TDS – Which Scheme?

Landlords who let property and take a tenants deposit, have since April 2007 had to use one of the government approved Tenancy Deposit Schemes.

We have recently warned landlords about a fake tenancy deposit scheme
operating under the name of mytenancydeposit.com.

There are two types of government approved schemes for landlords. Custodial schemes run by the Deposit Protection Service (DPS) and three insurance backed schemes, one ran by Tenancy Deposit Service, another by My Deposits and another also ran by Deposit Protection Service (DPS).

Property Hawk decided to evaluate the options that landlords now have in taking a tenant’s rental deposit and which is the best way to protect them.

Custodial scheme

There is only one approved custodial scheme operated by the Deposit Protection Service (DPS).

According to DPS’s own website 645,000 tenancy deposits have now been taken since its introduction protecting over £480 million of deposits.

The custodial scheme allows a landlord to protect a tenants deposit at no cost to the landlord. The transaction of paying over the tenant’s deposit can be carried out online and once a landlord is signed up, an account payment can be made using a card and the internet.

Many landlords have been attracted to this custodial scheme because of the absence of cost and also its relative ease of use. It is the one I currently use.

However, despite these attractions there is a downside to the scheme. The main one which has attracted much criticism from landlords is the problems getting their deposit back should there be a dispute with the tenant.

This can lead to protracted delays whilst the Alternative Dispute Service try to resolve any disagreement between the landlord and tenant, during which time the landlord is without any of the deposit monies and is often left to fund remedial works out of their own pocket. Ultimately, the case can go to court with the final decision being made by a judge. It has to be pointed out that where a judge decides, they frequently will without any strong evidence to the contrary, side with the tenant who is seen as the innocent victim. I can only underline the importance that landlords prepare a property inventory and schedule of condition that will persuade the judge otherwise.

Approved insurance based schemes

The two insurance based schemes do allow the landlord or their agent to retain the tenancy deposit. This gives many landlords the piece of mind to know that they have the tenant’s money should there be a problem.

The insurance based scheme aimed at private landlords rather than letting agents is called mydeposits.com and is run by landlord insurance brokers Hamilton Fraser.

It costs £57.50 to join the scheme and then £29.36 for each property protected. Renewing the scheme costs £14.70 each year. The main advantage to the landlord has been the ability for them to place the deposits within a high interest account and earn interest on the deposited sum. In the past this clearly would have generated considerable amounts of additional income for a landlord with several properties, especially where the deposit amounts were substantial. For instance when interest rates were at 5%, interest on £10,000 of deposits would amount to £500 per year. Currently with rates down below 1%, interest is negligible.

Despite the image of this scheme which indicates that a landlord is free to hold onto a tenants deposit in the same way as they could prior to the introduction of the Tenancy Deposit Scheme. The reality is that it is still subject to the provisions of the Housing Act 2004 which heralded the arrival of the Tenancy Deposit Scheme. The result is that should there be a dispute between the tenants and landlord over the amount of deposit withheld the matter will again go to arbitration or court.

Neither custodial or insurance backed schemes allows the landlord to be judge and jury in the way they previously were.

Ignorance of the Tenancy Deposit Scheme is no defence.

The Tenancy Protection Service recent research of a 1000 landlords shows that nearly 50% of accidental landlords were unaware of their responsibilities under the legislation governing the renting out of property.

Failure to protect a tenants deposit legally could result in various penalties being incurred by the landlord including the loss of the accelerated possession proceedings available under a Section 21 Notice and a fine of the amount equivalent to 3 months rent.

Pre-TDS deposits may also be protected

Most worryingly for landlords is a recent casewhich suggests that a tenant may in fact be protected by the legislation even where the original tenancy began before the implementation of the legislation.

Alternatives to using a Tenancy Deposit Scheme

There are several alternatives to the approved schemes that we have come across that offer a no cost solutions to landlords.

The first we have mentioned before. It is particularly suitable for landlords letting to students or with Houses in Multiple Occupation or low value lets.

In these cases rents will be low meaning that a months deposit will only be equal to a couple of hundred pounds anyway. Terry Samuel has stopped taking tenants all together instead preferring to charge the tenant a one off admin fee and insisting that his student tenants have a guarantor.

This solution may be ideal for younger tenants who have little financial history and therefore are always going to score poorly in any credit checks during the vetting of tenants.

Where the tenants are more established professionals, then requiring them to obtain a guarantor such as their parents may not sit well with a high flying lawyer or managing director. In this case landlords may want to look at a new service that Property Hawk has come across.

The scheme is quite a clever insurance based solution which ‘gets around’ the problem of the tenant not having a deposit by getting the tenant to actually insure themselves against the cost of the tenancy deposit.

The scheme operated by tenantdeposit.com requires the tenant to pay a one off admin fee for the scheme and then pay a monthly insurance cost to ensure that a deposit is maintained.

Example

For example a landlord who would normally require a deposit of £1400 say 2 months rent rather than getting the tenant to have to fork out 1 months advanced rent and 2 months deposit equalling £2100. A hefty amount even for well heeled professional. Instead the tenant would pay a one of admin fee of £35 and then a monthly insurance fee of £12.50. This means at the beginning of the tenancy they would be incur a charge of £47.50 and then pay a monthly insurance premium of £12.50.

Where for any reason the tenant stops paying the insurance then the scheme operator requires that the landlord would need to serve notice for possession and will maintain the deposit cover until possession is regained.

The big advantage of this scheme is that the landlord retains all the benefits of holding the tenants deposit whilst the landlord pays for the scheme. The tenant also gains by only having to hand over a small amount at the start of the tenancy as well as the up frontal rent payment.

Property Hawk verdict.

It seems for most landlords that the no cost custodial scheme is the default option. I can see little advantage of the insurance scheme unless interest rates reach 6% again. For many landlords who have student or high risk tenants then the guarantor no deposit option reduces the risk and avoids the bureaucracy involved with using the TDS. The insurance based scheme operated by tenancydeposit.com seems a nice simple alternative at no cost to a landlord. It also has attractions to landlords who do not want to put off tenants but also want to ensure that they take a sufficient deposit to make sure their investment property is safeguarded.

Any views on the Tenancy Deposit Scheme?

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Hi all

I have been a landlord since 1983 and now a a large range of property

When the TDS came into force I looked at its impactions and came to the conclusion that it was a waist of time

I prefer not to charge a deposit but my background checks on tenats are a lot more though

My application form asks for a third party Guarantor and they are checked too

since I have moved away from deposits I haven’t had any major problems at present I am taking a Third party to the small claims court which is a lot easier than trying to trace a tenant

imagine if you can the situation Tenant has done a moon light flit how can you convince the TDS that thay have left

its not worth the bother

thanks

ELAINE POWER

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The DPS is ok but it takes an awful amount of time to get your money if like me the tenants’ defaulted on their tenancy agreement.
Further, you MUST have an inventory and photos to prove your case if the tenants’ fail to look after your property. – Babs

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Hi – My letting agent has just gone bust without any warning whatsoever. (Not ARLA registered). In hindsight I should have gotten all the details about where they deposited my tenant’s money but alas I did not. Now I have no clue what scheme it is in, if any at all. All I can think of is that I will have to stump up their cash myself. A ptiful situation. – Jayne

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