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It sounds like a great idea. From April 2007 all landlords taking a deposit under an Assured Short-hold Tenancy (AST) must join one of three independent Government-approved schemes.
Landlords taking deposits must opt for either the custodial scheme run by the Deposit Protection Service, which is free to both sides, but the deposit is handed over to a third party for safe keeping.
Or they can take out one of the two insurance-based options. Tenancy Deposit Solutions run the version that is favoured by individual landlords, and the Tenancy Deposit Scheme is preferred by agents.
The insurance-based schemes charge the landlord a fee, but this will usually be less than the interest the landlord earns from investing the deposit.
With all the schemes, in the event of a dispute over the deposit, both parties can turn to the alternative dispute resolution service (ADR) and avoid lengthy and expensive court battles.
But nearly six months on, as few as 25 per cent of landlords have signed up to the schemes on offer. If they continue to take deposits, this leaves them vulnerable to legal proceedings and sitting tenants.
One reason for this could be ignorance. According to the Tenancy Deposit Scheme, letting agents believe only two-thirds of landlords and a half of all tenants understand the system and their rights and responsibilities.
The level of landlord awareness, however, is contradicted by research among landlords themselves which shows that a healthy 90 per cent now understand their mandatory obligations.
Malcolm Harrison, spokesperson for the Tenancy Deposit Scheme, says: "It’s a combination of people putting it off for tomorrow, and those put off by the costs and the paperwork involved.
"The take up with agents hasn’t been a problem, they understand they have to do it, but there is a proportion of individual landlords who don’t understand, as well as those who look the other way."
According to The Residential Landlords Association (RLA) there is another reason that could be putting off a small number of unscrupulous landlords.
The fear that the Inland Revenue may be able to access the information they give in order to investigate tax evasion.
So what are they doing instead? A number of tactics are being adopted to get around the regulations. These include:
According to the National Landlords Association (NLA), some landlords are using alternative tenancy agreements, such as assured tenancies, to avoid paying for deposit protection.
But David Salisbury, chairman of the NLA, warns that assured tenancies, as distinct from assured short-hold tenancies, make it difficult for landlords who need to recover possession of their property.
"For most landlords, avoiding the requirement to protect a deposit at the expense of compromising their ability to get their property back makes little business sense."
Research from The Guild of Residential Landlords has found that around 80 per cent of their members are no longer taking deposits.
And the RLA advises its members to avoid taking deposits of less than £600, or use the government custodial scheme.
As they point out, if you run your property on borrowed money, and you pay a premium of £30 a year for one of the insurance schemes, you would have to hold a deposit of at least £400 for at least a year, or your premium would be more than the interest saved.
And if you own the property outright, you would have to take a deposit of at least £600 for a year to avoid the premium of £30 being more than the loss of interest on your savings account.
However, not taking a deposit is obviously exposing landlords to risk in the event of damage to their property or default on the rent, so most are looking for other ways of safeguarding their investment.
This is being used by landlords to protect against defaulting at the end of the contract period.
The first two instalments are taken at the beginning of month one but no payment is collected at the beginning of month six, because the landlord has taken a month in hand.
However, this gives a landlord no protection in the event of damage to the property, and they would have to sue the tenant in the County Court.
Particularly popular when renting to students, the best guarantors are homeowners because in the event of a dispute the landlord may be able to obtain a charge on their house to enforce a court judgement.
In order for this to be legal, the landlord needs to use a properly drawn up Deed of Guarantee.
This, again, would only protect against loss of rental income, but the premium can be charged on to the tenant.
However, the insurance company may run a check on the tenant and refuse to insure them.
A non-refundable fee for administration relating to setting up the tenancy agreement is legal, though presumably unpopular with tenants.
Not taking a deposit and instead raising rents to cover the cost. The downside of this is that you could price yourself out of the market and end up with longer void periods, which can be very expensive.
Calling it rent, but offering cash back if everything is in order at the end of the tenancy.
Taking a cheque or bankers draft with the intention of cashing it if necessary at the end of the tenancy.
A utility or cleaning deposit. Anything that implied a return of money will fall foul of the scheme.
The penalties for either failing to protect a tenant’s deposit or not issuing the tenant with the prescribed Deposit Information Certificate (DIC, also known as a section 213 notice) are severe.
If caught the landlord is liable to pay the tenant three times the amount of the deposit. On top of that the landlord would be unable to apply to the courts for fast-track possession notice.
Be warned - the Guild of Residential Landlords are currently dealing with many calls from worried landlords who want to evict tenants but haven’t protected their deposit under one of the schemes.
Links
Tenancy Deposit Protection :Government information on the scheme, with advice for landlords and tenants.
Tenancy Deposit Solutions :Insurance-based scheme jointly owned by the National Landlords Association and Hamilton Fraser Insurance (HFIS plc).
Tenancy Deposit Scheme :Insurance-based scheme run by the Association of Residential Letting Agents, the National Association of Estate Agents and the Royal Institution of Chartered Surveyors.
Deposit Protection Service:Free custodial scheme managed by Computershare Investor Services Plc, a global business with more than eight years' deposit protection experience.
National Landlords Association (NLA)
The Residential Landlords Association (RLA)
The Guild of Residential Landlords
Citizens Advice
Nikki Sheehan
