About the tenancy deposits scheme

Since April 2007 landlords have been required to protect tenants deposits (for ASTs) in one of the three government authorised tenancy deposit schemes. This has largely infuriated landlords but there are a number of good reasons for it:

• The deposit money belongs to the tenant and not to the landlord
• Many landlords (not all but a substantial minority) were failing to return all or part of the deposit without proper justification
• When this happened, the only thing tenants could do was bring a County Court claim, but many people find the courts scary and intimidating
• The unjustified retention of their deposit was causing hardship, particularly when it was needed for a new tenancy

However under the new schemes the deposit money is protected, so that even if the landlord or agent holding the money becomes insolvent, the tenant will still get it back.  The schemes also come with a free arbitration service so that disputes regarding deductions from the deposit money can be independently assessed.

The problem now with tenancy deposits

Unfortunately it seems that many landlords are still not protecting deposits, despite that fact that they are usually aware the rules exist.

This is not only unfair on their tenants, it is also unfair on all the other landlords who are protecting deposits properly.

The tenancy deposit legislation may not be perfect, but it is the law. Landlords should not be allowed to pick and choose which regulations they will comply with. Often the landlords who fail to comply with the tenancy deposit legislation are also failing to comply with other legislation, and are generally the type of landlord which gives the whole landlording profession a bad name.

More practically, a landlords failure to protect the deposit means that if they then fail to return it unjustifiably (and often they do), their tenants don’t have access to the free arbitration service, and feel helpless to prevent their money being wrongly withheld. This is the very problem which the tenancy deposit legislation was set up to prevent.

Tenancy deposit scheme penalties

There are penalties included in the tenancy deposit legislation intended to deter landlords from flouting the legislation.

One of these is a penalty payment of three times the deposit sum, which a Judge will award if a claim is made to the County Court. However most tenants have no idea how to do this, cannot afford solicitors, and are scared of bringing a court claim without legal help.

The Landlord Law scheme

In order to help tenants in this situation, I am now able to offer the Landlord Law no win no fee tenancy deposit claim scheme. This operates as follows:

It is only available to tenants who have vacated the property.
In recent cases claims have failed where the landlord has protected the deposit before the tenants have issued proceedings. However this defence is not available where tenants are no longer living in the property.

It is only available where the landlord still owns the property.
The reason for this is that if the landlord fails to pay the award, a claim can be made to enforce the award against the property (so that both the sum awarded to the tenants and the solicitors costs will eventually be paid). This means, unfortunately, that our service will not be available where the landlords property has been repossessed by the mortgage company.

The service will be provided on a no win no fee basis.
So if your case is suitable, you will not have to make any up front payments, and will only have to pay solicitors costs if you win the claim.

For more information visit >> www.tenancydepositclaim.com.

You will also find a link to an application form.

He tells me that he arranged for a letting agent to protect the deposit, which they did with My Deposits.  He then went away travelling for a year.  While he was away, the agents ceased acting for him save for looking after the deposit.  However then, unbeknown to him, the agency busienss was sold to another company. 

The landlord, on returning back to this country, found that the new company had no record of receiving the deposit money.  It also seems that My Deposits wrote to him and to the tenant telling them that the deposit was no longer protected, but neither appear to have recieved the letter. 

The landlord is therefore left to pay the deposit money back to the tenant out of his own funds. He is also at risk of being  sued by the tenant for the penalty of three times the deposit sum, as the deposit has been unprotected for some time.

This just goes to show that often the DPS is the best and safest scheme.  Here the money is actually handed over to the scheme administrators so there can be no question of it getting lost and the landlord having to foot the bill. 

What do you think?  have you  experienced this type of situation?  Were you able to resolve it?

This is a question I was asked recently, and I am finding it harder than I thought originally, to answer it. The answer I have come up with is that you can, in that it is not illegal, but it may not be a very good idea.

As most of you know, a tenancy or damage deposit is a sum of money paid by a tenant to the landlord which is held during the tenancy, to be a fund the landlord can use to pay for any necessary repairs or replacement when the tenant leaves.

Deposits now need to be protected with a government authorised tenancy deposit scheme, but I have written about that extensively, elsewhere on this blog.

When first asked (in a comment here)  about the need to keep deposits at or below two months rent, my response was that deposits of over two months rent will be deemed to be a premium, and premiums are bad news and best avoided. When my questioner inevitably then asked “why?”, and I started looking more at the detail, things became less clear.

‘Key money’ and premiums in the past

A premium is a sum of money you pay to the landlord as a condition of being allowed to have a tenancy. They are standard practice with long leases, where you generally have a high premium of many thousands of pounds and a low ‘ground rent’.

Originally premiums were often charged for short lets. They were known as ‘key money’. During the first world war they were frequently charged as a way of avoiding the rent control legislation. Because of this they were outlawed, and this prohibition was eventually confirmed in the Rent Act 1977. Premiums were only permitted for long leases, ie leases for a term of 20 years or more.

Under the Rent Act, the definition of ‘premium’ included (s1289(1)(c)):

any sum paid by way of a deposit, other than one which does not exceed one-sixth of the annual rent and is reasonable in relation to the potential liability in respect of which it is paid

Premiums in the Housing Act 1988

The Housing Act 1988, introduced by the still relatively new Thatcher government, radically changed the law relating to renting property, and the law relating to premiums was no exception. Premiums are no longer illegal for assured and assured shorthold tenancies, as they still are for tenancies governed by the Rent Act 1977. However their exact status remains (for me at least) somewhat opaque.

Section 15 of the Housing Act 1988
The main mention of them, that I can find, is in section 15. This section relates to the assignment of tenancies without the consent of the landlord. Something all landlords will be keen to avoid, as they will not want the tenancy legally transferred over to a tenant who may be unsatisfactory and/or unable to pay the rent.

In essence s15 says as follows

• All periodic tenancies will have an implied term saying that tenants cannot assign without the consent of the landlord (s15.1) whether or not the landlords refusal is unreasonable (s15.2)

• If the periodic tenancy is not a statutory one (i.e. if it is not one which is created by any statute, such as s5 of the Act), then s15.1 does not apply if
  • The question of assignment is covered by the terms of the tenancy agreement itself, or
  • A premium is payable on the grant of the tenancy or its renewal

• A premium will be one of the following (s15.4):
  • A ‘fine’
  • Any ‘pecuniary consideration’ payable as well as the rent, or
  • A deposit if this is more than one sixth of the annual rent – i.e. two months.

So basically,

• if you have a periodic tenancy which is not a statutory one, then if there was a premium paid or payable, the landlord will not be able to prevent the tenant from assigning the tenancy if he wants to.

• However if there is no premium, then (for periodic tenancies) the landlord can prohibit assignment absolutely, and the tenant cannot challenge this on the basis that the landlord’s refusal to grant consent is unreasonable.

Is this worth worrying about, I was asked recently, bearing in mind that very few tenancies are contractual periodic tenancies?

My answer is that a tenancy may become a contractual periodic tenancy by agreement with the tenant, and the prospect that the tenant may then be entitled to assign the tenancy without the need for the landlords consent, is a compelling reason for avoiding deposits of more than two months rent in all tenancies.

Even if, in these circumstances, the landlord can end the assigned tenancy under section 21, this will only be after service of a notice of not less than two months, and possibly court proceedings, which could easily take a further two months or more. A tenant can do a lot of damage in four months.

Section 115 of the Housing Act 1988

However there is then section 115, which relates to premiums for long leases. This is saying effectively, that premiums are allowable provided the lease cannot be ended for 20 years after the date the lease was granted.

Does this then mean though, that if a premium is paid, this will effectively convert the tenancy to a 20 year lease? And if so, will the definition of a premium still include a deposit for a sum equivalent to, more than two months rent?

A quick scout around my textbooks, shows a dearth of information on the whole question of the relationship between deposits and premiums. It would be interesting to hear from lawyer readers with their views on this point.

Section 54 of the Law of Property Act 1925

This is the final piece of legislation which I have found which will affect us. The LPA 1925 s54 is the act which states that all deeds transferring or conveying legal title or ownership of property (which includes tenancy agreements as these transfer ownership of the property for a period of time) must be by way of a deed.

However there is an exception to this rule, if the tenancy is to take effect immediately, at a market rent, and provided a ‘fine’ or premium is not payable. You can read more about signing tenancy agreements as a deed here.

Conclusion

To summarise, my researches show as follows:

• If you take a deposit of more than two months, this will be classed as a premium
• If you take a premium, you will not be able to prevent your tenant from assigning your tenancy, if it is a contractual periodic tenancy, and
• You will need to get the tenancy agreement signed as a deed.

I also flag up the possibility that taking a premium may mean you cannot end the tenancy for 20 years.

What do you think? Is there anything I have left out?

Alternative Dispute Resolution (ADR)

There is a general trend in government and in society to give statutory authority to forms of alternative dispute resolution as a way of easing the burden on the court system, and on the small claims track in particular.

Leaving aside the inflammatory issue of sharia tribunals administering the authority of the High Court under the provisions of the Arbitration Act 1996, examples of low value disputes being outsourced to statutory adjudication services abound and systems are in place to resolve disputes over everything from telephone billing and school admissions to contested parking tickets and bus lane infringements.

ADR in deposit protection claims

In the field of housing law, landlord and tenant disputes are regularly determined by the deposit protection schemes’ in house alternative dispute resolution departments and the high number of cases decided by the schemes means that the deposit protection ADR services provide a statistically useful example of the outsourced dispute resolution model.

Deposit protection was introduced in England and Wales by the Housing Act 2004 as a measure to protect tenants from unscrupulous landlords, and as part of an drive to promote professionalism across the letting industry. Since September 2007, when the Act came into force, landlords of assured shorthold tenancies with an annual rental yield of up to £25,000 have been required to protect the tenant’s security deposit for the duration of the tenancy. Deposit protection is shortly to be extended to tenancies with a rental yield of up to £100,000 per year.

The government currently licenses three deposit protection schemes. Each scheme is required to operate an alternative dispute resolution department in order to determine rights pertaining to the deposit where the parties cannot independently reach an agreement.

In practice, all three schemes choose to use adjudication to determine claims as it is a quick and cost effective method of resolution, suited to processing a large volume of low value claims. The schemes are estimated to process around 20,000 disputes per year between them, and more disputes are raised year on year as tenants become aware of their rights.

The schemes’ ADR services have been the subject of much criticism amongst the lettings industry for a perceived prejudice against landlords and, at first glance, the available figures appear to support this position.

The most recent statistics, released by My Deposits, show that, whereas the landlord is awarded the entire disputed amount in 8% of cases, the tenant is awarded the full value of the claim in 49% of cases. In the remaining cases the disputed amount is divided between the parties. Faced with a 92% chance of losing money, the disquiet amongst landlords at the introduction of the new system is understandable.

The deposit protection dispute resolution process is, quite properly, administered to a legal standard. To operate otherwise would be to invite public outcry. The schemes are responsible for the distribution of millions of pounds, in contested deposits annually, and need to must act in a fair and impartial way.

The services adopt a basic legal procedure, employ proper rules of evidence and utilise the concepts of burden and standard of proof, in an effort to conform to accepted standards of justice. The schemes take the view that for the duration of the tenancy, the deposit belongs to the tenant, and is held in escrow pending future obligations under the tenancy agreement. The burden of proof in a dispute is, therefore, placed squarely on the landlord, who must prove, in the balance of probabilities, that any claims on the deposit are justified by the evidence.

In my experience, a significant proportion of landlords’ claims fail because landlords do not sufficiently engage with the process of dispute resolution.

• Arguments are regularly submitted out of time,
• statements of case show a disregard of the burden of proof, and
• supporting documents often muster little evidential value.

A large number of landlords’ claims are unsuccessful, not because they are unjustified, but because the amateur approach taken by the landlords does not satisfy the stringent, quasi-legal, tests posed by the dispute resolution system.

The dangers of the development of dispute resolution systems

A statutory dispute resolution system, dealing with low value disputes, such as those administered by the deposit protection schemes, encourages the direct participation of the parties, and discourages the use of legal representation.

The system of adjudication dispenses with any kind of tribunal or hearings in person and the paper based nature of proceedings may partially account for landlord claimants submitting evidence without obtaining advice.

The overriding factor, however, is almost certainly the value of the disputes. With an average of only £601 in contention, according to figures released by the Tenancy Deposit Scheme earlier this year, it is barely worth the parties obtaining the services of a solicitor, whose bill would be liable to engulf the majority of any potential award.

Free legal advice services are often unavailable to business customers, and even a single buy to let investment is regarded as a business. If landlords can obtain advice from a law clinic or similar, the strict deadlines imposed by the schemes, which are necessary for operational efficiency, are often incompatible with voluntary legal advice services, which operate at a slow pace.

It is arguable, then, that by adopting a policy that relieves the court system of high volume, low value, industry specific disputes, which do not warrant expensive legal advice or resolution by tribunal, the government is removing the safeguards that the justice system has built up to protect the litigant in person.

The County Courts are indulgent of the litigant in person, and the small claims track, in particular, has evolved to permit district judges the opportunity to examine claims in less formal surroundings and without the strict adherence to procedure of the court room.

The bare decision making of adjudication, on the other hand, offers no opportunity for participants to rephrase submissions that may not be clear to the decision maker, or to explain the relevance of an incongruous piece of evidence.

Looking to the future

As long as society remains relatively litigious and government lacks the funds and the impetus for a considerable expansion of the central justice system, it is difficult to see the current trend towards outsourced dispute resolution abating.

Faced with losing money unnecessarily, those members of the public participating in the ADR processes will inevitably demand low cost legal advice services to maximise their prospects of success.

To cope with the consumer demand, I foresee the emergence of highly specialised services, delivered primarily online and targeted specifically at the various alternative dispute resolution services. With the Legal Services Act introducing alternative business structures to the law marketplace next year, early adopters are already actively looking for new markets that suit the commodification of legal services.

Legal products aimed at participants in ADR processes, where consumers demand a low cost product, and where the highly specialised nature of the dispute lends itself to automated delivery, may prove very attractive to firms looking for profitable business areas that are beyond the remit of traditional legal services.

Forward thinking lawyers are already preparing themselves for a seismic shift in the way legal businesses interact with consumers, and this area is certainly one to watch for clues as to the future delivery of legal services.

Tom Derrett

About Tom Derrett: Tom has a wealth of experience in housing, having spent many years working with disadvantaged tenants on social housing projects and, after training in law, working as an adjudicator for a deposit protection scheme. Tom now runs ADR Solution, providing much needed assistance to landlords who are using the deposit protection schemes’ ADR services.

I have received the following email from one of our readers:

My boyfriend and I moved into a 7 person flat share beginning of Nov 2008 where we were advised by the tenant moving out that there had not been a lease agreement with the Landlord via the letting agents for a while.  It had expired and the agents hadn’t renewed despite the tenant asking. Anyway they said it worked for them to not bother with a new lease as the turn over of tenants was fairly regular so they started a system that a new tenant coming in just paid the tenant leaving the bond.

I have been told by the agency who we rent the property through that due to a government law bought out in April 2007  regarding deposits they would be unable to transfer the names from tenants that were on the lease at the time to my name therefore leaving me in a position where I will not be able to get the deposit back should there be a situation where we need to leave and are not replacing out selves with another tenant.  Is there anything i can do about this?

This is not the first time I have been consulted in a case where ‘tenants’ move in and move out of a property without signing any form of tenancy agreement, often where the original tenants who signed the tenancy agreement have long gone.

Are they tenants or lodgers?

It raises a number of legal problems.  If the original tenants are still living in the property, the incoming occupiers probably have the status of lodgers.  However what is the situation when all the original tenants have left?  You can’t really have a house full of lodgers under a tenancy where the tenants are no longer there.

Here are two suggestions -

• the occupiers have an oral tenancy, or
• there has been some sort of implied assignment

I would favour the oral tenancy argument, perhaps on the basis that they have a tenancy of their own room and shared use of the common parts.  What do you think?

What about the deposit?

And what is the situation regarding the deposit?  If this was protected (and it may not have been) it would have been protected with one of the three tenancy deposit companies, under the names of the original tenants.  Is there any procedure whereby it can be paid out to the current occupiers?  The original tenants won’t be interested as they will have been repaid by the incoming occupiers.

My advice to both landlords and tenants, is never allow this sort of situation to develop. It is a lazy approach to letting which benefits neither party, and which can be very prejudicial to either.