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Deposits – An Essential Reminder

On 1st October 2015 a significant number of changes impacted the legal landscape for letting agents and landlords renting property. A raft and wave of legislative change has continued, and is continuing, with increasing numbers of local authorities expanding selective licensing which increases both fees and costs for landlords when making the applications, and the additional requirements, obligations and costs licensing brings.

‘Right to Rent’ obligations, ‘How to Rent’ booklets, EPC’s and gas safety obligations, amongst others, should all be on landlords’ radars.

In the context of all the recent changes deposit requirements must not be overlooked and it is essential for landlords and letting agents taking deposits to ensure that you comply with the rules. If you do not then you cannot end the tenancy or regain possession of your property under section 21 until the deposit has been repaid or a court case has ended. The other important aspect is that your tenant can apply to a county court to receive compensation between one and three times the value of their deposit if the deposit was not protected or if they haven’t received information about the scheme used. This information is known as ‘prescribed information’. Clearly such a combination of issues is significant and important to avoid.
As a starting point be clear on what the deposit actually is. We have seen cases where a ‘holding deposit’ is paid to ‘secure’ the property (subject to references), and then later a ‘damage deposit’ is paid if the references are successful. Our advice is to separate any fees and charges (really what the holding deposit was) from deposits regarding the condition of the property to avoid any issue.

The rules

If you receive a deposit you must register it within 30 days. There are three government approved schemes;

Deposit protection service – any landlord can use this service to hold deposit in a bank account. When the tenancy ends the money is returned to the person entitled to it. There is no charge to the landlord or tenant for using this scheme.

MyDeposits – this is an insurance-based scheme. Under this scheme the landlord or agent holds the deposit, but pays a fee that funds an insurance scheme.

Tenancy Deposit Scheme – this is another insurance-based scheme that operates in the same way as MyDeposits.
The second element of deposit protection is that ‘prescribed information’ must be given to the tenant. This must also take place within 30 days from the deposit being received.
Each of the different schemes above have different documents that make up the ‘prescribed information’. The correct documents must be used relevant to the scheme you use. This can include deposit protection certificates and other documents such as information leaflets and terms and conditions. Partial prescribed information won’t be good enough, the entire documents relevant to the scheme used must be adopted and provided in full and the scheme rules must be adhered to. Website links to where to find the information won’t be sufficient. We would always recommend landlords provide the tenant will all documents in person and also retain copies of the documents signed by the tenant confirming that they have received a copy.

With the complexity involved it might be attractive to try to find a way around complying with the deposit rules. We would always try to discourage landlords from approaching deposit protection requirements in this way. Asking for the rent to be paid eight weeks in advance initially and then monthly thereafter, but with no deposit stated in the AST, is at risk of being arguably a deposit. Another example is where the tenant is asked to pay an extra £50 per month in addition to the monthly rent to accumulate a deposit over time. This is equally uncertain. Litigation is risky and expensive. In even simple cases it can take months and takes even longer in complex cases to regain possession of a property. No landlord wants to incur the cost, risk and time in establishing new case law. We would therefore always advise landlords to consider the cost; benefit of any ‘non-standard’ approach with the message overall being that its far better to keep things simple from the outset.
To avoid delays and complexity we are seeing an increase in landlords who take no deposit but who request a guarantor property owner as an alternative. This trend may continue.

Recommendations

– Be clear at all times on what the deposit sum actually is;
– Be clear on when the deposit is received;
– Register the deposit with an approved scheme;
– Provide prescribed information regarding the deposit to the tenant;
– Retain copies of all the documents you provide together with a signed acknowledgment and receipt from the tenant confirming they have received them;
– Whether or not you request a deposit consider also requesting a guarantor.

Alex Cook is a Director at Helix. Alex initially trained academically as an unregistered barrister and was a Partner and Head of Civil Litigation at a large firm based in the South East before joining Helix Law. As well as focussing on expanding Helix, Alex specialises in commercial and property related litigation and he has acted for a broad range of clients including offshore property investment funds, small businesses and individual property owners.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]