The Housing Act 2004 has brought in new rules concerning the protection of tenancy deposits. The changes are due to come in on 6th April 2007 and will only relate to assured shorthold tenancies granted after that date (including replacement or new fixed term tenancies).

The government is proposing two types of scheme, a custodial scheme or an insurance backed scheme. Both schemes will have an alternative dispute resolution (ADR) service to try and keep deposit disputes out of the county court. Going through an ADR scheme will not be compulsory. Therefore, you may have to face proceedings in the county court.

We would advise that you contact the local authority to find out who has the contract to run the schemes where your property is located.

With custodial schemes, you will have to pay any deposit you receive (or have received if you are giving a replacement tenancy) to the scheme administrator. There is no cost involved and if you and the tenant agree at the end of the tenancy how the deposit should be apportioned, the scheme will pay out according to your and the tenants wishes. However, in the event of any dispute, it is proposed that you and the tenant can use the alternative dispute resolution service (ADR). If you do, the decision of the ADR service will be binding. They will divide the deposit up as they see fit. If either you or your tenant decide not to use the ADR service, the court may need to decide the issue.

With insurance backed schemes, you retain the deposit but you pay a premium to a designated third party. Under such schemes, you will need to pay a fee to the scheme administrator. In the event of a dispute, you will have to pay back to your tenant any amount that is not being disputed and transfer the amount that is being disputed to the scheme. You and the tenant can then agree to use the ADR scheme or take the matter to court. In the event that you do not transfer any undisputed funds to the tenant, the scheme can pay the tenant and recover any funds from you.

You will need to provide your tenant with proof that you have safeguarded the deposit in one of the schemes. The decision on what type of scheme to use is up to you.

In terms of returning deposits, any deposit paid after 6th April 2007 that is not disputed, should be returned within a maximum of 10 days. If you do not use the ADR scheme, the any funds should be returned to your tenant within 10 days of the court's decision.

Failure to safeguard the deposit in one of the above schemes can have serious consequences. For example, if you fail to put the deposit in one of the schemes, the court can refuse you a possession order if you have want the tenant to leave.

Furthermore, should you fail to safeguard a deposit on a tenancy granted after 6th April 2007, your tenant can apply to the court to make you safeguard the deposit in one of the schemes and to provide them with proof that you have done it. If the court is satisfied that have you have failed in your obligations, it can either:

• Order you to repay the deposit to your tenant within 14 days or;


• Order you to pay the deposit into a designated scheme.

The court must also order you to pay the tenant an amount equivalent to three times the value of the deposit! Therefore, a failure to safeguard a deposit on any new tenancy after 6th April 2007 could prove very expensive.

Remember, if you already have a tenant and you are thinking of granting a new tenancy after 6th April 2007, you will need to safeguard the deposit in one of the schemes.

In terms of good management of deposits, there are some basic things that you need to know:

• Keep formal and accurate records of all rent payments you receive.


• Keep any records you receive in relation to unpaid utility bills.


• Prior to letting your property, take photographs or video evidence of its condition.


• At the end of the tenancy, take photographs or video evidence of any damage caused.
• Do not assume that the deposit is your money. It is money that you hold on trust for your tenant. You can only claim what your tenancy agreement or the law allows you to.

At the county court, deposit claims are normally heard as "small claims". Therefore they are heard on an informal basis before a district judge and the judge's decision is final. Often, district judges are faced with a situation where it is your word against the tenant's and it becomes a matter of credibility. If you can attend court with evidence to back you case and you are fully prepared, you should not face any problems. If you need advice or help, please contact us.