UK: Tenancy Deposit Schemes Under the Housing Act 2004

Last Updated: 30 March 2006
Article by Stephanie Thomas

Originally published January 2006

Approximately 11% of households in England are within the private rented sector. This totals approximately 2.3 million tenancies.

The Housing Act 1988 deregulated tenancies and enabled landlords to let premises on a shorter basis by way of the assured shorthold tenancy. As a result, tenants had less security of tenure and landlords had greater control over their premises. Under the Housing Act 1996, assured shorthold tenancies became the default private sector tenancy. Short term lets of 6 months at a time became the norm. Currently, assured shorthold tenancies comprise approximately 63% of all private sector tenancies. The Government’s stated aim is to ensure that there is a healthy and thriving private rented sector with greater flexibility and choice in the market. The deposit scheme is intended to regulate both landlords and tenants who have, to some extent, through reported problems with the return of deposits, damaged the reputation of the sector.

The powers in the Housing Act 2004 relating to tenancy deposit schemes will not come into force until commenced by secondary legislation. The anticipated date is 1 October 2006.

Standard practice is for a landlord to take a deposit equivalent to one month’s rent as a guarantee of the tenant’s obligations. However, prior to the Housing Act 2004, "deposit" had not been defined in statute.

The reforms are intended to regulate two commonly occurring problems in the market. Firstly, the withholding by a tenant of the final month’s rent in lieu of the deposit and secondly disputes with the landlord as to whether damage has been caused, other than through wear and tear, so as to entitle the landlord to withhold the deposit either in whole or in part.

Only deposits taken in relation to private sector assured shorthold tenancies beginning on or after the commencement date of the legislation will be covered by the tenancy deposit scheme.

Definition of a "deposit"

Section 213(h) of the Housing Act 2004 defines a deposit as being:-

"...any money intended to be held (by the landlord or otherwise) as security for:-

  1. the performance of any obligations of the tenant; or
  2. the discharge of any liability of his; or
  3. arising under or in connection with the tenancy"

Therefore, money taken at the commencement of the tenancy on the basis that it is to be returned at the end of the tenancy must be safeguarded, whether or not the parties actually call it a deposit. Guarantees from third parties are not deposits within the meaning of the Act and therefore will not come within its provisions.

Definition of "landlord" within the 2004 Act

This also includes an agent, or anyone acting on the landlord’s behalf concerning the tenancy. Therefore, when a letting agent holds deposits on behalf of landlords he will need to ensure that those deposits are safeguarded by a tenancy deposit scheme.

The purpose of tenancy deposit schemes

The Act sets out two main purposes of tenancy deposit schemes which are to safeguard tenancy deposits and to facilitate the resolution of disputes arising in connection with the deposit. The deposit will be safeguarded through an independent third party and a mechanism will exist to enable a dispute to be resolved without reference to the Court.

The types of tenancy deposit scheme

Schedule 10 of the 2004 Act allows for there to be two different types of tenancy deposit scheme:

The custodial scheme

Under this scheme, a deposit would be held by a third party rather than the landlord. A private organisation, known as the "scheme administrator" will contract with the Government to run the scheme. There will be no fee payable for the use of the scheme but there will be a fee for the return of the deposit to the landlord. All deposits will be held in a single designated bank account managed by the scheme administrator and interest on the monies will be used to fund the running costs of the scheme. At the end of the tenancy both the landlord and tenant will notify the scheme administrator that they have agreed on how the deposit is to be split and the deposit will be paid out in line with this.

Insurance based schemes

Under these schemes a landlord would continue to hold the deposit himself and in the event of no dispute at the end of the tenancy the landlord would return the agreed amount of the deposit to the tenant. The landlord would only be required to transfer to the insurance based scheme administrator that part of the deposit amount that he and the tenant dispute at the end of the tenancy. Once the disputed amount has been transferred to the scheme, it will operate in a similar manner to the custodial scheme with the administrator holding on to the disputed amount until the dispute is settled. The scheme administrator will pay the tenant the amount due regardless of whether the landlord has transferred the deposit to the scheme’s designated account as required. Thereafter, the scheme administrator will be able to pursue the landlord for the amount it has paid out. Failure to do so could result in termination of the landlord’s membership of the insurance based scheme and he would then only be allowed to use the custodial scheme.

However, if a tenant decides to withhold the final month’s rent in lieu of the deposit, as approximately 20% of tenants are believed to do, a landlord would not automatically be repaid the deposit and would have to apply to the Court to recover it.

The requirements of a landlord

There will be civil sanctions available against landlords who fail to comply with the requirements of tenancy deposit schemes. A landlord will not be permitted to take a deposit in respect of an assured shorthold tenancy unless it is going to be safeguarded by one of the authorised tenancy deposit schemes.

When a landlord takes a deposit he will be required to provide the tenant with information about the scheme by which the deposit is being safeguarded and the relevant legislative provisions. This will enable the tenant to verify that his deposit is protected.

The landlord must provide the relevant information to the tenant within 14 days of receiving the deposit. The secondary legislation will set out the information a landlord is required to provide.

If a landlord fails to provide a tenant with the prescribed information and the tenant cannot obtain confirmation from the scheme administrator that his deposit is protected, he will be able to make an application to the County Court. In such circumstances the Court could order the deposit to be repaid to the tenant or paid into the designated account held by a custodial scheme administrator. The landlord would be free to rectify the position before the Court hearing. However, if he has not done so by the time of the hearing, the Court can order the landlord or agent to pay the tenant a sum equivalent to three times the amount of the deposit.

A landlord will be prohibited from serving a notice requiring possession of the premises at the end of the term fixed by the tenancy if he has not complied with the requirements to safeguard the deposit and provided the tenant with the prescribed information.

The landlord and tenant will not be able to contract out of these requirements.

Baroness Andrews, the Housing Minister, has said that whilst most landlords and letting agents do repay deposits, a substantial minority do not. She has said that "the tenancy deposit schemes will ensure long-overdue protection for more than £740 million of assured shorthold tenancy deposits in England and Wales and above all help to drive up standards in the private rented sector".

© RadcliffesLeBrasseur

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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