The Tenants Deposit Schemes were introduced in by the Housing Act 2004 to protect the damage deposit paid by tenants at the outset of a tenancy (where the tenancy started after 6th April 2007).
All landlords letting a buy to let property on an assured shorthold tenancy (with the exception of those who live in the same property as their tenants), are under a legal obligation to put the tenants deposit under the protection of a Tenants Deposit Scheme.
The landlord of the buy to let is not required to protect a holding deposit (i.e. a deposit paid before the signing of the tenancy) but will have to protect the deposit under a Tenancy Deposit Scheme once the tenancy begins.
There are two types of Tenants Deposit Schemes:
1. Custodial Scheme:
This is run under the ‘Deposit Protection Service’. The Deposit Protection Service holds the tenant’s deposit in a bank account and releases the deposit to the person entitled to it at the end of the tenancy.
If the landlord of the buy to let is based overseas, they must use the Custodial Scheme unless they are using a UK based managing agent.
2. Insurance Based Scheme:
Under the Insurance Based Scheme, the landlord of the buy to let property or their managing agent can hold the deposit and pays for an insurance policy against the landlord illegally taking the deposit and not repaying it.
If the landlord of the buy to let does not repay the deposit the insurance company will pay the deposit to the tenant and pursue the landlord for the money.
If the tenant is paying the deposit in instalments as part of a rent deposit scheme, the landlord of the buy to let must use an Insurance Based Scheme.
There are two providers of the Insurance Based Deposit Protection Schemes these being:
My Deposit and the Tenancy Deposit Scheme.
Only landlords of but to let properties that are members of an approved professional body or trade association may use the Insurance Based Tenancy Deposit Scheme. Examples of approved professional bodies or trade associations are:
The Association of Residential Letting Agents
The Royal Institution of Chartered Surveyors
National Association of Estate Agents
National Approved Letting Scheme
There is no cost to the landlord or the tenant for using the custodial Tenancy Deposit Scheme on the buy to let property and the costs involved in the Insurance Based Scheme are the membership fee and the insurance premium.
What are the obligations of the Landlord of the buy to let, under the Tenancy Deposit Scheme?
Within 14 days of receiving the tenant’s deposit, the landlord of the buy to let must put the tenant’s deposit under a Tenancy Deposit Scheme and provide the tenant with a statement setting out:
1. Full details (including contact details) of the Tenancy Deposit Scheme under which their deposit is protected.
2. The address of the buy to let property and the amount of deposit paid.
3. The Landlord’s or letting agents name and contact details.
4. The name and contact details of any third party involved in the provision of the deposit.
5. Items or services covered by the deposit for the buy to let property.
6. The circumstances under which the landlord of the buy to let may retain some or all of the deposit.
7. What to do if there is a dispute over how much deposit should be returned to the tenant at the end of the tenancy.
What if the landlord does not protect the tenant’s deposit with a Tenants Deposit Scheme?
If the landlord of the buy to let does not protect the tenant’s deposit with a Tenants deposit scheme, the tenant can take action against the landlord in the county court. If the court finds that the landlord of the buy to let has not protected the tenant’s deposit or has not done taken all the actions that he is required to do under the legislation, it must do one of the following:
a. Order the person or party holding the deposit to pay the tenant back their deposit or pay the deposit into the Custodial Deposit Protection Scheme and in addition to this, make a further payment to the tenant of an amount equivalent to three times the deposit.
b. Order that the landlord of the buy to let will lose the right to evict the tenant on two months’ notice (without providing a reason), under the usual ‘shorthold ground’.
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