UK: Tenancy Deposit Schemes – Are they working?

Last Updated: 23 July 2012
Article by Louise Clark

The payment of a returnable deposit by tenants to their landlords is a common requirement under assured shorthold tenancies. The deposit is paid to secure the tenant's compliance with the terms of the tenancy. The landlord is entitled to deduct from the deposit any damages caused by breach of the tenant's obligations at the end of the term and the tenant will receive back its deposit less legitimate deductions.

The provisions of the Sections 212-215 of the Housing Act 2004 which introduced Tenancy Deposit Schemes were enacted with the aim of curing a number of ills arising from the treatment of deposits in the private sector: landlords withholding all or part of deposits or misappropriating them; and tenants refusing to pay the last month's rent. The parties were discouraged from pursuing deposit related claims because of the irrecoverable costs likely to be incurred in doing so.

From 6 April 2007 it has been mandatory for a landlord to join a Tenancy Deposit Scheme on creation of a new residential assured shorthold tenancy in England or Wales where a deposit is paid by the tenant to the landlord on commencement of the tenancy. A Tenancy Deposit Scheme is a scheme which is made for the purpose of safe guarding tenancy deposits paid in connection with assured shorthold tenancies and facilitating the resolution of disputes arising in connection with such deposits. Its provisions must comply with the requirements of Schedule 10 to the Housing Act 2004.

There are two types of scheme: a custodial scheme where the landlord pays the deposit to an a scheme administrator and an insurance based scheme where the landlord retains the deposit but pays a fee and a contribution to premiums which the scheme administrator will pay for insurance to safeguard the deposit against misappropriation by the landlord.

Since 6 April 2007 any deposit must be dealt with in accordance with an authorised Tenancy Deposit Scheme and the tenant or anyone who has paid the deposit on the tenant's behalf must give to the tenant prescribed information which includes details of the relevant scheme, the statutory provisions governing the scheme and how the scheme deals with repayment of the deposit and settlement of disputes within 30 days of receipt.

The provisions of the Housing Act 2004 provide remedies for tenants and sanctions for landlords who fail to comply with the statutory requirements. The tenant can apply to the court for an order for repayment of the deposit or for its transfer into an authorised scheme. In addition a landlord who fails to comply with the requirements is prevented from serving a notice under Section 21 of the Housing Act 1988 to bring an assured shorthold tenancy to an end until it has complied with the requirements. Crucially the provisions also provide that the court must require the landlord to pay a penalty where it is satisfied that the landlord is in breach of the requirements. Until 6 April 2012 the penalty was three times the amount of the deposit.

However, despite the introduction of the scheme a survey in 2008 found that 62% of landlords were still flouting the law. A further survey in 2009 indicated some improvement but 30% of landlords were still not registering deposits. In a series of cases in 2010 and 2011- the first in relation to the operation of the statutory provisions - the court has singularly failed to enforce the provisions requiring landlords to pay a penalty. In these cases the court has directed that provided that the landlord remedies the breaches of the statutory requirements before the court hearing this will be a complete defence to a claim for a penalty payment.

Changes have been now been made to the statutory provisions with a view to addressing these continuing issues. Section 184 of the Localism Act 2011 has made significant amendments to sections 213 - 215 of the Housing Act 2004 to with a view to making the statutory provisions more effective and making it easier for the court to grant orders requiring landlords to pay a penalty payment where appropriate.

There are three important changes imposed by Section 184. These provisions came into force on 6 April 2012:

  • The period for the landlord to protect a deposit under a TDS and provide the prescribed information is extended from 14 to 30 days.
  • A tenant may now apply to the court for a landlord to pay a penalty even if the tenancy has come to an end.
  • The penalty for failure to comply with the TDS is now between one and three times the amount of the deposit.

It is undoubtedly the case that the introduction of Tenancy Deposit Schemes has improved the position for tenants. However, there is concern over the numbers of landlords who are still not complying with the statutory requirements. The attitude adopted by the Courts in relation to applications by tenants to enforce the statutory provisions has not been encouraging. The message relayed by these decisions is that the time limits are not significant and that it is only necessary for the landlord to comply with the statutory provisions prior to any hearing of a claim that the tenant might bring. This places the onus on tenants to insist on landlords' compliance with the statutory provisions.

It will remain to be seen as to whether the changes imposed by Section 184 will have the intended effect. Certainly extending the time period for landlords to comply with the requirements when taking a deposit is sensible, as is providing a remedy for tenants where the tenancy has come to an end as well as during the term. Equally allowing flexibility for courts faced with applications by tenants for penalty payments may encourage them to make awards where appropriate to do so where previously the fixed level of the penalty payment may have acted as a deterrent to the making of such orders. Only time will tell as to the impact these changes will have.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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