Tenancy Deposit Schemes

Background:

From 6 April 2007, when a Landlord takes a deposit from a Tenant, the deposit must be protected in a government-authorised tenancy deposit scheme. At the start of the tenancy, the Tenant will pay the deposit over to the Landlord, who must then ensure that it is enrolled in a government-authorised scheme. The Landlord must provide details of this scheme and certain prescribed information to the Tenant within 14 days of payment of the deposit.

The two types of schemes available to a Landlord are the custodial schemes and the insurance-based schemes. The custodial schemes hold the deposit until it is repaid to the Tenant at the end of the tenancy. In insurance-based schemes the Landlord holds the deposit and pays the insurance scheme to insure against the Landlord failing to pay the deposit back to the Tenant at the end of tenancy.

Each type of scheme has a number of authorised providers and each provider have their own Scheme Rules. It is important that the Landlord adhere to these rules. In certain cases, the provider requires certain clauses to be added to the AST agreement, in which case the said clauses will need to be inserted into the agreement.

Tenancy Deposit Scheme Options:

Landlords taking deposits from Tenants under an AST agreement must register with one of the following authorised schemes:

• DPS Custodial Scheme:
  This is the only custodial scheme and is run by the Deposit Protection Service (DPS). It is the favoured scheme for Landlords as it is free of charge. It is funded by the interest received on the tenancy deposits held by the scheme. The Tenant pays the deposit to the Landlord who then pays the deposit into the scheme.
• The Dispute Service (TDS):
  This is an insurance-based scheme whereby the Landlord pays an annual fee to join the scheme. The Landlord is then entitled to hold onto the deposit until such time as a dispute arises. The Landlord must then forward the portion of the deposit that is in dispute to the scheme, who will then adjudicate on the matter and distribute the deposit in terms of its decision. If the Landlord defaults and keeps the deposit, the insurer linked to the scheme will pay all or part of it back to the Tenant if they are entitled to it. The scheme will then attempt to recover the monies from the Landlord.
• Tenancy Deposit Solutions Limited (TDSL):
  This is also an insurance-based scheme whereby the Landlord pays an annual fee to join the scheme. The Landlord is then entitled to hold onto the deposit until such time as a dispute arises. The Landlord must then forward the portion of the deposit that is in dispute to the scheme, who will then adjudicate on the matter and distribute the deposit in terms of its decision. If the Landlord defaults and keeps the deposit, the insurer linked to the scheme will pay all or part of it back to the Tenant if they are entitled to it. The scheme will then attempt to recover the monies from the Landlord.

Administrative Procedures:

With regard to all 3 schemes discussed above, Landlords must notify the Tenants of which scheme they have elected to use within 14 days of having received the deposit. Landlords using the custodial scheme must also pay the deposit to the DPS within these 14 days.

Furthermore, Landlords must give the Tenants the following prescribed information within 14 days of having received the deposit:

• Contact details of the elected scheme;
• Contact details of the Landlord;
• How to apply for the release of the deposit;
• The purpose of the deposit and how it is to be held; and
• What to do where there is a dispute relating to the return of the deposit.

Landlords also need to sign a certificate confirming that:

• The information given relating to the tenancy deposit and the elected scheme is accurate to the best of their knowledge and belief; and
• They have given the Tenant an opportunity to sign any document containing the prescribed information in confirmation that the information provided is accurate to the best of their knowledge and belief.

Alternative Dispute Resolution:

Where the Landlord and the Tenant have agreed as to whether the deposit should be returned in full or in part, or should be retained by the Landlord, the deposit must be paid out within 10 days. With the custodial scheme, the 10 days will run from the date of the scheme being notified of such agreement. With the insurance-based schemes, the 10 days will run from the date that the Tenant requests the return of the deposit.

In the case of a dispute between the Landlord and the Tenant relating to the deposit, both the custodial and the insurance-based schemes offer free alternative dispute resolution (ADR) services. The outcome of the ADR will be binding upon both parties. Whilst this is the cheaper and more cost effective way of dealing with such disputes, the Landlord and/or the Tenant may elect not to use ADR and deal with matters through the courts.

Under the custodial scheme, the undisputed portion of the deposit with any interest is paid out within 10 days of notification of this amount. The scheme will hold onto the disputed amount until the alternative dispute resolution process or the court makes a decision. Upon notification of that decision, the scheme has 10 days to pay out the balance of the deposit to the relevant party.

Under the insurance scheme, the Landlord must return the undisputed portion of the deposit within 10 days of the Tenant's request. The disputed amount must be lodged with the scheme pending the outcome of the dispute resolution process or the court case. Upon notification of that decision, the scheme has 10 days to pay out the balance of the deposit to the relevant party.

Failure to Adhere to Tenancy Rules:

Should the Landlord fail to join an authorised tenancy deposit scheme and/or have failed to provide the prescribed information to the Tenant in cases where the Tenant has paid over a deposit to the Landlord, the Landlord will incur the following consequences:

• The Landlord will be unable to obtain possession of the property in terms of Section 21 proceedings. For more information of Section 21 proceedings, see Section 21 Notices; and
• The Tenant may apply to the courts to have the deposit protected and/or the prescribed information to be provided.

In these cases, Landlords will incur fines of up to 3 times the amount of the deposit.

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