The House of Commons published a briefing paper yesterday on Tenancy Deposit Schemes. The briefing paper gives the background to the introduction in 2007 of the requirement for landlords to protect their tenants’ deposits in regulated schemes in England and Wales. This was done through provisions in the Housing Act 2004. Non-compliance can lead to the imposition of penalties. The legislation aims to ensure that tenants can be assured they will have their deposit returned at the end of the tenancy (subject to reasonable deductions for damages etc) and they will have access to an alternative dispute resolution (ADR) service in cases where landlord and tenant do not agree on how much deposit is to be returned. This service is free at the point of delivery as the schemes are funded by interest accrued on deposits held. The decision of the ADR service is binding. Both tenant and landlord do retain the right to take the dispute to Court instead of the ADR service or if they wish to challenge the ADR service’s decision.

The briefing paper explains how the two types of deposit schemes work: custodial schemes where the landlord hands the deposit over to the scheme and insurance based schemes where the landlord keeps the deposit and pays a premium to the insurance company.

The paper also reviews case law linked to the legislation some of which were felt to weaken the protection offered to tenants. Amendments to the original legislation were made through the Localism Act 2011 which came into force in April 2012. Landlords now have 30 rather than 14 days to protect the tenant’s deposit. Loopholes have been tightened up so landlords who did not initially protect the deposit cannot return the deposit to the tenant and then not be liable to pay the penalty to

the tenant. Landlords who did not initially protect the deposit can now use the Section 21 eviction process if they return the deposit or resolve the court proceedings first.

Section 32 of the Deregulation Act 2015 concerns other legislative changes which were felt necessary due to case law. Section 32 clarifies that tenancies that were started prior to April 2007 and subsequently moved to a statutory periodic tenancy should be subject to the provisions in the Housing Act 2014 regarding protected deposits, i.e. the deposit should be put into a TDS. When a deposit is held in a protected scheme and the tenancy moves to a statutory periodic tenancy, there is no need to re-protect the deposit or re-send the prescribed information about the TDS.

The Housing (Tenancy Deposit Schemes) Order 2007 added articles to Schedule 10 of the Housing Act 2004 which prescribe what action can be taken if either the landlord or the tenant are not able to be contacted within 14 days of the tenancy ending.

Amendments 28 and 35 which concerned a Government Review of the Tenancy Deposit Scheme due to concerns that if landlords chose to resolve disputes using the courts rather than an ADR service, it might not be financially viable for some tenants to contest this and they would therefore default on claiming their deposit. These amendments were not moved however. Lord Beecham had proposed Amendment 28.

Amendments to the Housing Act 2004 made through the Housing and Planning Act 2016 enable the sharing of certain data by the three TDS schemes in England. Local authorities have been able to request and obtain information held by the TDS in order to help them identify rogue landlords.

Housing is a devolved matter in Scotland, Northern Ireland and Wales. The relevant provisions of the Housing Act 2004 apply in Wales. Both Scotland and Northern Ireland have legislated to make TDS protection obligatory for all assured shorthold tenancies.

In Scotland, the Housing (Scotland) Act 2006 allows the Scottish Government to define and prescribe Tenancy Deposit Schemes for a rental contract involving a deposit. The Tenancy Deposit Schemes (Scotland) Regulations 2011 brought this legislation into force on 7 March 2011, although deposit schemes did not become available until 2 July 2012. Landlords are required to put deposits into an approved scheme within 30 days and provide details about the chosen scheme to the tenant. The Scottish TDS’s must provide an ADR service. The legislation only provides for custodial schemes, not insurance-based schemes.

In Northern Ireland, Articles 5A and 5B of the Private Tenancies (Northern Ireland) Order 2006 were inserted by the Housing (Amendment) Act (Northern Ireland) 2011. Article 5B stipulates that all deposits for a private tenancy must be protected by a deposit scheme and that once received a deposit must be protected within 14 days and the landlord must give the tenant details about the chosen TDS. Article 5A allows the Northern Ireland Government to define approved deposit schemes: the Tenancy Deposit Schemes Regulations (Northern Ireland) 2012 brought this legislation into effect. It allows for both insurance and custodial schemes and outlines the ADR they must provide. These approved schemes became operational on 1 April 2013. Since that date, a TDS has been a legal requirement for all private tenancy deposits.

The briefing paper goes on to examine responses to Tenancy Deposit Schemes. Although they may have improved professionalism in landlords and given tenants greater protection, it has also been argued that they are not good value for money. In a study commissioned by the RLA, Michael Ball, Professor of Urban and Property Economics at the University of Reading’s Henley Business School concluded in his report that: “Tenancy deposit schemes are poor value for money- costing the sector more than £275m a year in fees and administration, when only £7m is returned to tenants annually in deposits judged to have been unreasonably withheld”.

Another issue that has been raised is that there is a significant minority of landlords who do not co-operate with the legislative requirements. This could be as many as one in six landlords. The problem is that it is tenants who have to take the landlord to court for non-compliance. There are also problems which insurance-based schemes. For instance, if a landlord is expelled from a scheme, e.g. for not being able to show that the deposit is being kept in a separate client account, tenants cannot claim against the insurance. Concerns have also been raised about the high costs of deposits.

A number of alternatives have been suggested to the current schemes, some of which would operate like savings accounts for tenants. It has also been proposed that local authorities should offer interest free loans for people unable to afford a deposit. Another suggestion is for the Government to act as a “universal guarantor” the idea being that this would be “cost-neutral” as the Government could recover the money.

The Housing, Communities and Local Government Select Committee recommended that the Government should assess the merits of alternatives to traditional security deposits. The Government agreed that it would report back to the HCLG Select Committee within six months.

The Government recognises that a deposit can represent a significant amount of money for a tenant to find at the start of a tenancy and wants to explore how this financial burden can be minimised. This led to the consultation paper brought out in April 2017 “Banning Letting Agent fees paid by tenants”. The Government also wants to consider the option of capping the amount of deposit that landlords can ask for. The Draft Tenant Fees Bill was brought out in November 2017. This was subject to pre-legislative scrutiny by the Housing, Communities and Local Government Select Committee. Their findings were published in March 2018 and the Government’s response to the Committee was published in May 2018. Later that month, the Tenants Fees Bill 2017-19 received its First Reading in the House of Commons. Provisions in the Bill cap security deposits at six weeks’ rent rejecting the Select Committee’s recommendation of a 5 week cap. The Government’s rationale is that their cap of six weeks represents an upper limit rather than a guideline. They want to strike a balance between affordability for tenants and landlords having adequate security for their assets. A six week cap enables landlords to accept higher risk tenants such as those with pets. Sarah Jones for Labour moved an amendment in Public Bill Committee to reduce the maximum deposit from six to three weeks’ rent, arguing that a six weeks would not help most tenants who are required to pay four weeks’ rent (based on evidence from Shelter and Citizens Advice). The Government rejected this on the basis that a deposit serves an important function as a deterrent and also be sufficient to cover damages or unpaid rent. If the deposit would not be able to fulfil this function, landlords might offset the risk by asking for more rent or stop investing in the sector. The amendment was defeated.

The RLA are of the view that larger deposits help to limit the cost of eviction, particularly as it takes a long time for an eviction to go through the courts.

Statistics related to the Tenancy Deposit Scheme are also covered in the briefing paper. The number and value of deposits protected by the three operators since the scheme was introduced have risen considerably between March 2008 and March 2017. Other statistics concern tenants’ knowledge about their deposit. Nine percent know their deposit definitely isn’t protected; twenty percent don’t know whether or not their deposit has been protected.

Finally, the briefing paper discusses disputes leading to adjudication in England and Wales. Disputes increased sharply following the introduction of the legislation. A report from TDS notes that the number of disputes represents a small proportion of all deposits protected. The main causes of disputes in 2016-17 in their own scheme were cleaning (56% of disputes); damage (51% of disputes); decoration (28%); rent arrears (20%) and gardening (16%).

You can find the complete briefing paper about tenancy deposit schemes here.