What are the rules around tenancy deposits?
All deposits relating to an Assured Shorthold Tenancy (AST) which has not yet expired, regardless of when it began, must be registered. All historical deposits had to be registered with a scheme by 23rd June 2015.
The aim of the legislation is to ensure a fair balance is struck between Landlord and Tenant. It prevents a landlord from keeping a tenant’s deposit unfairly once the tenancy has expired. It also assists landlords who want to claim monies fairly required to put right a property that a tenant has left.
Landlords are not obliged to take a deposit from their tenant, however if a deposit is taken it must be protected by a scheme.
There are two types of scheme:
- Custodial- where the deposit is physically held by the scheme; and
- Insurance- where the landlord pays a premium on an insurance policy to cover the risk that they fail to return a deposit which is due back to the tenant.
A landlord must register the deposit with a scheme within 30 days of receipt of the deposit. However, it is safer to protect the deposit within 14 days of receipt as there is inconsistency between schemes and landlords may be held liable for failure to comply with scheme-specific provisions.
A landlord must also provide details of the scheme to the tenant within 14 days of receiving the deposit.
If the landlord fails to protect the deposit through one of the schemes OR fails to give the prescribed details to the tenant, there are two sanctions:
1) A section 21 notice (under the Housing Act 1988) cannot be served on the tenant. This notice enables a landlord to reclaim possession of the property, after the fixed term has expired, on two months’ notice and after the first six months of the tenancy; and
2) The tenant may bring a claim to require the landlord to either register the deposit or repay it to them, and they may claim compensation of three times the deposit amount. In the case of Gardner v McCusker 2014 the tenant was awarded compensation of twice the amount of the deposit from the landlord.
It is essential that the deposit scheme is notified as soon as any deposit-related dispute arises. The government-approved schemes offer Alternative Dispute Resolution and this can be useful in avoiding court and the costs often associated.
The burden of proof always falls on the landlord. The assumption is that money is due back to the tenant unless the landlord can prove otherwise. This is why it is prudent to agree an inventory and/or schedule of condition at the outset of the tenancy. A landlord should ensure records of rent payments and the amounts of which are constantly kept up to date.
One of the government backed schemes, the Deposit Protection Service, offers guidance on resolving disputes:
The alternative is to take the dispute to small claims court. This is often a more expensive route as parties will be responsible for their own legal costs but the advantage is that the claimant has up to six years to bring the claim.
Selling a property subject to an AST?
- Under the custodial scheme, the new landlord must register with the scheme. It is not possible for the new landlord to change the scheme where the money is held.
- Under the insurance scheme, the existing landlord must notify the scheme of its intention to withdraw the deposit. The deposit remains protected under the existing scheme for a 3 month period. The landlord must arrange their new scheme before this period ends. The Tenant must be provided with the updated information.
However, this can’t be done with Tenancy Deposit Solutions Limited (one of the government backed schemes), who, despite the legislative provisions, do not allow transfers of deposit between landlords. Landlords should therefore think carefully about whether this scheme is suitable for them.
A Landlord should therefore think carefully about what the landlord intends to do with the property as a decision on what scheme to use should be based on this.
Buying a property subject to an AST where the seller hasn’t registered the deposit with a scheme?
This can present a risky situation for the buyer landlord as they will assume full liability for the failings of the original landlord. Landlords buying property subject to an AST should seek legal advice, as they may wish to negotiate an indemnity clause in to their sale contract regarding liability. Another option might be to surrender the existing AST and create a new one, however this is not ideal and practically could cause problems.
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