Alternatives to tenancy deposit schemes are growing in popularity and many tenants are delighted with them. However, others are finding that they are not working as expected – as was shown in a recent BBC news article.
The new schemes can be excellent but they should not be confused with traditional deposits as they are very different.
If you are a tenant, here are ten issues you need to be aware of when considering using one of these schemes.
How they work:
1. They are a guarantee, not a deposit
The essence of a deposit is that it is money that you pay on the basis that if no valid claim is made – you will get it back. This is not the case with ‘deposit-free’ schemes.
The payment that you make is non-refundable. You will never get it back. You are paying for a guarantee service for the landlord.
If you leave the property owing money (eg for damage or unpaid rent) the company running the scheme will pay this to the landlord up to a specified amount, and then chase you to recoup their losses.
2. If a claim is made, you will have to pay this on top of the fee you paid at the start
For example, if you pay a fee of £300, and leave the property at the end of the tenancy having done damage to the value of £300 – you will have to pay this as an extra payment.
It will not be offset against the £300 you have already paid.
3. If you fail to pay damage at the end of the tenancy, you will be chased for this
If you pay a traditional deposit, what normally happens is that the landlord will recoup any expenses from the deposit and if there is any additional loss to them, they will generally take no further action. Not always but frequently.
However with a Deposit-Free renting scheme – the scheme will have paid out to the landlord so will be looking to recoup this money from you. They are unlikely to give up and you can expect to have debt collectors chasing you (for years if necessary) and/or county court judgements being obtained in the Small Claims Court.
These companies are likely to be much more experienced in chasing unpaid debts than ordinary landlords!
4. You will be at risk of paying more than you would with a traditional deposit
Traditional deposits are now capped at 5 weeks worth of rent. However, these Deposit-Free renting scheme can protect landlords for up to 8 weeks worth of rent or more.
So if the landlord is able to bring a claim against you for damage once you have left the property – this could end up being considerably more than you would have lost had your traditional deposit been awarded to your landlord (always assuming the landlord decided not to chase for the balance, which is what normally happens).
See also the points on adjudication procedure below which could result in higher awards being made against you.
5. If there is a dispute you will not normally be entitled to use the County Court or appeal the adjudication decision.
This is the normal rule with adjudications. You agree to abide by the decision of the adjudicator.
With a traditional deposit, you do not have to go to adjudication if you do not want to. You always have the option to go to the County Court instead. This option is unlikely to be available to you with a Deposit-Free scheme.
How the law protects you:
6. Your landlord must give you a genuine choice
On the positive side, if landlords and agents offer a no-deposit scheme option, they are obliged to give tenants a genuine choice and allow them to pay a traditional deposit if they want to.
Failure to provide a genuine choice will be a breach of the terms of the Tenant Fees Act 2019 and the Welsh equivalent legislation. Its all right, by the way, to just offer a traditional deposit. Landlords only have to give a choice if they are offering a no-deposit scheme.
7. If you are not given a genuine choice you can claim a refund
If you are able to show that your landlord or his agent pressurised you into paying for the alternative scheme (for example if you were given to understand that it was a condition of your tenancy), then the Deposit-Free renting scheme fee will be a ‘prohibited payment’.
You will be entitled to claim a refund of the fee paid by making a claim to the First-Tier Tribunal. If an order is made in your favour it will be payable by the landlord within 7 or 14 days and if not paid it will be enforceable as if it were a County Court Judgement.
Things to watch out for:
8. Watch out for additional fees
Depending on the terms of your particular scheme, you may have to pay additional fees – for example if a dispute goes to adjudication.
So check to see if this is the case before you sign up. It may not be a deal-breaker but you need to know.
9 Check what the procedure is if there is an adjudication
Disputes over damage at the end of a tenancy are often adjudicated by the same adjudication companies that deal with adjudications for the traditional deposit schemes. However in many cases
- The adjudication company will be contracting with the scheme (for example with the letting agency if it is the agent’s own scheme) – not with you, the tenant, or indeed the landlord
- Often the submissions for the adjudication will come solely from the agent and if you have a complaint about the adjudication you will not have direct access to the adjudicators.
- So check what options there are for your version of events to be put to the adjudicators in the case of a dispute. Or to put it another way
- Do you trust the agents to submit your case to the adjudicators on your behalf?
Some schemes have a portal which will allow you to submit your evidence. Others may not. You need to check this out.
10 Check whether the scheme is regulated
Some schemes are regulated which will allow landlords and tenants access to the Financial Ombudsman Service if they have a complaint. Others are not.
If the scheme YOU are being sold says nothing about financial services regulation – then it will almost certainly not be regulated. In which case you may want to think carefully before signing up to it.
An interview with Eddie Hooker and Suzie Hershman of My Deposits
I first became aware of the points on adjudications in an interview I did with Eddie Hooker and Suzie Hershman in September 2019 – which was a bit of an eye-opener for me.
You will find an extract of the relevant parts below.
(‘KPI’ stands for Key Performance Indicators)
If you have been very happy with one scheme, note that a different scheme offered by a different letting agent may operate in a completely different way.
You need to be aware of the disadvantages as well as the advantages of the specific scheme you have been offered and make an informed decision.
So study the scheme website carefully and do not allow yourself to be rushed.
It looks from the BBC news article as if some letting agents, being under financial pressure as a result of the tenant fees ban, are selling these schemes (which often will pay them a commission) aggressively as a way of recouping their lost fees income.
If you are unhappy about the alternative scheme on offer to you – remember that you have the right to insist on paying a traditional deposit.
If you consider that you have been pressurised into signing up for a no deposit scheme you are unhappy with – note that (as well as claiming back the fee via the First Tier Tribunal) this is something you can complain about to your letting agents’ Property Redress Scheme. So keep all the emails and records of telephone calls in case you need to bring a complaint later.
But the main message from this post is to check and double-check the scheme you are offered and only to sign up to it if you are 100% happy with it.