The Complete Guide to Letting Property

6th edition by Liz Hodgkinson


The Tenancy Deposit Scheme

The controversial Tenancy Deposit Scheme, where landlords are no longer allowed to hold tenants’ deposits, comes into force in 2007. Under this scheme, landlords can entrust the tenants’ deposits to letting agents which are members of ARLA, the Association of Residential Letting Agents, keep it themselves in an insured scheme, or hand it over to a custodial scheme.

An ‘insured scheme’ does not actually relate to being insured, only that you are guaranteeing to the tenant that if the landlord disappears with the deposit, the tenant can get it back. In practice, this means that the deposit has to be passed to an insurance company if there is a dispute at the end of the tenancy. To make this scheme work, the tenant of course has to know in advance all about the insurance scheme and the names and details of the insurers.

It is now a criminal offence for any landlord to hold a tenant’s deposit outside any of these schemes. Intended both to protect tenants’ deposits from unscrupulous landlords who fail to return them at the end of the tenancy, and also to protect landlords from the habit some tenants have of not paying the last month’s rent, the scheme is described by many within the letting industry as a ‘sledgehammer to crack a nut’, as the vast majority of tenancies end smoothly with the deposit being paid back either in full, or minus an agreed amount for breakages, dilapidations and damage.

Under the scheme, tenants will have their deposits returned in full 10 days after the end of a tenancy, unless there is a dispute, when an independent adjudicator will decide whether the outgoing tenant has caused damage for which he or she must pay.

The entire deposit must be held in either an insured or a custodial scheme. The custodial scheme, administered by private operators under government contracts, costs nothing either for the landlord or the tenant; income is generated for the scheme from interest on the many deposits held. It is expected that the insured scheme, whereby the landlord continues to hold the deposit but has to protect it by taking out insurance, will cost the landlord about 3% of the total deposit.

If there is no dispute or disagreement, the entire deposit will be returned to the tenant at the end of the tenancy. Each new deposit has to be insured anew and individually – you cannot take out a block insurance for all deposits, if you are a portfolio landlord.

Where there is a dispute over the condition of the property, this will be resolved by an alternative dispute resolution (ADR). With insurance-based schemes, the landlord must transfer to the scheme the amount of the deposit in dispute. Then, landlord and tenant can either agree to use the scheme’s ADR service, or take the matter to court.

The ADR is supposed to adjudicate within ten working days of the end of the tenancy. This is how it all works: say the tenant has paid ?1000 as a deposit.At the end of the tenancy, the landlord states that he wishes to withhold ?200 to pay for damaged furniture. The tenant disagrees, claiming that the furniture was already in that state when the property was originally let to him or her. The remainder of the deposit - ?800 – can be returned to the tenant at once,as this amount is not in dispute. The other ?200 will then be transferred to the scheme administrator until the dispute is settled.

Landlords who find tenants through ARLA members should not have to worry about anything, as the deposit will be taken care of by the agency. Around 50 per cent of landlords, however, go it alone and find tenants without using an agency; if these landlords do not conform to one or other of the Tenancy Deposit Schemes, the tenant can take them to court, where they can be ordered to pay the tenant three times the deposit amount, within 14 days of making the order.

What does it all mean in practice? Landlords do not, of course, have to take deposits and an increasing amount are deciding not to do so. Instead, they are insisting on a guarantor for the tenant. This is usual anyway for students and young people under 21, but an ever-increasing amount of landlords are now asking for a guarantor for any tenant, and this guarantor must be a householder who will guarantee to pay any outstanding rent, and also pay for damage sustained by the tenant during the tenancy. If the prospective tenant baulks at having a guarantor, the landlord will not let the property to him or her.

Other landlords are taking six months’ rent upfront, in lieu of a deposit. Obviously this is not a possibility with all tenancies, as not all tenants have six months’ money sitting in the bank. But it is another option some landlords are considering to avoid subscribing to the cumbersome terms of the TDS.

For most landlords and tenants,the scheme in practice will mean that vastly more care has to be taken with compiling the inventory, and establishing the condition of the property at the start of each tenancy. When independent adjudicators come into a property following a dispute, they will want to see written evidence, and maybe photographic evidence, of the condition of the property when the tenancy began.

Since 2004, ARLA has operated a voluntary scheme which has also adjudicated in a number of disputes.By far the greatest number of disputes concern the level of cleanliness of the property at the end of the tenancy. If a landlord has to pay for professional cleaning, this is usually charged to the tenant, but if the tenant insists that the place is clean – or, at least, as clean as it was at the beginning of the tenancy – then a nasty dispute can arise.

Marks on walls, stains on carpets, scuffs on furniture, scratches on fridges and washing machines, are all areas of potential disputes. Those disputes which have already been subject to adjudication often end with the tenant having to pay for professional cleaning, for dry-cleaning of curtains or for a new fridge or washing machine. The resolutions do not always favour the tenant, by any means.

The good side of the TDS is that properties will become cleaner and smarter than ever before, as otherwise it would be impossible to adjudicate at the end of the tenancy. Any tenant who wants the deposit returned in full must make sure the place is spotlessly clean on vacating.

So the introduction of the TDS will put more onus on both landlord and tenant for the property to be absolutely immaculate at the start and finish of each tenancy. In the past many landlords – myself included – have automatically paid the deposit back to the tenant in full at the end of the tenancy, so long as the rent has been paid as agreed, and have not worried about minor damage, scuffs and marks. Where a tenant has been in situ for three or four years, there will inevitably be some wear and tear.

Now, though, landlords will start taking minor damage they may have previously ignored, into account.

The main thinking behind the TDS is that the deposit belongs to the tenant, nobody else and continues to be the tenant’s money all the time it is held temporarily by the landlord or agent. Some landlords, the government has argued, have regarded the deposit as extra rent.

The reality is, though, that the vast majority of both tenants and landlords are decent people and most deposits are returned either in full, or in part, with the agreement of the tenant. Very very few cases have ever been disputed and even fewer have reached the courts. In a decade of letting many properties to dozens and dozens of all types of tenants, aged 18 to 70, and of every nationality, I have only ever had ONE problem over unpaid rent and damage.

Most landlords say the same. It is the view of many landlords that the TDS adds another onerous layer of bureaucracy to an industry increasingly groaning under the weight of ever more bureaucracy and government interference, especially when the vast majority of landlords are small-time operators with only one or two rental properties in their portfolio.

The downside of the scheme – and it is a serious downside – is that those tenants who do not pay the last month’s rent, will most probably continue this behaviour. If they fail to pay the last month’s rent AND leave the property in poor condition (the two things usually go together) the landlord will be left with no last month’s rent AND the deposit held in the custodial scheme, unable to be released until the tenant signs a discharge.
There are no sanctions available to the landlord where a tenant fails to pay the last month’s rent and leaves the place in a disgusting condition.

If, as usually happens, such tenants do a bunk, the landlord will be left with a deposit he cannot easily recover. In these cases, it seems likely that the landlord will have to apply to the county court to have the deposit released by the custodial scheme.

Many landlords hold nominal deposits of, say ?150 and in such cases, it would not be financially worthwhile to go to court and pay a fee of ?150 to recover that same amount.

The problem of speedily evicting tenants who get into serious rent arrears, is not addressed by the TDS as it assumes all tenants are wonderful creatures who pay rent on time and never trash the place. Although landlords are always being urged to create longer tenancies than the six-month chunks of the Assured Shorthold Tenancy, so as to give renters more security of tenure, the difficulty of evicting problem tenants more quickly than this makes them reluctant to create longer tenancies.

One landlord I know operates a scheme whereby as soon as she wants to get rid of a tenant, she evicts him or her by throwing all their stuff into the communal hall, changing the locks and keeping all the rent and the deposit. This Hoogstraten-type method is not recommended, but landlords who can neither evict bad tenants nor get their deposits back might start to resort to this kind of direct action.

At the time of writing, the TDS is too new to be able to be assessed in the cool light of day; only time will tell whether it is a workable scheme or not.

Two more aspects of the scheme is that if the landlord does not comply with the scheme, he cannot issue a Section 21 notice for eviction, and if the tenant takes the landlord to court and wins, the landlord will have to pay three times the original deposit back to the tenant.

As ever, the likeliest scenario is that responsible landlords will comply with the scheme but the unscrupulous ones will not, and will just ignore it.

This is an extract of a book published by Kogan Page, ?10.99
www.lizhodgkinson.com

 

laterlife interest

The above article is part of the features section of laterlife.com called laterlife interest. laterlife interest contains a variety of articles of interest for visitors to laterlife.com written by a number of experienced and new journalists.

It includes both one off articles and also associated regular columns of a more specialist nature such as Healthwise, Talkback, Gardener's Diary, and a beauty section called Looking good in later life.

There's also 'It could be you' by Maggi Stamp laterlife's counsellor on human relationships. 

Also don't forget to take a look at our regular IT question and answer section called YoucandoIT by IT trainer and author Jackie Sherman.

To view the latest articles click on laterlife interest or to view indexes to previous articles click on laterlife interest index. To search for articles about a certain topic, use the site search feature at the top of the navigation.