Tenancy Deposit Schemes – Ignore them at your peril!

Tenancy Deposit Schemes (TDSs) became a mandatory requirement for all residential assured shorthold tenancies created on or after 6 April 2007 in England and Wales where a deposit is paid by the tenant to the landlord on commencement of a tenancy. The overriding objective of TDSs are to ensure that deposits are protected and returned to the tenant at the end of the tenancy (so long as there hasn’t been a breach of the tenancy agreement, such as unpaid rent or charges or damage to the property) and to resolve disputes between landlords and tenants without having to go to Court (known as alternative dispute resolution).

Furthermore they are intended to ensure that a landlord is not left out of pocket when a tenancy expires and a tenant abandons a property. It is important to note that the obligation to join a TDS applies only to assured shorthold tenancies.

An assured shorthold tenancy is the most common type of tenancy with private landlords and gives you a legal right to live in your accommodation for a period of time. It was introduced by the Housing Act 1988, with important changes made by the Housing Act 1996. They generally last for a period of 6 or 12 months and do not afford long-term security (the right to remain in occupation of the property) to a tenant.

There are two types of government authorised TDSs:

Custodial schemes – the landlord or agent pays the tenant’s deposit into the scheme within 30 days of receipt from the tenant, where the scheme administrator will hold the deposit until the end of the tenancy. Any interest earned on the deposit will likely be retained by the administrator. At the end of the tenancy the deposit is returned by the administrator to either the tenant, landlord or be divided between the parties.

Insurance scheme – the landlord or agent keeps the tenant’s deposit but pays an insurance premium and administration fee to the administrator – meaning the tenant’s deposit is insured if the landlord wrongly withholds or misappropriates the deposit.

It is the landlord’s sole decision as to which scheme to use although they must inform the tenant of their choice within 30 days of receipt of the deposit (this is known as the prescribed information). It is therefore prudent for a prospective tenant to make enquiries of the landlord before entering into an assured shorthold tenancy to find out which scheme will be used so that they can familiarise themselves with the mechanics of the TDS.

The consequences of failure to comply can be twofold. Firstly the landlord may be required to pay a substantial financial penalty (equivalent to three times the amount of the deposit) and may ultimately be prevented from recovering possession of its property from the tenant until the failure is rectified.

Our specialist team of solicitors can draft residential tenancy agreements on your behalf, and advise both Landlords and Tenants in relation to their rights relating to tenancies and TDSs. For any further information please do not hesitate to contact the Property Department at Spire Solicitors LLP.