This is day 13 of my 31 days of tips on tenancy agreements series. To see the rest of the series click here.
Tenancy deposits
It is fairly common for landlords to take a deposit. This gives the tenant an incentive to look after the property as if he does not, he will lose his money.
Premiums and the two month limit
It is normal for deposits to be equivalent to one month, or at the most two months rent. It is unwise to take a larger sum. The reason for this is that under s15 of the Housing Act 1988 a landlord cannot prevent a tenant from assigning his tenancy if a premium has been paid, and s15 (4)(c) defines a premium as including a deposit which is 1/6 of the annual rent (or two months). This will be discussed further on day 25 when I look at assignment and subletting. However if you have spent time and money checking and referencing your tenant, you will not want him to have the right to pass his tenancy on to someone else, who may prove unsatisfactory.
Background to the tenancy deposit protection regulations
In the past, unfortunately many landlords (not all but a substantial minority) failed to return deposits, sometimes making up fictitious damage claims to justify retaining the money, or in a few cases just refusing point blank to return it.
The only way tenants could enforce payment was by obtaining a county court judgement – not something that the majority of tenants felt comfortable about doing. The courts are to many people an intimidating place.
About the regulations
This situation changed in 2007 with the coming into force of the tenancy deposit regulations.
- Landlords are now required to protect all deposits taken for assured shorthold tenancies, with an authorised scheme, within 14 days of receipt.
- Landlord must also serve a notice on the tenant containing prescribed information, again within 14 days.
- The three schemes all provide a free arbitration service in the event of a dispute regarding deductions from the deposit at the end of the tenancy
- There are penalities for non compliance
- Tenancies which are not assured shortholds are not affected by the regulations.
At the time the regulations came into force, we all had to change our tenancy agreements to reflect the new rules. All assured shorthold tenancy agreement should now :
- State that the deposit will be protected under a government authorised scheme,
- Give details of the circumstances under which a deduction will be made (basically if the terms of the tenancy agreement are breached),
- If the tenancy agreement is held under an insurance based scheme you can also say that the tenant will not be entitled to any interest (as the money is theirs, the default view is that tenants are entitled to any interest). If the deposit is held with the DPS they have their own rules about apportionment of interest which are not affected by the terms of the tenancy agreement
- The tenancy agreement should also state that the deposit will be returned at the end of the tenancy in accordance with the terms of the tenancy deposit scheme used.
You can either state in the tenancy agreement the scheme being used, or leave this to be covered in the notice.
Note that TDS have their own terms and conditions which landlords/agents using their scheme are required to incorporate into their tenancy agreements.
The three authorised tenancy deposit schemes
As I would hope everyone would know by now, there are three authorised schemes:
- The Deposit Protection Service – free, but the deposit money has to be paid over to the scheme administrators
- My Deposits – an insurance based scheme where the landlord or agent holds the money and pays a fee to the scheme administrators
- TDS (short for Tenancy Deposit Scheme or The Dispute Service) which is also an insurance based scheme, mostly for agents, where the money is held by the agent/landlord and a (differently calculated) fee is paid to the scheme administrators.
It is important that the deposit is dealt with promptly. Ideally a form giving the prescribed information can be given to the tenant(s) at the time the tenancy agreement is signed, and they can then counter sign the landlords copy. This may not always be possible though, depending on when the payment is made and which scheme is being used.
If the deposit is not protected, the regulations provide that no section 21 notice will be valid until this has been done. The tenant may also be entitled to go to court and claim a penalty of three time the deposit sum.
There is a lot of information on the Landlord Law Blog about the various problems that have resulted from this legislation (which was not particularly well drafted).
Do you have any comments on this section? Have you had any practical problems getting the notice served on the tenants after protecting the deposit, and have you any advice for readers on this?
NB Read about my tenancy agreements service here.
Related posts:
It is not clear what, if any, penalty there is for not giving the tenants the prescribed information. This is the case on my tenancy, although the deposit has been protected with The DPS. The prescribed information and the required certification is not incorporated in my tenancy agreement.
The legislation is unfortunately a bit confused on this and other points. We are, at the time of writing this, waiting for a Court of Appeal decision which may make things clearer.
Re ‘Premiums and the two month limit’, I cannot see how s.15(3) HA1988 can apply to a fixed term AST? Both s.15(1) and s.15(3) refer to periodic tenancies. Am I missing something?
Fixed tenancies often become periodic tenancies after the end of the fixed term. The rule will apply then.
s.15(3) says “In the case of a periodic tenancy which is not a statutory periodic tenancy…” etc.
Granted, fixed term ASTs do often become periodic, but usually this will be statutory not contractual. I mean, it is probably rare for an AST contract to make provision for a contractual periodic tenancy following the fixed term, and if it doesn’t, how does s.15 HA1988 apply?
I have done a post on this point now here: http://www.landlordlawblog.co.uk/2010/06/28/why-can%E2%80%99t-tenancy-deposits-be-for-more-than-two-months-rent/
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