Tenancy Deposits

February 06

Another date for your landlord diaries - October 2006

This is the month where the provisions of the Housing Act 2004 that are to do with Tenancy Deposits come into force.

The claim is that there have been a small number of landlords who have acted unfairly or even illegally in refusing to return the deposits paid by tenants. It is then claimed that, because of this practice, many tenants withhold the final month rent, because they believe that the landlord is likely to keep money from them.

It is not clear to me who these tenants are - no tenant of mine has ever withheld payment, and the only time I have ever made a deduction from a deposit was when a place had genuinely been damaged and the deduction was recommended by a Letting Agent to pay for the costs of sending round a handyman to repair the place.

It turns out, however, that the basis for the reseach was that the government asked the Citizens Advice Bureau to try to assess the scale of the problem. The CAB carried out this research by asking every housing-related client of theirs a single question:

"has a landlord ever withheld part of a deposit?"

Note that the question did NOT address whether this was resolved, or whether arbitration had determined that the withholding was fair - it only asked whether any money had been withheld!

Whatever the background, the law has been passed, and landlords will have one of two choices.

In either case, the landlord has a 14 day period after receiving the deposit in which they have to notify the tenant of which scheme they are using, and who will be holding the funds.

Option 1: The custodial scheme

• In this case, the landlord pays over the deposit to a third-party custodian, licenced by the Government. This custodian holds the deposit, and only releases it once they have received written permission from both landlord and tenant. They will also help with the dispute resolution.
• This option seems, at least according to current guidance, to be reasonably well balanced. There will not be charges for using the scheme - instead, however, the scheme custodian will keep any interest earned on the money to pay for the scheme. It is POSSIBLE that the government may decide to set an interest rate at which the deposit will earn interest to be paid to the tenant (or the landlord if the landlord is looking to retain a part for genuine reasons.)
• The other thing that strikes me as well thought out is a measure to protect landlords if their tenants do a runner owing rent - if the TENANT does not reply within 14 days of the end of their tenancy, then the scheme will return the deposit to the LANDLORD in lieu of unpaid rent.

Option 2: The insurance scheme

• In this case, the landlord keeps the deposit, but, in the event of any dispute, must transfer over the deposit directly to the scheme. There will, in this case, be a fee payable.

The penalties for landlords are reasonably severe if they do not comply. Landlords can be fined up to three times the size of the deposit, and lose some rights to get their property back at the end of a tenancy. (Basically, they cannot serve a Section 21 notice on their tenants simply because the fixed term of the tenancy has expired.)

What no-one yet seems to be commenting on is that these schemes will be large and bueracratic, and each step of the process will take time. It seems likely that once a landlord and tenant have agreed a refund of the deposit, a scheme could easily take 47-72 hours to issue the cheque, which then needs to clear...

... and what happens if the tenant needed that money back to put down a deposit on another property?

Under the current legislation, it is not unusual for a deposit to be held by the letting agent - and if a tenant is moving locally, the letting agent will often be flexible because they KNOW that the deposit is already held by them and only needs earmarking for a different landlord!

The other thing that the new schemes throw into SHARP focus, and my own view is that this is a GOOD thing - is the need for accurate, clear, signed inventory and condition reports on properties. Over the last few years, I have taken to doing my own reports because I was aghast at hot little information the so-called professional inventory companies provided. I deliberately list things like marks and stains - so that it is clear that a new cigarette burn is indeed new.

The other tip for inventories well worth mentioning relates to appliances - if you have relatively new appliances, list the manufacturer and model. It is not unheard of for tenants to get a new fridge from the landlord, sell the new fridge, put in its place a battered, broken, 20 year old fridge, and then point out that the inventory only states "a fridge", and that is what they have returned!

Hopefully, though, the enforcement will be good enough that more of the sharks will be weeded out of the landlording profession, and the image of the landlord will be that of a service provider.

I do not exactly have a track record of being pro-legislation :-)

However, in this case, the compromise that has been proposed seems reasonably well balanced!

This is just the feature article from the February 06 newsletter. Subscribe for market comment, forthcoming events, and more.

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