Tenancy Deposit Scheme (TDS)

The Tenancy Deposit Scheme (TDS) was bought about by the 2004 Housing Act introduced from the 6th April 2007 a mandatory system for all assured shorthold tenancy deposits.

The change meant it is was no longer acceptable for landlords to hold a tenant’s deposit independently.

Instead, landlords must choose between one of two Tenancy Deposit Scheme types:

• Custodial schemes
• Insurance schemes

The Custodial Tenancy Deposit Scheme

The custodial scheme is free to use for landlords.  Its’ running costs being financed using part of the interest generated from the deposit monies it holds.  It involves the landlord having to hand over the deposit monies to a third party organisation of which there are 3:

• Deposit Protection Service (DPS)
• Tenancy Deposit Scheme
• My Deposits

How does the custodial tenancy deposit scheme work?

• The tenant pays the landlord or letting agent their rental deposit.
• The landlord/agent pays the deposit into The Deposit Protection Service (DPS) within 30 days of receiving it.
• Following receipt of the deposit, They will provide confirmation and details of the protection scheme being used to both the landlord/agent and the tenant.
• At the end of the tenancy, the landlord/agent and the tenant agree repayment of the deposit and inform the scheme administrators. The deposit repayment, divided accordingly and including any interest accrued, will be initiated to each party within 10 days.
• If there is a dispute, The Deposit Protection Service (DPS) administrators return any undisputed amount (plus interest) to the relevant party, but hold the disputed portion until the Alternative Dispute Resolution  (ADR) service or the courts decide what is fair.

 
Example 1

A tenant pays a deposit of £700.
At the end of the tenancy, the landlord says he wishes to keep £50 to pay for cleaning the flat.

The tenant agrees.
£650 (plus interest) is returned to the tenant and £50 (plus interest) is returned to the landlord.

Example 2

A tenant pays a deposit of £1,000.

At the end of the tenancy, the landlord says he wishes to keep £200 to pay for replacing damaged furniture.

The tenant disagrees, claiming the furniture was damaged before they moved in.

Both agree to use the Alternative Dispute Resolution (ADR) service.
£800 (plus interest) is returned to the tenant, but the disputed £200 (plus interest) is safeguarded until the dispute is settled by the ADR service administrator, and repaid according to the decision.

Tenancy Deposit Insurance Scheme

The alternative for landlords is to use one of the three insurance backed schemes.  Here landlords are able to retain the deposit monies but instead are required to take out insurance to protect the tenant against non return of the deposit if a dispute arises at the end of the tenancy. 

www.depositprotection.com 
www.mydeposits.co.uk
www.depositguard.co.uk

To find out more about tenancy deposit fees and charges refer to this recent article.

How do the tenancy deposit insurance schemes work?

These details are based on the Tenancy Deposit Solution Ltd scheme.
 
The tenant pays the deposit to the landlord as they do now. The landlord holds the deposit and notifies the Scheme Administrator that they have the deposit and that it should be protected.

At the end of the tenancy the landlord and tenant will agree what happens to the deposit. If the tenant is dissatisfied and complains to the Scheme Administrator, the landlord will be required to lodge within a set period of time the disputed amount with the Scheme Administrator.

When the dispute is resolved between the tenant and landlord, the lodged money will be repaid to the landlord and tenant in accordance with agreement, dispute resolution, or court order.

If the landlord fails to lodge the disputed amount with the Scheme Administrator, insurance arrangements will ensure the return of the disputed amount to the tenant when they are entitled to it, and recover the amount from the landlord.

Which tenancy deposit scheme should a landlord choose?

For most small landlords with say 1 or 2 properties the custodial scheme run by Deposit Protection Service (DPS) is probably the most suitable.  It’s a no brainer why pay for something that you can get for free.

Landlords that take very high value deposits and have large portfolios will generally be better off using the insurance backed Tenancy Deposit Solutions scheme which allows them to retain all the interest earned.

Landlords should remember that the situation is fluid.  If the Base Rate is at a low level; then the size of deposit required for the insurance backed scheme to be economic increases.

Landlords also need to ensure that they make detailed inventories at the commencement of any tenancy and provide evidence at the end of the tenancy to support any claim of damage by the tenant.   Use our free TDS compliant property inventory software.

Landlords Concerns over Tenancy Deposit Scheme

There are some concerns that by registering a tenancy deposit through one of the schemes will mean that the Government Agencies, particularly the Inland Revenue, may be able to obtain access to the records if they consider there has been tax evasion.  Although the schemes incorporate appropriate data protection measures, the Inland Revenue has achieved some success in accessing details relating to foreign bank accounts as part of its measures to counteract tax evasion.

Undoubtedly, the Government will be able to obtain some valuable data relating to the private rented sector and potentially landlords from tenancy deposit information.  Therefore, landlords may rightly feel ‘uneasy’ about providing so many details about their property holdings to the Government.

Can landlords avoid using a Tenancy Deposit Scheme (TDS)?

If landlords are determined to avoid the approved scheme there remains a number of options open to them:
 
Assured tenancies – an assured tenancy as a posed to an assured shorthold tenancy is not covered by the regulations.  However, this gives the tenant considerable security of tenure which will be unacceptable to many landlords.

Tenant guarantor – the second option is for the landlord to obtain guarantors who are property owners, to guarantee not only the rent of the tenant but also provide cover against damage.  If this is done then there may be no need for a deposit at all.  However this will severely reduce the number of prospective tenants and is generally only appropriate for high risk tenants.

No money deposit– another option for landlords is not to take a deposit at all and just take say two months rent in advance to cover the possibility of non payment of rent, for which a deposit is often used to safeguard anyway.  The risk here for landlords is that significant damage by the tenant could leave the landlord still further out of pocket.

Some landlords have suggested that you could avoid the legislation by taking tangible items such as a watch or TV from the tenant in replace of a money deposit.  Well landlords can’t.   The Housing Act does not allow anything other than money to be held as a deposit by a landlord. A landlord seeking to circumvent the regulations by taking an item other than money will be in breach of the law.

What happens if a landlord doesn’t comply with the Tenancy Deposit Scheme?

As a result of the Localism Act 2011 which came into force from the 6th April 2012 in the case of all assured shorthold tenancies created after 6th April 2007 the landlord is required to:

1. protect the tenants deposit within 30 days of the deposit was paid or the tenancy renewed
2.  the landlord must also give the tenant the Prescribed Information within 30 days
3. If 1 & 2 are not carried out then the landlord is not able to serve the tenant with a section 21 notice unless they return the deposit to the tenant.

The biggest issue now faced by a landlord is that failure to pay the tenants deposit into an approved scheme and serve the tenant with the prescribed information means that they are liable to a fine equivalent of 3 month rent.

For more details on the background to the changes to the legislation on tenancy deposits.

How has the Tenant Fees Act 2019 affected tenants deposits?

New tenancies (after 1st June 2019)

Whilst the Tenant Fees Act 2019 suggests it’s all about the control and banning of fees charged in respect of a tenancy such as tenancy renewal fees,  it goes far further and has now a big impact on how much a landlord can hold as a tenancy deposit.  For new tenancies from the 1st June 2019 the size of the tenancy deposit a landlord can take will depend on the total annual rent.  If the annual rent is less than £50,000 the maximum tenancy deposit is 5 weeks rent.  For rental properties with rents over £50,000 the maximum deposit figure goes up to 6 weeks.  Where there is a joint tenancy then the deposit figure relates to the tenancy not the individual tenant.  This is all pretty straightforward.

The complications arise when looking at existing tenancies or renewals of an existing tenancy.

Renewals of existing tenancies

So if you take the latter where a landlord renews a tenancy with an existing tenant where the original tenancy was granted pre- Tenant Fees Act coming into force (i.e. before 1st June 2019).  If a landlord created a new tenancy then even where previously they held more than the legally acceptable amount of deposit they would have to return the sum over that allowed by the new legislation.

There is a transition period from 1st June 2019 to 31st May 2020 which has been instigated to allow landlords and tenants to renegotiate their agreements but during which the original tenancy agreement is still legally binding on the tenant.

After the transition period 1st June 2020

Tenancy Deposit Scheme (TDS) Frequently Asked Questions

Q.1 Do landlords have to do it?
The simple answer is, YES landlords do have to. Regardless of how large or small the deposit, if a landlord lets under an Assured Shorthold Tenancy Agreement (AST) and takes a deposit they will need to use one of the Government backed Tenancy Deposit Schemes.  If landlords don’t, then as discussed above they may not be able to get possession of their property as easily and could end up with a large fine.

Q2 Which tenancy deposit scheme should a landlord use?
Generally if you are a landlord with a portfolio of properties and or one that takes large deposits then you will be better off using an insurance backed scheme and being able to retain all the interest from the deposit.  Many landlords however, will be attracted by the custodial scheme because it is free.

Q.3 Does it matter who pays the deposit?
As long as a deposit is paid, it does not matter whether it is paid by the tenant or someone else on the tenant’s behalf. It could be a parent. Some local authorities operate tenancy deposit schemes which pay over a deposit. All of these are subject to the tenancy deposit scheme where there is an Assured Shorthold Tenancy (AST) in place.

Q.4.Does a landlord need to issue a section 213 notice containing the prescribed information?
YES, the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 sets out the fact that when taking a deposit landlords and agents are obliged to provide certain prescribed information about the chosen TDP scheme to tenants within 14 days of letting. This is sometimes known as a Section 213 Notice. 

The details of the required information or prescribed information are contained in Statutory Instrument 2007 No. 797

Q.5 Does tenancy deposit protection apply to landlords who live overseas?
YES, if a landlord lives overseas but lets a property in England or Wales on an assured shorthold tenancy (AST) and takes a deposit, the landlord will still have to protect their tenants’ deposit by using one of the approved schemes.

Q.6 The legislation requires the deposit to be dealt with within 30 days of receipt of the deposit by the landlord– what does that mean?
The landlord should assume that the 30 day period will run from the time you actually receive the tenants’ money.

Where a landlord receives a cheque, the 30 days will start when the landlord receives the cheque; rather than the date when the cheque is subsequently cleared.

The legislation requires the deposit to be dealt with within 30 days of when the landlord receives the deposit. It does not matter that the deposit relates to a tenancy which commences at a later date. For example, a property may be let in May by a landlord with the tenancy commencing in July. The landlord must deal with any deposit taken in accordance with the scheme as soon they receive it. The landlord cannot wait until the tenancy starts at a later date. 

Q.7 What happens if the tenant renews their contract after 6 April 2007?
If the tenant decides to remain in their existing rented property beyond the initial fixed term of 6 months how the deposit is treated will depend on how the tenancy is continued:

Periodic tenancy – i.e. the tenancy continues with no new agreement —Tenancy Deposit Protection (TDP) will not apply, as no new Assured Shorthold Tenancy (AST) will have been created. This is what is called a statutory periodic tenancy.

Replacement tenancy – i.e. a new Assured Shorthold Tenancy (AST) is created between the same landlord and tenant for the same property on substantially the same basis — Tenancy Deposit Protection (TDP) will apply to the initial deposit that was paid prior to 6 April 2007. Thus only if the tenancy is expressly renewed by new agreement will the deposit have to be dealt with under the Tenancy Deposit Protection (TDP).

The legislation only applies to new deposits paid for Assured Shorthold Tenancy (AST) entered into on or after 6 April 2007. Any deposit paid before this date will not need to be safeguarded by a tenancy deposit scheme.

Q.8 What happens when there is a dispute over the return of the deposit?
Each scheme has an Alternative Dispute Resolution (ADR) service.

When a dispute occurs, and if landlord and tenant both agree to use the Alternative Dispute Resolution (ADR) service, they will also have agreed to be bound by its decision with no recourse to the courts. Disputes will only go to the courts if the landlord and tenant do not agree to use the Alternative Dispute Resolution (ADR) service. Where it goes to Court it will be dealt with under the small claims procedure.

In the custodial scheme, where a landlord or tenant does not co-operate in order to release the deposit, i.e. by not agreeing to the release of full or part of the deposit; and not agreeing to resolve the dispute through Alternative Dispute Resolution (ADR) or court, ADR will be the default way in which to resolve a dispute.

In the Insurance-based scheme, where the landlord is contactable by the scheme but is refusing to co-operate with the scheme by choosing whether to use Alternative Dispute Resolution (ADR) or the courts, it will be mandatory for the case to be referred to the scheme for resolution through its Alternative Dispute Resolution (ADR) service.

The Alternative Dispute Resolution (ADR) will be free of charge for landlords and tenants. It will be paid for from the running costs of the Scheme.

Q.9 What happens if I don’t comply with the Tenancy Deposit Scheme?
If a landlord fails to comply with the Tenancy Deposit Scheme (TDS) holding a deposit and not using either the custodial or an insurance backed scheme or not issuing the prescribed information then the following applies:

a) Unable to use ‘notice only’
Currently, a landlord can obtain an order for possession of an assured shorthold tenancy at any point after the first six months of the tenancy providing any fixed term has expired and the landlord gives the tenant at least two months’ written notice (Under Section 21 of the Housing Act 1988). This is known as ‘notice-only’.

However, under Tenancy Deposit Protection, the landlord is unable to regain possession of the property using the usual ‘notice only grounds’, if the deposit has not been safeguarded and the prescribed information passed onto the tenant within 30 days of the landlord receiving it.

b) Payment to the tenant
Tenants can apply for a court order requiring the deposit to be safeguarded or the prescribed information to be given to him about the scheme in which the deposit is safeguarded.

Where the court believes that the landlord has failed to comply with these requirements, or the deposit is not being held in an authorised scheme, the court must either order the landlord within 14 days of the making of the order to repay the deposit; or order the landlord to pay the deposit to the custodial scheme administrator.

The court must also order the landlord to pay to the tenant upto three times the deposit amount within 14 days of the making of the order.

Q.10 How can I find out more?
The best place for landlords to find out more details on how the two schemes operate is to go to their respective websites and look at their detailed FAQs.

Recent useful case law:

• Gladehurst Properties Ltd v Hashemi – deposit never registered during tenancy
• Tiensia v Vision Enterprises Ltd^[2] – deposit registered after 14-day deadline
• Draycott v Hannels – deposit registered after 14-day deadline
• Harvey v Bamforth – deposit registered within 14 days but information not provided