Tax & Accounting News

Residential Tenancies - Tenancy Deposit Scheme

11/06/2007

New provisions in the Housing Act 2004 mean that a landlord will not be able to take a deposit in respect of an assured Shorthold tenancy unless it is covered by a Tenancy Deposit Scheme (TDS). The main aim of the legislation is to put an end to the problem caused by unscrupulous landlords who do not return deposits at the end of a tenancy. The provisions were introduced on 6 April 2007.

A TDS is designed to:

• safeguard tenants’ deposits; and
• facilitate the resolution of disputes arising in connection with such
deposits

There will be two different types of scheme.

Custodial Schemes

Under custodial schemes, the tenant pays the deposit to the landlord who is then required to pay the whole of this amount into a designated scheme account. The scheme administrator will hold thedeposit until it is paid to the tenant or landlord, in accordance with their agreement or following a court order, after the tenancy has ended.

Insurance-based Schemes

Under insurance-based schemes, the landlord retains the deposit and this is only transferred into a scheme if there is a dispute with the tenant at the end of the tenancy. The scheme will then hold the deposit until the dispute is settled. When the tenancy and the landlord reach agreement, the administrator will distribute the deposit amount to the relevant party. The scheme will need to pay the tenant regardless of whether the landlord has transferred the deposit to the scheme as required. There will be a cost for a landlord to belong to an insurance-based scheme. This fee or premium will be set by the scheme administrator.

Both types of scheme must make available alternative dispute resolution mechanisms so that those involved can try to resolve disputes over the return of deposits without resorting to the courts.

Any amount of money taken by a landlord from a tenant which acts as a security deposit will be covered by the legislation, even if the payment is referred to as something different.

Landlords must:

• deal with the deposit in accordance with an authorised scheme
• comply with the initial requirements of the scheme within 14 days; and
• provide the tenant with the appropriate information relating to the deposit within 14 days of receiving the deposit.

Until this is done, the landlord will not be able to regain possession of the property using the usual ‘notice only grounds’ for possession. Under Section 21 of the Housing Act 1988 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 they give the tenant at least two months’ written notice.

If a landlord has not arranged for a deposit to be dealt with in accordance with a scheme or providedthe tenant with the relevant information within 14 days of receiving the deposit, the tenant can apply directly for a court order for the landlord to repay the deposit to them or pay it into a custodial scheme.

If the landlord has failed to comply with these provisions by the date of the court hearing, the court must make the order as requested and order the landlord to pay the applicant an amount equivalent to three times the deposit within 10 days.

Landlords will need to make arrangements to comply with the new rules and have procedures in place to ensure that deposit monies are dealt with correctly. For individual advice, please contact our Tax Manager, Martina Fitzgerald.

ACCEPTANCE OF PAYMENT SCHEME CAUSES LOSS OF RIGHTS

A recent case involving a tenant that became insolvent should sound a warning bell for landlords. In this instance the tenant, which was a company, entered into a company voluntary arrangement (CVA) and the landlord accepted payments of rent after the due dates.

The relevant lease contained a clause which allowed the landlord to repossess the property if the tenant became insolvent or fell into arrears of rent. The landlord, therefore, applied for forfeiture of the lease.

He failed in the Court of Appeal, which ruled that because the landlord had accepted the late payments of rent, he had waived the right to forfeiture of the lease and that the tenant’s debts for the arrears of rent were compromised under the CVA.

If your tenant falls into arrears of rent and/or service charges, take advice before you take action or even accept a late payment from the tenant. Hasty actions can have expensive unforeseen consequences.

If you would like any further information, please do not hesitate to contact us.

 

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