Deposit protection
Kate O’Raghallaigh examines buy-to-let schemes designed to protect deposits and help with disputes between landlords and their tenants
As of 6 April 2007 every landlord in England and Wales taking a deposit from an assured shorthold tenancy is now legally required to protect the tenant’s deposit by putting it in a protection scheme. Such initiatives were introduced as a way of protecting tenants from dishonest landlords and vice versa.
The new rules
Before such schemes were introduced by the Government, many tenants may have found themselves in a position where their landlord kept all or part of their deposit, without giving sufficient reason for doing so. Equally, landlords may also have had problems with tenants disappearing at the end of a contract without paying the last month’s rent. In cases such as these, getting the deposit back or claiming unpaid rent, often proved a difficult and pointless process. Kevin Firth, client services director for the Deposit Protection Service, says: “Many landlords and tenants were left out of pocket by wither rogue landlords failing to return deposits or rogue tenants disappearing leaving unpaid rent.”
Now, if tenants find themselves in sticky situations such as these, they are automatically protected. As part of the new legislation, tenants are entitled to a free dispute resolution service, which makes the process of claiming back a deposit much easier. In the case of a tenant leaving a property without paying the last month’s rent, the landlord, under the new legislation, can make a single claim for the tenant’s deposit. The tenant is however, notified of this and so even though the landlord may be entitled to keep the deposit, the deposit is not automatically given away simply because the tenant left it.
Options
There are two kinds of protection scheme currently available: custodial and insurance based. Insurance-based schemes enable landlords to hold tenants’ deposits themselves, while paying a premium to an insurer for a service that includes a dispute resolution facility, should there be a disagreement regarding the deposit at the end of the tenancy. With custodial schemes, the landlord hands the tenant’s deposit to a third party and no premium is paid.
The aim of all deposit protection schemes is to make sure tenants get all or part of their deposit back where they are entitled to it, as well as encouraging both landlords and tenants to be clear on where they stand from the beginning of the tenancy.
The Deposit Protection Service (DPS) is currently the only Government-approved custodial scheme and celebrates its one year anniversary this April. Since it started, 84,000 landlords have joined the scheme, amounting to a total of £185m in protected deposits.
Tenants feel safe in knowing that their deposit rests with a third party, but the real advantage of the scheme is that it pays interest on the deposit, says Kevin Firth, client services director for the DPS. He explains: “Prior to the new legislation, it was very rare for tenants to receive any interest on their deposits. With our scheme, the interest [Base Rate minus 2.32%] accrues throughout the duration of the tenancy and a portion of it is given back with the deposit at the end. If the deposit is divided up between the landlord and the tenant, each person still receives the relevant portion of interest.”
So far, £2.5m in interest has accrued on the 250,000 deposits that the scheme protects. The scheme is free to use, and all landlords and tenants have can access their deposit account online. Firth says: “Another advantage is that the scheme is very transparent and easy to use. If, for example, at the end of a tenancy, the landlord wants to claim part of the deposit, he cannot do so until the tenant has signed off on the decision, and all the correspondence is recorded in the online account, and conducted via email.”
Arguments
In the event of a tenant and landlord failing to agree on the distribution of the deposit, they can make use of Alternative Dispute Resolution (ADR), which involves a decision being made by an independent third party. “We encourage landlords and tenants to seek mutual agreement on the return of the deposit, but recognizing that this is not always possible, this service has been introduced. Feedback on the ADR process has been very positive, with both tenants and landlords welcoming an independent ruling on whether there is any factual or contractual basis for retaining all or part of a tenant’s deposit,” Firth says.
If you’re on the lookout for a rented room or property, make sure that either the letting agency or landlord you use is registered with a protection scheme. Many agents will have a sticker in their window advertising the scheme they subscribe to, and if they don’t it’s just a matter of asking. Similarly, if you’re a new landlord, you should ensure that you provide adequate protection for your tenants and for yourself by signing up for a scheme as soon as possible.
Tags: buy to let, renting, tenants
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