will not affect the position because, as a matter of law, however, the
tenancy is described, it is not an assured tenancy if it is a company let or if
the rent exceeds £25,000. In such a situation the deposit will not be subject
to the tenancy deposit scheme.
Q.7 It has been suggested that if I let a property on a license then
I can take a deposit outside the tenancy deposit scheme?
Legally, it is very difficult to create a license. You would need
specialist advice. You are only likely to be able to create a license if you
let hostel type accommodation. If you were successfully able to create a
genuine license arrangement then the tenancy deposit scheme would not apply to
any deposit taken.
Q.8 What about holiday lettings?
Any deposits taken in connection with holiday lettings would be
outside the tenancy deposit scheme.
Q.9 What happens regarding the deposit if it not an assured
shorthold tenancy?
You can deal with the deposit as provided for in the agreement.
Provided the tenancy is not an assured shorthold tenancy then it is not subject
to the tenancy deposit scheme. You must still keep to any contractual
provisions relating to the deposit which are set out in the tenancy agreement.
Q.10 Even where the Scheme applies is there any control on the
amount of the deposit payable?
No.
Q.11 Does it matter who pays the deposit?
As long as a deposit is paid it does not matter whether it is paid
by the tenant or someone else on the tenant’s behalf. It could be a parent.
Some local authorities operate tenancy deposit schemes which pay over a
deposit. All of these are subject to the tenancy deposit scheme where there is
an AST in place.
Q.12 Does tenancy deposit protection apply to landlords who live
overseas?
If a landlord lives overseas but lets a property in England or Wales
on an assured shorthold tenancy (AST) and takes a deposit, the landlord will
have to protect their tenants’ deposit.
Q.13 What is the average deposit for an assured shorthold tenancy
(AST)?
According to the Government, the most recent Survey of English Housing
(05/06) found that the average deposit for an AST in England is £695. Deposits
are usually set at an amount equivalent to one month’s rent or perhaps six
weeks rent.
What is a tenancy
deposit?
Q.14 Can you please explain what is a tenancy deposit?
The legislation defines a tenancy deposit as money intended to be
held as security to ensure that the tenant pays the rent and complies with the
terms of the tenancy. Money is defined as cash or otherwise, so it would
include cheques, bank transfers credit card payments, money orders and postal
orders as well. The purpose of the scheme is to protect sums of money,
deposited with the landlord which are returnable so long as the tenant has paid
the rent and has not otherwise broken the tenancy terms.
Q.15 Can I take a deposit in some other form?
No – deposits can only be paid in the form of money. The legislation
outlaws other transfers of moveable property attempted to give as security.
Thus you could not take the tenant’s Rolex watch off him to keep it during the
tenancy as security!
Q.16 What about guarantees?
There is nothing to stop you taking a guarantee eg. From a parent.
Operation of the tenancy deposit scheme
Q.17 How will deposit protection work in practice?
There are two types of scheme: a custodial scheme and two
insurance-based schemes.
The landlord — not the tenant — will have the option to choose
whether to safeguard the deposit in the custodial or an insurance-based scheme.
Q.18 How long will the landlord have to take action?
A landlord will have 14 days to safeguard a deposit from the day he
receives it. The landlord will have to provide the tenant prescribed
information about the scheme safeguarding the deposit within these 14 days.
Q.19 What happens if there is a dispute?
To avoid disputes having to go to the courts, both schemes will be
supported by an alternative dispute resolution (ADR) service – although the use
of this will not be compulsory. Instead of dispute it can go to Court if either
the landlord or the tenant objects to the ADR procedure being used.
Q.20 What information does the landlord have to give the tenant?
Within 14 days of receiving a deposit, landlords will have to
provide tenants will details of which scheme is protecting the deposit
Q.21 How can tenants find out if their deposit is protected?
The scheme will be able to confirm if the deposit is protected. A
tenant will be able to ask the scheme administrators direct for confirmation
that the deposit is protected under the tenancy deposit scheme.
Schemes
Q.22 Who will be running the schemes?
See details attached.
Custodial Scheme
Q.23 How will the custodial scheme work?
The tenant will pay the deposit to the landlord as now. But – and
here’s the difference with the insurance-based scheme – the landlord will then
pay the deposit into the custodial scheme. It will have to be sent to the
custodial scheme in 14 days of receipt. At the end of the tenancy, if the
landlord and tenant agree how the deposit should be allocated, they will tell
the scheme, which will pay out the money as agreed.
Q.24 What is meant by receipt for these purposes?
You should assume that the 14 day period will run from the time you
actually receive the money. Where you receive a cheque, the 14 days will start
when you receive the cheque; rather than the date when the cheque is
subsequently cleared.
Q.25 What happens if I take a deposit but the tenancy starts at a
later date?
The legislation requires the deposit to be dealt with within 14 days
of when you receive the deposit. It does not matter that the deposit relates to
a tenancy which commences at a later date. For example, a property may be let
in May with the tenancy commencing in July. You must deal with any deposit
taken in accordance with the scheme as soon as you receive it. You cannot wait
until the tenancy starts at a later date.
Q.26 What happens if the landlord or tenant cannot contact the other
party to agree how the deposit should be returned, or where one party is being
un-co-operative?
A ‘single claim’ can be submitted to the scheme in these
circumstances.
If the landlord is unable to contact the tenant, he can submit a
single claim to the scheme indicating the reason for the claim, including
evidence.
If a tenant cannot contact the landlord and makes a single claim, no
other reason is required as the deposit is the tenant’s money.
A single claim can also be made, if both the landlord or tenant are
contactable, but one party refuses to co-operate – either in agreeing deposit
release or agreeing to resolve any dispute via ADR or court.
Q.27 Does this mean that I have to get the tenants agreement in
writing even if the full amount of the deposit is to be repaid to the tenant?
It is understood that the legislation is to be changed so that it
will provide that you can have a clause in your tenancy agreement pre-agreeing
the return of the full deposit to the tenant. You can then rely on this tenancy
clause but only where the full amount of the deposit is to be returned at the
end of the tenancy to the tenant. Otherwise, you will not be able to rely on
clauses in the tenancy agreement to pre-agree how the deposit is to be dealt
with once the tenancy has come to an end. This is to be confirmed.
Q.28 Will landlords have to pay to transfer the deposit to the
custodial scheme?
No. The custodial scheme will be free to use by landlords and
tenants.
Q.29 How will the custodial scheme be paid for?
Deposits held in the custodial scheme will earn interest which will go
to the administrator to pay for the running of the scheme. The remainder will
be used to pay interest to the tenant/landlord. Where the deposit, or part of
it, is divided between the landlord and tenant the interest will be allocated
pro-rata.
Q.30 Will the addition of interest on the deposit affect a tenant’s
entitlement to housing benefit?
During the period of the tenancy, the interest that accrues on the
deposit will be disregarded for the purposes of housing benefit. This is
because the tenant is unable to use the deposit and any interest accrued.
However, at the end of the tenancy the position may change. When the
deposit and any interest is returned, provided that the housing benefit
claimant’s capital remains under f6000 then the capital will continue to be
disregarded. If the deposit and the interest received raises the claimant’s
capital to over £16000 then benefit will cease to be paid.
In practice, however, since it is likely that the deposit will be
transferred to a new tenancy, the returned deposit plus any accrued interest
may only have a minimal, if any, effect on entitlement to benefit.
Insurance-based Scheme
Q.31 How will an insurance-based scheme work?
The tenant will pay the deposit to the landlord. The landlord will
retain the deposit and pay a premium to the insurer. This is the difference
from the custodial scheme as, under the custodial scheme, the deposit has to be
paid over to the scheme administrator. Under the insurance scheme the landlord
will be able to keep the deposit himself. At the end of the tenancy, if the
landlord and tenant agree how the deposit should be divided, the landlord
returns all or some of the deposit.
Q.32 If there is a dispute, what happens where the deposit is held
under the insurance based scheme?
If there is a dispute then the amount in dispute must be paid over
to the administrator of the insurance scheme in question by the landlord and it
will then be held by the scheme administrator pending the dispute being
resolved.
Q.33 Will a landlord pay for the deposit to be covered by an
insurance-based scheme?
Yes. Landlords will pay a fee to belong to an insurance-based
scheme. This will safeguard the deposit, should it be misappropriated.
Q.34 How much will the fee be?
Contact schemes directly.
Q.35 Will the proposed insurance based scheme be open only to
landlords who are members of a trade body or professional organisation?
No. The use of any scheme will not be dependent on membership of any
trade body or professional organisation.
Students
Q .36 Will students who pay deposits be subject to tenancy deposit
schemes?
Where student accommodation is let under an assured shorthold
tenancy (AST), the deposit must be safeguarded, as with any other AST.
Halls of residence are not let on an AST if they are controlled by
the university/educational institution. However, some universities lease their
halls of residence to private companies. These companies may let the
accommodation on an AST in which case the Scheme will apply.
Q.37 What happens where a parent pays the deposit on a student
tenant’s behalf?
Where the deposit is paid for an assured shorthold tenancy, it would
still need to be safeguarded in a scheme.
Q.38 How would the deposit be repaid once an overseas student
returns home?
Schemes will be able to return deposits into foreign bank accounts.
There would be a charge for this that would need to be paid by the tenant.
Disputes
Q.39 What happens when there is a dispute over the return of the deposit?
Each scheme will contain an alternative dispute resolution (ADR)
service. When a dispute occurs, and if landlord and tenant both agree to use
the ADR service, they will also have agreed to be bound by its decision with no
recourse to the courts. Disputes will only go to the courts if the landlord and
tenant do not agree to use the ADR service. Where it goes to Court it will be
dealt with under the small claims procedure.
In the custodial scheme, where a landlord or tenant does not
co-operate in order to release the deposit, i.e. by not agreeing to the release
of full or part of the deposit; and not agreeing to resolve the dispute through
ADR or court, ADR will be the default way in which to resolve a dispute.
In the Insurance-based scheme, where the landlord is contactable by
the scheme but is refusing to co-operate with the scheme by choosing whether to
use ADR or the courts, it will be mandatory for the case to be referred to the
scheme for resolution through its ADR service.
Q.40 Will there be a charge for the use of ADR?
No, ADR will be free of charge for landlords and tenants. It will be
paid for from the running costs of the Scheme.
Q.41 In the event of a dispute in the insurance-based scheme, what
happens to the deposit?
If there is a dispute and the deposit is safeguarded by an
insurance-based scheme, the landlord must hand over the disputed amount to the
scheme for safekeeping until the dispute is resolved.
The scheme administrator will divide the disputed amount in
accordance with the ADR services, or court’s, decision.
For example, say that a tenant has paid £1000 as a deposit. At the
end of the tenancy the landlord states that he wishes to retain £200 to pay for
replacing damaged furniture, but the tenant disagrees claiming the property was
already in that condition when he or she moved in. If the landlord only wishes
to retain £200, the remainder of the deposit (£800) has therefore been agreed
to belong to the tenant and should be returned to him/her. The disputed £200
will then be transferred to the scheme administrator until the dispute is
settled.
Q.42 What happens if the landlord fails to transfer the disputed
amount into the insurance-based scheme?
The scheme itself will pay the amount due to the tenant as a result
of the ADR service’s or court’s decision. The scheme will then recover the
money from the landlord.
Q.43 In the event of a dispute in the custodial scheme, what happens
to the deposit?
If there is a dispute, the scheme will continue to hold the amount
until the ADR Service or courts decide the dispute. Unlike the insurance
policies the whole of the deposit will be retained even if part of it is not in
dispute.
The scheme administrator will divide the disputed amount as a result
of the ADR service’s, or courts, decision.
Paying back the deposit
Q.44 When must deposits be paid back?
When the landlord and tenant agree how the deposit should be
returned, in full or in part, it must be paid back within 10 days as follows:
In the custodial scheme: within 10 days of the scheme being notified
of agreement between the landlord and tenant or notified of an ADR/court
decision.
In the insurance-based scheme: within 10 days of the tenant
requesting that the landlord return his deposit
In case of a dispute: within 10 days of the scheme being notified of
the ADR service’s, or court’s, decision.
Q.45 Do both the landlord and the tenant have to agree?
Yes – However where the full amount of the deposit is to be paid
back to the tenant then the tenant’s agreements can be pre-agreed in the
tenancy agreement. Otherwise, pre-agreement as to how a deposit is to be dealt
with it not permitted.
Q.46 Can’t it he paid back before then ie on the last day of the
tenancy?
Yes. 10 days is the maximum. In practice, DCLG would like to see
deposits returned more quickly and will be working with scheme administrators
to see how this can best be achieved.
Many landlords currently pay the deposit back on the last day of the
tenancy. In the insurance-based scheme, if the landlord and tenant agree on the
amount to be returned, the deposit can be returned on the last day of the
tenancy.
Q.47 Will schemes return cash to tenants without bank accounts?
The custodial scheme will not be able to return cash to tenants. It
will return deposits electronically or via cheque.
Landlords in insurance-based schemes can continue to give deposits
back in cash.
Failure to comply with the tenancy deposit
rules
Q.48 What are the penalties if a deposit has not been protected?
The landlord is unable to use ‘notice only’
possession procedure (the AST “ground”)
Currently, a landlord can obtain an order for possession of an AST
at any point after the first six months of the tenancy providing any fixed term
has expired and the landlord gives the tenant at least two months’ written
notice (Under Section 21 of the Housing Act 1988). This is known as
‘notice-only’.
However, under TDP, the landlord is unable to regain possession of
the property using the usual ‘notice only grounds’, if the deposit has not been
safeguarded and the prescribed information passed onto the tenant within 14
days of the landlord receiving it.
Financial penalty
Tenants can apply for a court order requiring the deposit to be
safeguarded or the prescribed information to be given to him about the scheme
in which the deposit is safeguarded.
Where the court believes that the landlord has failed to comply with
these requirements, or the deposit is not being held in an authorised scheme,
the court must either order the landlord within 14 days of the making of the
order to repay the deposit; or order the landlord to pay the deposit to the
custodial scheme administrator.
The court must also order the landlord to pay to the tenant a
penalty of three times the deposit amount within 14 days of the making of the
order. There is no provision for this penalty to be reduced/mitigated. It is
automatic if the Court finds against the landlord.
Q.49 What if a tenant moves out of their home before realising that
their deposit hasn’t been protected?
The tenant will need to apply for a court order and the court will
order the landlord to repay the deposit amount to the tenant.
In order to avoid this situation, tenants have been advised to make
sure that their landlord has given them the prescribed information relating to
the scheme that is safeguarding their deposit, and check that the deposit is
safeguarded, within 14 days of paying the deposit.
Deposits paid before 6/4/07 and renewal of
tenancies
Q.50 How will this affect deposits paid for ASTs which start before
6 April 2007?
The legislation will only apply to new deposits paid for ASTs
entered into on or after 6 April 2007. Any deposit paid before this date will
not need to be safeguarded by a tenancy deposit scheme, so long as the tenancy
agreement was signed up and completed before 6th April 2007.
Q.51 What happens if the tenant renews their contract after 6 April
2007?
If the tenant decides to remain in their existing rented property
beyond the initial fixed term of 6 months how the deposit is treated will
depend on how the tenancy is continued:
Periodic tenancy – i.e. the tenancy continues with no new agreement
—TDP will not apply, as no new AST will have been created. This is what is
called a statutory periodic tenancy.
Replacement tenancy – i.e. a new AST is created between the same
landlord and tenant for the same property on substantially the same basis — TDP
will apply to the initial deposit that was paid prior to 6 April 2007. Thus
only if the tenancy is expressly renewed by new agreement will the deposit have
to be dealt with under the TDP.
Existing deposit schemes
Q.52 Where do those provisions leave organisations that already have
voluntary schemes up and running?
TDP will replace voluntary schemes. Voluntary schemes will not be
permitted to take new deposits in England and Wales from 6 April 2007.
Q.53 Some local authorities operate rent deposit schemes. Will these
be covered by TDP?
It depends. Where a rent deposit scheme actually pays money to the
landlord on behalf of the tenant, then this will need to be protected by TDP
However, where the rent deposit scheme offers a letter of guarantee, no money
passes to the landlord, so TDP will not apply.
Inventories/Condition of the Property
Q.54 Will an inventory be compulsory?
No – Although it will not be a legal requirement to complete an
inventory, DCLG wants to see the continued use of inventories as standard good
practice to reduce the potential of a dispute at the end of the tenancy.
Q.55 What evidence should be available if there is a dispute?
A landlord will be in a much better position to prove his case if he
has take a full inventory when a note of the condition of the furniture etc.
Photographs/a video would assist. Likewise, as regards the condition of the
property, if there is a proper record of the condition of the property at the
start of the tenancy this would assist. Again, photographs/a video record would
be helpful. Without a proper inventory/schedule of condition the landlord may
well fail when it comes to the ADR/Court process to decide the dispute.
Q.57 Would it be preferable to agree the inventory/any photographic
evidence with the tenant?
Yes – it is good practice to ensure that the inventory is signed off
by the tenant(s) so as to confirm the tenant’s agreement to this (or any other
record of the condition of the property) at the outset of the tenancy.
It is being suggested that you can protect your property without
taking a deposit in the following ways:-
Rent in Advance
When the tenancy deposit scheme was introduced, we advised members
to consider taking rent in advance as an alternative. Communities and Local
Government’s “Frequently Asked Questions” indicate that advance payment of rent
is outside the statutory tenancy deposit scheme. We have previously issued
advice to members to ensure that advance payment of rent is properly described
as such and documented. However, it has now come to our attention that the
Courts are beginning to carefully scrutinise advance payments of rent and that
judges may treat it as a disguised deposit which ought to be dealt with under
one of the statutory tenancy deposit schemes. This could mean that you could
have to pay three times the amount penalty if you have taken advance rent, and
not protected it under one of the statutory schemes should the Court decide to
treat it is a deposit. Judges are appearing to regard it as an attempt to avoid
the legislation. As a result, if you apply for possession using Section 21
against an assured shorthold tenant, at the least you could have to attend Court
to explain the situation and persuade the judge that the money you received
genuinely was an advance payment of rent and not a tenancy deposit. If you
bring action based on rent arrears you could face a claim by the tenant that
the advance payment of rent was not that at all but was a deposit. This could
mean that the tenant could then try to counterclaim for the penalty to avoid
rent arrears. Either way, you could face delay and anxiety in obtaining
possession. It may well be the case in time that the position is clarified in
favour of the landlord. We are however, issuing a strong warning to landlords
about the problems which could be encountered by you. Our advice therefore is
not to take an advance payment of rent from the tenant because of the potential
uncertainty and problems you might face. Another alternative to look at is
taking an administration fee. This is a non returnable charge which you take
for preparing the tenancy, signing the tenant up and initial administration.
You could simply decide not to take a deposit. Alternatively, you can take a
tenancy deposit but you must then register it under one of the schemes.
If you have already taken advance payment of rent you should
seriously consider whether to protect it as a deposit under one of the
Statutory Schemes. If you do decide to take this step you will need to notify
the tenant(s) and give the prescribed information as well.
Guarantee
Use a guarantor who is a home owner and would
provide assurance that rent/damage will be paid for before the end of the
tenancy – taking a guarantee is outside the tenancy deposit scheme.
You are well advised, however, to satisfy yourself as to the
financial status/ability to pay of the guarantor. You should also check with
the guarantor’s identity.
You need to make sure that the person who actually signs the
guarantee is in fact the guarantor.
This could be done by meeting the guarantor, ensuring the guarantor
provides you with a proof of identity, and arranging for a third party to
witness the guarantee (you should not witness the guarantee yourself because it
is in your favour).
You need to use a properly drawn up Deed of Guarantee.
The guarantor does not need to be a home owner but the advantage of
a guarantor who is a home owner is that you may be able to obtain a charge on
his house to enforce a court judgment in the event of you having to sue the
guarantor to enforce payment.
Guarantees are often used in the case of students where a parent is
asked to guarantee the tenancy. For more about guarantees see Documentation.
