The starting point always when considering tenancy deposits is that they are not the landlords money.
Tenancy deposits belong to the tenants.
What are tenancy deposits?
They are a payment made to the landlord of a sum of money for them to hold for the duration of the tenancy, which can be used at the end of the tenancy, if the tenant owes the landlord any money in connection with the tenancy.
This could be things like:
- Unpaid rent
- Repairs that need doing which are not down to ‘fair wear and tear’
- Replacing items that have been broken during the tenancy’
- etc
However, before the landlord can actually do this, there needs to be something else.
Authority
There needs to be authority given to the landlord to use this money, in the tenancy agreement.
This will normally take the form of a clause which says something along the lines of that the landlord can make deductions from the deposit money for money owed to the landlord in respect of breaches of the terms of the tenancy agreement.
If there is no such clause, particularly if the tenancy agreement does not mention the deposit at all – then the landlord is not entitled to make any deductions and will not be able to succeed if a deduction is disputed and goes to adjudication
Deposit v. rent
Sometimes, as in the case of Johnson v. Old, there is some confusion as to whether a payment is a deposit or whether it is rent.
Often this is in circumstances where a landlord has taken a payment which he wants to use as a deposit but does not want to have to protect under a scheme.
This is the best way to look at it:
- If a payment is taken and applied to towards the rent immediately (even if the agents do not actually pass all the money over to the landlords at once) and the tenant is not expected to pay any more for the period of time the payment covers, and if it is clear that the money will not be refunded – then it will be rent.
- Otherwise, it could be held in some circumstances to be a deposit.
The tenancy deposit scheme
This only applies to assured shorthold tenancies so if the tenancy is (for example) a common law one, or an assured tenancy (or it it is not a tenancy all – for example if it is a lodger situation), you will not need to protect the deposit.
Assuming the tenancy IS an AST then the landlord must
- protect the deposit with one of the three authorised tenancy deposit schemes, and
- serve ‘prescribed information’ (I will be looking at prescribed information in a separate article)
within 30 days of payment of the deposit money.
The three schemes are
The first two are ‘insurance’ backed schemes where the landlord can hold the money in his own bank account but has to pay a fee to the scheme. Then if the landlord runs off with the money, the tenant will be paid by the scheme (who will then chase the landlord for repayment).
The final scheme is free but the money must be paid over to the scheme administrators to hold. This type of scheme is a ‘custodial’ scheme. The DPS is the only administrator at present, authorised to run a custodial scheme (they also offer an insurance-based scheme).
If the deposit is not protected
- Then the landlord will be vulnerable to being sued by the tenant for a penalty of between 1 and 3x the deposit sum and
- The landlord will not be able to serve a section 21 notice unless
- the deposit money is returned to the tenant (and deductions can ONLY be made with the tenants consent) or
- There has been a claim for the penalty which has been resolved by agreement or a court order
There are no exceptions
I am often contacted by people who have not protected the deposit – either because they forgot or because they were not aware of the need to do so.
Invariably they want me to tell them how they can use section 21 to evict their tenant without having to refund the deposit money.
However, this cannot be done. There are no exceptions. You cannot evade the law just because you are a nice person or because there was some excellent (according to you) reason why you should not have protected.
Problems with the law
There have been a lot of problems with this legislation and we have recently had a new round of changes correcting the problems which came from the Superstrike case.
These are dealt with in separate articles on this site.
It is to be hoped that this legislation can now settle down and we can have a period of time without issues relating to tenancy deposits.
“It is to be hoped that this legislation can now settle down”
Indeed, as the Deregulation Act is going to keep everyone busy for some time!
Regarding return of deposit, it also depends on whether new tenancies have been created in the meantime.
Is it now not allowed to take the first and last months rent in advance? (I know of landlords that do so, claiming it is not a deposit.)
It may be OK but personally I would not risk it. So far as i am aware we have not had a case on that point yet.
I am curious about your point on regaining the ability to serve a S.21 Notice if you have failed to protect the deposit. If a landlord has returned the deposit but the penalty hasn’t been settled or litigated, wouldn’t the S.21 ability still be frozen after the Localism Act removed the interdependence between the repayment of the deposit (or payment into a scheme) and the penalty for failure to protect?