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New Laws for Deposits from 6 April 2007

Anyone involved in the residential lettings market will be familiar with tenancy deposits.  Typically a tenant is required to pay a month’s deposit against failure to pay rent or comply with other tenancy obligations. 

However, from 6 April 2007, that may change with the implementation of the Housing Act 2004 (HA 2004), Ch 4.  The legislation aims to remove the risk that rogue landlords and agents might misappropriate deposits, and provide a quick and cheap means of resolving disputes.

The Basic Regime

The legislation applies only to Assured Shorthold Tenancies, but the parties cannot contract out of the provisions which apply to performance deposits of any description.  HA 2004, Ch 4 applies to any deposit received – rather than a tenancy entered into – after the provisions come into force on 6^th April 2007. 

The new restrictions (see HA2004. s 213(5)) are:

§         a deposit must be paid in accordance with a government authorised scheme;

§         landlords must comply with the relevant scheme’s initial requirements’; and

§         the landlord must notify tenants of their rights under the relevant scheme.

The Schemes

The legislation envisages two types of scheme.  Under a custodian scheme the deposit is paid to an independent scheme administrator who holds it in a special account.  The interest on the deposit finances the scheme’s administration and there are no other costs involved. Under an insurance scheme the landlord keeps the deposit but pays a premium to the administrator.  Both types must offer alternative dispute resolution.  Once a dispute is resolved, the deposit cannot be paid out without an agreement, adjudication or court order. 

Requirement to Notify

The obligation to notify under HA 2004, s.213(5) applies once the deposit is received – rather than once the deposit is required or the tenancy is granted.  The landlord then has 14 days to give information in prescribed form – or a form of similar effect – to:

§         the tenant; or

§         any person who has paid a deposit on the tenant’s behalf.

Enforcement

If a landlord receives a deposit and has not complied with the initial requirements or fails to give notice within the 14-day period, the tenant can apply to the county court for certain orders.  The court has no discretion and, if it finds the landlord in breach, it must order:

§         Return of the deposit to the tenant – or, in the case of a custodial scheme, payment of the deposit to the scheme administrator  (see HA 2004 s 214(3); and

§         Payment to the tenant of a sum equal to three times the value of the deposit ( HA 2004, s 214(4).

The court has no power to extend time limits.  A landlord who gives notice outside the 14-day time limit, or who forgets to serve notice on the tenant’s parent who wrote the deposit cheque, will have to pay back the deposit plus three months’ rent or more.

The other sanction for non-compliance is that under HA 2004, s 215, no s 21 notice requiring possession under the Housing Act 1988 may be served while a deposit is held, otherwise than in accordance with one of the schemes.  Tenants who seek to resist a possession order may therefore wait until possession proceedings are issued to point out a failure to comply with HA 2004, CH 4.  It may also be that ‘defective’ deposits will emerge as a significant basis for tenants resisting possession claims in the county court and counter-claiming the enhanced deposit penalty under HA 2004, S 214(4).