Tenancy Deposit Schemes – the pitfalls for non-UK resident landlords

Tenancy Deposit Schemes (“TDS”) have been devised under the Housing Act 2004 to safeguard tenancy deposits paid in connection with assured shorthold tenancies and to assist in the resolution of disputes arising in connection with the refund of tenancy deposits.

As from 6 April 2007 any deposit taken under an assured shorthold tenancy (“AST”) must be safeguarded in a TDS. Most tenancy agreements for self-contained residential property entered into post 1997 are ASTs.

Penalties

If a landlord fails to join a TDS and / or provide the relevant information about the TDS to the tenant within 14 days of receipt of the deposit, then the landlord may be prevented from recovering possession of the property under the section 21 notice procedure. The alternative methods of recovering possession are likely to be much more expensive and time consuming. The landlord may also be liable to a financial penalty of three times the amount of the deposit.

There are 2 types of Scheme:

A custodial TDS

A custodial TDS requires a landlord to pay its tenant’s deposit to a scheme administrator within 14 days of receipt from the tenant.

The scheme administrator holds the deposit until the tenancy comes to an end. At the end of the tenancy, the deposit is returned by the scheme administrator to either the tenant or the landlord or is split between them.

The landlord does not, therefore, retain possession of the deposit.

There is no provision allowing a custodial TDS to charge a fee for administration but there is provision allowing the scheme administrator to retain interest accruing on the deposit money. The intention is therefore that the custodial scheme will be funded by the accrued interest earned on deposits.

An insurance TDS

Under an insurance TDS, the landlord retains possession of the deposit but owes various obligations to the scheme administrator.

The deposit is secured by paying a fee and an insurance premium to the administrator. The administrator will then use the insurance proceeds to pay the tenant should the landlord not repay the deposit.

Landlords will pay for insurance TDS through an administration fee and contributions towards the scheme administrator’s insurance premiums.

Limited availability to non-UK resident landlords

At the time of writing only the insurance TDS with www.mydeposits.co.uk is available to landlords incorporated in the Channel Islands (in addition to those incorporated in the UK). It is not available to landlords incorporated in other jurisdictions.

The custodial TDS is available only to UK resident landlords and can be accessed through: www.depositprotection.com.

The alternative insurance TDS is also available only to UK resident landlords and can be accessed through: www.disputeserve.co.uk.

Inventories

Even though not mandatory, it is good practice for landlords to create an inventory for a property, including a schedule of condition of fixtures and fittings, as it may be useful in resolving disputes over the return of the deposit.

Disputes relating to deposits

A key feature of both types of TDS is alternative dispute resolution (ADR).

The aim of ADR is to provide both parties with a means of resolving deposit disputed without having to go to court.

Both the custodial TDS and the insurance TDS are required to offer ADR to tenants and landlords as an alternative to issuing court proceedings, but both the tenant and the landlord retain the right to go to court.

Alternatives to deposits

  • Use of a guarantor
  • Rent insurance
  • Rental payment in advance (not to be confused with a deposit)