Member Article

New rules regarding rent deposits

With Watson Burton LLP Law Firm

On 6th April 2007 a mandatory scheme, under the Housing Act 1988 (the ‘Act’), will come into force governing how rental deposits for Assured Shorthold Tenancies (‘ASTs’) are held.

All Landlords who wish to take a monetary deposit as security for an AST entered after 6th April 2007, irrespective of whether it is called a ‘deposit’, must join a Tenancy Deposit Scheme (‘TDS’).

Landlords may choose from two schemes: the Custodial Scheme; and the Insurance Based Scheme. Landlords must inform Tenants within 14 days of receiving a deposit which scheme is to be adopted. A failure to do so may result in a court order to repay the deposit, pay it into an TDS account, or make a payment to the Tenant of three times the deposit.

Custodial Scheme

Deposits will be paid into the scheme and held in a designated rent deposit account. Interest which accrues will be used to fund the scheme. The money will remain in the scheme’s account until the parties agree the amount to be returned to each party and notify the scheme administrator. If the parties cannot agree, they can choose to use the free arbitration service or seek a court order.

Insurance Based Scheme

The Landlord will hold the deposit and will pay a membership fee to an insurance company to protect that deposit. The Landlord must repay the deposit within 10 days of the end of the tenancy. If a dispute arises regarding repayment, the money is paid over to the scheme administrator, until the dispute is resolved through arbitration or court order. If the Landlord fails to repay the money, the scheme will reimburse the Tenant and then recover the cost from the Landlord.

Landlords who fail to comply with the provisions of the Act will:

a) be unable to regain possession of the property using the ‘notice only’ provision of the Act; and

b) may be liable to pay a fine of three times the deposit to the Tenant.

The new rules will create additional administration, but should not produce any major difficulties, and if the Custodial Scheme is adopted, should not incur additional costs. However, if Landlords wish to avoid the new provisions, instead of taking a deposit, they could safe guard themselves by taking a third party guarantee or increasing the rent.

If you have any queries in relation to this article or any other property matter, please contact Caroline Rye at Watson Burton LLP (caroline.rye@watsonburton.com).

This was posted in Bdaily's Members' News section by Ruth Mitchell .