An Overview Of Deposit Protection

Deposit protection legislation was introduced to prevent unscrupulous landlords from improperly retaining the tenant’s security deposit.

Since September 2007 landlords of assured shorthold tenancies in England and Wales, which includes almost all residential tenancies with a rental yield of up to £25,000 per year, have been required by law to protect the tenant’s security deposit. Changes to the law due to be implemented later this year mean that many tenancies with an annual rent of up to £100,000 will also fall under the remit of the scheme.

The government currently licenses three deposit protection schemes:

• My Deposits and the Tenancy Deposit Scheme (TDS) both operate insurance based services, whereby the landlord or agent retains the money from the deposit. The deposit is insured through the schemes at a cost to the landlord.
• The Deposit Protection Service (DPS) operate a custodial scheme, whereby the landlord or agent pays the deposit to the DPS, who retain it until proper repayment is agreed between the parties. The DPS is free to use and has no entry requirements.

Research by the schemes indicates that that more than a third of eligible deposits are not yet protected. Landlords who do not comply with the legislation risk prosecution by their tenants, who have a right to be informed which scheme their deposit is protected by within 14 days of paying the deposit. If found liable for failing to protect the deposit, landlords face the unusual penalty of having to return the deposit plus three times its value to the tenant.

The schemes are required to provide an alternative dispute resolution (ADR) service. If at the end of the tenancy, the landlord and tenant cannot agree how much of the deposit should be returned to the tenant, the parties may opt to use the ADR service to resolve the matter at no extra cost. All of the schemes currently use adjudication to resolve disputes, which involves both sides setting out their claim and their supporting evidence in writing, and a single adjudicator making an impartial decision based on the available evidence.

The system is ideally suited to the high volume of low value cases that the schemes have to deal with, being both quick and cheap to administer, but it is not without its critics, who express concerns that it is biased towards the tenant. Recent figures published by My Deposits show that the tenant wins outright in 49% of deposit disputes, whereas the landlord wins outright in only 8%.

The schemes would argue that the discrepancy can be explained by the landlords’ failure to present their case to the appropriate legal standard. They take the position that the deposit should be regarded as belonging to the tenant, and that the burden is on the landlord to show to a legal standard of proof that the proposed deductions from the deposit are justified. In the absence of appropriate evidence, the schemes will simply return the deposit to the tenant. As disputes often relate to several hundred pounds, landlords would be well advised to take particular care over presenting their case in deposit disputes.