Tenancy Deposit Protection - the bare essentials
The explanation
Section 212(1) of the Housing Act 2004 requires the Secretary of State in England, and in Wales the National Assembly for Wales, to make arrangements for securing that one or more deposit schemes are available for the purpose of safeguarding tenancy deposits paid in connection with assured shorthold tenancies.A “shorthold tenancy” is defined in section 212(8) of the Act as one falling within the meaning of Chapter 2 of Part 1 of the Housing Act 1988.
Which deposits are affected?
All deposits paid in respect of Assured Shorthold Tenancies (AST) on or after 6 April 2007 are affected. It will not cover tenancies created before 6 April 2007 until, and unless, there is a renewal agreement (this renewal agreement can be for a fixed term or a periodic tenancy) created after 6 April 2007.Examples of deposits that are NOT affected are those paid in relation to:
• ASTs created before 6 April 2007 that ‘run on’ to become statutory periodic tenancies on or after 6 April 2007
• Tenancies where rent exceeds £25,000 p.a. (i.e. non-AST)
• Tenancies let to corporate bodies.
The schemes
A scheme may be a custodial scheme as defined in 1(2) of Schedule 10 to the Act (“the Schedule”) or an insurance scheme, as defined in paragraph 1(3) of the Schedule.The scheme administrators
Three firms have been appointed to set up and administer competing schemes. An Alternative Dispute Resolution (ADR) service will be provided by each one.
The custodial scheme
One custodial scheme will be available - The Deposit Protection Service (The DPS) operated by Computershare Investor Services plc. The ADR service will be provided by the Chartered Institute of Arbitrators.The DPS is free of charge, there are no administration, annual membership or per unit fees. The service pays for itself from the interest accrued from deposits.
Within 14 days of receiving a deposit, the landlord must pay it to The DPS and provide the tenant with the prescribed information - see later.
At the end of the tenancy, if the landlord and tenant agree on the allocation of the deposit, The DPS will pay the deposit to the two parties in the agreed proportions. The rules allow for the payment of interest at Bank of England base rate less 2.32%.
If a dispute arises, The DPS will ensure that an effort to persuade the parties to agree has been made before referral to the ADR service. The DPS will pay out any money not in dispute immediately, and only retain that amount that is in dispute.
The DPS will pay out the disputed amount as decided by the ADR service or a final court ruling.
The insurance based schemes
Broadly these operate as follows:• The landlord or agent retains the deposit
• Within 14 days from receipt of the deposit, the landlord provides the tenant with the prescribed information
• At the end of the tenancy, if landlord & tenant agree on any deductions the deposit is paid to the parties as agreed
• If there is a dispute, the landlord or agent must refund undisputed amounts and pay the disputed amount to the scheme administrator. They will then be able to choose to use the scheme’s ADR service or the court to resolve the dispute.
• If the dispute part of the deposit is not sent to the scheme administrators within 10 days, the scheme administrator will claim the money from the insurance provider. The insurance provider will then seek to recover the money from the defaulting scheme member using the normal court options. Such failure to comply is also likely to result in eviction from the scheme.
• Once the ADR services, or the Courts, have reached a decision the disputed amount will be paid out to landlord and/or tenant
• The law does not prevent the costs of the scheme being recovered from the landlord or tenant.
There are two insured schemes:
1. Tenancy Deposit Solutions Ltd (TDSL); owned jointly by the National Landlords Association (NLA) and Hamilton Fraser Insurance plc (HFIS).
The scheme isadministered by Hamilton Fraser and is designed to enable individual landlords to hold deposits throughout tenancies. Agents can also chose to join this scheme.
An ADR service will be provided by the Chartered Institute of Arbitrators.
Fees will be charged to members to cover the administration costs, the costs of the dispute resolution and the insurance premium to cover unpaid deposits.
The scheme, primarily designed for NLA members and landlords - is based online to minimise costs. An effort is being made to attract agents and larger landlords.
Members of the scheme must be UK resident, corporate members must be registered in the UK.
2. The Dispute Service Limited (TDS); owned by ARLA, NAEA & RICS and is the successor to the voluntary scheme - the Tenancy Deposit Scheme for Regulated Agents. Dispute resolution isprovided from their own resources.
Fees are charged to agents per office and may vary based on volume of business.
Landlords may join TDS although fees may discourage all but the larger portfolio owners, and will be based on risk assessments.
The dispute resolution
ADR for The Dispute Service scheme is provided by their own panel of adjudicators as this is fundamentally what they exist to do.The Chartered Institute of Arbitrators (CIA) will provide the adjudication for the custodial scheme and the NLA sponsored insurance scheme.
The Institute is a not-for-profit charity working in the public interest through an international network of 30 branches and chapters. DRSCIArb, a division of the Institute administers systems for the resolution of business and consumer disputes.
The prescribed information
As part of the rules for the new schemes, the agent or landlord must give to the tenant certain information. The information required is prescribed, in accordance with Section 213(5) of the Act, in regulations.The penalties
Failure to protect a deposit or provide the prescribed information may bring substantial penalties.The landlord will not be able to give a Section 21 notice, the tenancy will not therefore be able to be ended in this way.
If the tenant cannot verify that the deposit is covered by one of the schemes, and all schemes have to provide a system for checking that deposits are covered, the tenant has the right to go to the County Court. If the County Court find the deposit is not properly covered or the prescribed information was not provided, they must either award that the deposit is repaid to the tenant (not waiting till the end of the tenancy) or order that it is brought within one of the schemes.
If the Court orders either of these actions they MUST also award a further penalty by ordering the landlord to pay the tenant a sum equal to three times the deposit.
Landlords who incur such penalties, or who are found to be in breach of other legislation may find they will not be welcome as members of insured schemes.
How much!?
Any new legislation should bring benefits, but will inevitably increase bureaucracy and through this introduce costs. Good legislation balances costs verses benefits.Tenancy deposit research
Trials run by the Independent Housing Ombudsman indicated that a full-blown tenancy deposit scheme would cost about £19 million to run and had the potential to save about £20 million pounds of tenants’ deposit money. With the figures so close, the trial scheme was closed as not viable.
Regardless of their own research showing the idea was not really worth implementing, the Government pressed ahead with the legislation under pressure from a number of groups. The critical thing is that the tenants stand to save £20 million, but they will not be the ones directly having to pay the costs.
Your costs
So what might all this cost and how can you protect the profitability of your agency? The first consideration is the various income and expenditure streams that are affected and what "deposit options" you have.
The first option for any agent or landlord would be not to take any deposit at all. This might be considered in situations where guarantors were taken. If this course is followed, there are no membership costs, compliance issues or prescribed information needed. However, there is still a cost to most agents in that they would lose the interest earned on the deposits. Some agents hold the deposits in non interest bearing accounts, but they gain by negotiating free banking instead.
The second option to consider is the custodial scheme. This is very similar to not taking deposits in that the "cost" is the loss of interest; however, there are now compliance costs to consider as well.
The third option is to use one of the insured schemes. They both have costs of membership and each scheme has its attractions to particular agents. The direct charges for different categories of members are shown in the table overleaf.
With the insured scheme you have to pay fees for membership but you do retain the deposit and therefore potentially gain the interest. Depending on the scheme you choose, the interest earned may or may not cover your membership costs. Generally it is fair to say that smaller agents may find the Tenancy Deposit Solutions scheme more cost effective, whilst larger agents may find The Dispute Service scheme more financially beneficial.
When considering costs the "published rates" are easy to compare, but the "real cost" should not be ignored. For example, if an agent decides to join ARLA simply to gain the cheaper rate offered by The Dispute Service to ARLA members, what other costs are involved?
Annually there is the ARLA membership fee, currently listed as £336 on their web site. Additionally to be an ARLA member, Client Money Protection Insurance is required and this is between £75 and £140, depending on turnover. Additionally there is a one-off joining cost of £300 plus the costs of things like training and qualifications if these are not already held. It will, however, still be financially attractive to use these schemes for many agents.
An interesting thing is to consider why we hold the deposit in the first place. It can be argued that it is about holding a sum of money to which we have easy access and control. Sadly these two features will no longer exist under the new rules. Though we hold the deposit the tenant has to agree to the deductions. If not, we have to go to court or ADR. The good side of the deposit is that after ADR or the court judgement we should get paid swiftly, so there is some merit.
It is interesting to muse on the reasons, other than pure financial ones, why an agent might choose one scheme over another. There are no obvious advantages of any scheme apart from the agent retaining the interest.
Recover subscription fees?
If agents choose to try and charge landlords for joining an insured scheme they should be aware of the danger of the landlord asking what the advantages of that scheme are over and above another. If the only real reply is that the agent can keep the interest the agent may be sailing very close to his duty of loyalty as an agent, doing what is in the best interest of his principal.
These changes are going to require ‘financial adjustments’ and perhaps this is a good time to review your whole charging structure. For example, if you no longer get the interest, a simple commission increase of less than 0.5% will generally provide as much income as the interest.
Alternatively, a slight increase in move in fees (generally about £45 per tenancy) will also provide the same amount of income as the interest.
The custodial scheme paying interest is almost certain to increase demand from tenants for them to be paid interest on their deposit. This may be a growing force that is hard to resist.
Increased disputes – increased costs?
The fees for the insured schemes quoted overleaf are only their opening charges. The great fear of the scheme providers is the unknown number of disputes they will have to deal with (and their contracts with DCLG do not allow them to directly charge for this). Therefore if the number of disputes is much higher than the models they have predicted, it could result in an increase in membership charges to ensure the financial viability of the scheme.
For all users of the insured schemes, it will be in their own long-term interest to minimise the disputes going to ADR to keep costs under control.
One interesting effect of the high cost of ADR is going to be the view of the scheme administrators on using ADR (and for two of them it is a fixed cost per claim so the more claims the more costs).
If it is assumed that the cost of ADR is about £200 (and this is probably not unrealistic) then there could become a tendency for the scheme administrators to ‘settle’ small claims. For example, if there was a cleaning claim of £80 on move out. The parties do not agree on the deposit refund and go to the scheme administrators. Knowing the cost of ADR, the scheme administrators decide it is cheaper for them if they simply pay both landlord and tenant the £80 rather than foot the bill for the full ADR service. It is a logic commercial decision.
The danger of such a policy is that over time the parties may come to feel that they always win minor disputes and so they become more likely to complain.
Other costs
Agents and landlords should not ignore other costs. It may be great to get a dispute off your desk and off to ADR, but there are bound to be costs involved in filling out paperwork, registering every tenancy, the inventory, check in and check out.