Housing Act 2004 Tenancy Deposit Schemes - Spring 2007

01 April 2007

The Housing Act 2004 has introduced a Tenancy Deposit Scheme. The scheme was to come into effect on 1st October 2006 but has been postponed to 6th April 2007. It is a mandatory scheme and all landlords granting an assured shorthold tenancy after 6th April 2007 and requesting a deposit from the tenant will have to participate.

If students live in halls of residence, whether on campus or not, they will not be subject to the tenancy deposit scheme where they have a student let direct from the educational institution as opposed to an assured shorthold tenancy agreement.

There will be two types of deposit schemes.

• One will be ‘custodial’ where the landlord will pay the deposit into the scheme and at the end of the tenancy, if both parties are in agreement, the scheme will be notified and the deposit paid out. This scheme does not incur the landlord in a fee.
• The other scheme will be an insurance-based scheme. This differs from the custodial scheme because the landlord, having obtained the deposit from the tenant, will be required to retain the deposit and participate in insurance arrangements which will assure the return of the deposit to the tenant at the time they are entitled to it. In the insurance-based scheme the landlord will be required to pay a fee which will safeguard the deposit should it be misappropriated. It will be for the landlord to decide which scheme to use.

Both schemes will be supported by an alternative dispute resolution (ADR) service although its use will not be compulsory. If the dispute goes to ADR the decision is binding and there is no recourse for either party to apply to Court. If one of the parties does not agree to ADR then the dispute will go to Court to be decided.

At present the Government is running a tendering exercise to select suitable suppliers to run the schemes. They hope to make a decision to award contracts for a custodial scheme and one or more insurance-based schemes early this year. The fee will be decided by the supplier.

A significant penalty for landlords not participating in one or other of the schemes is that they will not be able to obtain a Court Order under the Section 21 Accelerated Possession procedure. Tenants can also apply to the Court for an Order that the landlord pay the deposit into the custodial scheme or repay the deposit to the tenant. The Court will also order the landlord to pay the tenant a sum equivalent to three times the amount of the deposit within 14 days of making the order.

At the end of the tenancy, in the custodial scheme the deposit will be returned within 10 days of the scheme being notified that agreement has been reached or an ADR or Court decision has been made. Under the insurance-based scheme this is within 10 days of the tenant requesting his deposit be returned or, where there is a dispute, within 10 days of the scheme being notified of the ADR or Court decision.

If a tenancy under which a deposit was taken was granted before 6th April 2007 and is renewed on substantially the same terms after 6th April 2007, so it is a replacement tenancy, then the original deposit paid before 6th April 2007 will need to be safeguarded by the landlord adopting one of the two schemes.

Neither scheme will apply where the fixed term of the tenancy granted before 6th April 2007 expires and the tenancy continues as a periodic tenancy. This is because there has been no grant of a new tenancy so the deposit is not caught by the new rules.

Landlords must comply with these new rules or find themselves unable to recover possession of their properties until they have safeguarded the tenant’s deposit. Furthermore a mandatory payment to the tenant of a sum equivalent to three times the deposit should be sufficient motivation for landlords to comply. Tenants in the know will be looking out for an opportunity to gain a windfall at the landlord’s expense.
 

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