Nearly £900m of tenants’ deposits has been safeguarded under the Government’s tenancy deposit protection scheme in its first year, recent figures show.

More than half of this amount has been protected by the Tenancy Deposit Scheme, (TDS) of which most ARLA agents are members. As we reported in our last issue, the TDS covered nearly 450,000 tenancies, housing close on 700,000 tenants in property owned by 335,000 landlords. These figures are rising by an average 7.5% a month.

The Government’s figures revealed that a total of 1m deposits have been protected at a rate of more than 2,500 a day since the scheme started on April 6, last year.

Under the rules, landlords and agents have a legal duty to sign up to one of three Government-backed schemes when they take a deposit for a new assured short-hold tenancy.

Housing and Planning Minister Caroline Flint said:

“With the average deposit now nearly £1000, the changes we have made mean thousands of tenants no longer risk waving goodbye to their cash.

We want to ensure bitter disputes between tenants and landlords are a thing of the past. The new rules we have brought in achieve this by striking a fairer balance between the rights of both parties.”

There are 1.7m assured short-hold tenancies, to which tenancy deposit protection applies, accounting for just under one in twelve of all households in England (2005/06).

Landlords not protecting a deposit taken since 6 April 2007 are committing a civil offence, which could lead to them having to pay tenants three times the value of the deposit and forfeit their right to possession of their property.

Meanwhile, the Government approved custodial scheme; The Deposit Protection Service (DPS), says that tenants and landlords will be on the receiving end of £2.5 million in interest as the tenancies currently protected by the service come to an end.

The DPS works by holding a tenant’s deposit, free of charge, for the term of the tenancy agreement. At the end of the rental period, the deposit, and a portion of the interest it has accumulated, is paid back to whoever is entitled to it – tenant or landlord, depending on the condition of the property and the terms of the rental agreement. The remaining interest is used to fund the service.

“Prior to the new legislation, it was very rare for tenants to receive any interest on their deposits,” said Kevin Firth, Client Services Director for The DPS.

The DPS has protected deposits submitted by some 84,000 landlords, with a total of approximately £185 million deposits, equating to more than 250,000 rental agreements. The DPS has also successfully introduced an effective dispute resolution service.

“We encourage landlords and tenants to seek mutual agreement on the return of the deposit, but recognising that this is not always achievable, the Alternative Dispute Resolution (ADR) service has been introduced,” Kevin says.

“Feedback on the ADR process has been very positive, with both tenants and landlords welcoming an independent ruling on whether there is any factual or contractual basis for retaining all or part of a tenant’s deposit.”

Of the deposits protected with The DPS just 40 cases have needed to be resolved through ADR and only three disputes have been resolved through the county courts.

“While we receive around 200 new registrations from landlords and agents each day, The DPS has anecdotal evidence that there are still a large number choosing to ignore the legislation, either by not taking deposits or putting the deposits in their back pockets”, commented Kevin.

What is a deposit?
Lawrence Greenberg from The Tenancy Deposit Scheme answers a surprising frequently asked question

We often get asked to define a deposit for the purposes of tenancy deposit protection. Any money taken for security in respect of a tenant’s obligations or liabilities connected with the tenancy must be secured in a TDP scheme. This includes any extra payments where the intention is to hand them back to the tenant if there is no call to retain them.

Rent paid in advance is not a deposit. But a deposit paid as a “rent deposit” is a tenancy deposit under Section 212(8) of the Housing Act 2004, and, therefore, must be protected in an authorised scheme.

An administration fee paid to the landlord with an expectation that all or any of it will be refunded at the end of the tenancy must be treated as a tenancy deposit and protected under a scheme.

If, however, it is non-refundable, it is not a deposit. This may occur where, for instance, a fee is charged for repairs or the replacement of broken items which normally would get deducted as expenses from the tenant’s deposit, but which, according to the tenancy agreement, will be repaired or replaced at the landlord’s own expense

A holding deposit is not a tenancy deposit for the purposes of section 212 of the Housing Act 2004 and will not be required to be held under an authorised Scheme. A deposit is only required to be placed in a scheme if it is money held which is paid as security for the performance of any obligations of the tenant or the discharge of any liability of his, arising under or in connection with the tenancy.

So if the tenancy agreement has not been entered into, or there are no contractual obligations resting on the tenant when s/he pays the holding deposit, the deposit paid is not a deposit for the purposes of the Act.

However, if a landlord has a holding deposit in respect of a person who subsequently becomes his tenant, then the landlord must either return the holding deposit to the tenant (so that the tenant can give it to him again as a tenancy deposit) or retain it, and protect it in a scheme within 14 days of the tenant agreeing to enter into a tenancy (i.e. from the date that the holding deposit becomes a tenancy deposit).

You might find it helpful to put a clause in your documentation which defines the event(s) which constitute the transformation of a holding deposit into a tenancy deposit, and commits you to putting the relevant details on the tenancy database within 14 days thereof. At that date you would also serve the prescribed information on the tenant, if you hadn’t already done so.