Ah, the deposits! For almost two decades tenants have struggled with the current system as strangers dipped their sticky fingers into this lucrative honeypot. Conservative estimates quote figures of tens of millions each year stolen or misappropriated by agents and landlords alike. So, heaven be praised, the government has finally acted. A Tenancy Deposit Scheme came into in operation on 6 April 2007 and woe betide the landlords who don’t obey this new rule.

However, and it’s a big however, introducing all the systems to get a scheme as big as this off the ground has been an enormous task and, in truth, the system may still be subject to delays and hiccups. However, credit where it’s due. The old system was a mess. A better system is long overdue and now things should begin improving for tenants and landlords.

Because I can only show you the broad principles in a guide that covers so much ground, I’m going to begin this lesson with a few website addresses. Familiarise yourself with them. Keep an eye on progress as free booklets are beginning to be released, www.commumties.gov.uk/tenancy.deposits. Run through the links under Housing. Another particularly good site is a landlord site – it’s the RLA (Residential Landlords Association) and this has a great Q&A session that anyone can understand at www.rla.org.uk. Alternatively your Citizens’ Advice Bureau will (hopefully) soon have details, or if you get stuck ring your local council, explain what you need and they’ll find someone in the private rental sector department to help you.

Eventually, I have every confidence that the government will soon have one of their excellent booklets. Until then, it’s web web web.

Meanwhile I’ll do the best I can to explain:

• The old system that will still affect many of you with existing deposits already held by landlords/agents.
• Brief principles of the new scheme for all deposits on assured shorthold tenancies from 6 April 2007, along with other reputable sources where more than my snapshot can be checked through.
• Pitfalls that might cause problems for tenants with the new system.

Who deposits belong to

Whenever you decide to rent a property, now or under any new scheme, you will be required to pay a deposit against damage and unpaid bills during and after your tenancy. This deposit belongs to tenants. It doesn’t now, nor did it ever, belong to landlords/agents. Unfortunately, many people didn’t seem to appreciate that legal nicety. Hence the need for new legal protections for tenants.

If you are asked to pay a deposit of more than two months’ rent, you really need to take some specialist advice. You may be able to claim that you have paid a ‘premium’, which confers some additional legal rights. It’s most unlikely to happen if you use an experienced landlord or agent so be warned, life is easier if tenants do business with a landlord who knows the current rules.

The carrot and stick principle

All landlords/agents need a deposit in order to safeguard the contents and condition of the property they are letting out. There are tenants who abuse property. Tenants who leave behind a trail of bad debts, which can leave new tenants facing nightmares with their own credit or fending off bailiffs. Tenants who really expect someone else to scrape a year’s fat from the cooker and scrub behind the loo for free when they leave. You name it, all landlords have seen it. A deposit is our only protection against this. What seems to have got lost somewhere is the carrot concept, the idea that, given a nice clean flat to start with and a thorough inventory agreed by both parties, tenants do clear up in order to get their much needed deposit back.

Of course, the vast majority of tenants do not damage property. On the contrary, most do their level best to ensure that property is returned in good order simply because they really need the deposit refund. Most obtain a full refund. Many obtain a part refund (though many experience vastly inflated ‘charges’). What the legislators are seeking to prevent are inflated costs and to protect the ten per cent of tenants who get nothing back at all. Because ten per cent nationally is an awful lot of cash going walkies.

Under the existing system, getting money back from people doing their level best to stop you is where the fun and games so often start.

How deposits work

By the day you move in at the latest, and under both old and new systems, the landlord’s full deposit will be required (though this may be taken by the agent).

If you are asked for key money, this is a separate, additional charge. Avoid it. It’s a throwback to the days when the deposits held were only token sums. You need a landlord who’s up to date with all these new rules, not one still running things in the 1950s.

Check how the deposit needs to be provided. Some landlords require cash (but only usually for relatively cheaper units). Some agents and landlords prefer cheques, banker’s drafts or building society cheques. Ask what is required for your property, plus when and how it needs to be paid. It must always be paid in time for funds to clear before you are allowed to sign leases. However a deposit is requested you must always insist on having a separate receipt for your deposit, and keep it safe.

Reasonable deductions

Deductions can obviously be expected to be made if you make a cigarette burn in the carpet. Deductions cannot be made if a hole wears in the carpet, as this is ‘wear and tear’. Routine redecoration cannot be charged for. However if you damage the decorations in any way, you will be charged for part or full redecoration. If you decide to repaint the walls, the landlord/agency can, and probably will, charge you for the cost of returning the property to the owner’s preferred colour. Electric kettles, which wear out or break during normal use cannot be charged for. Ones that you have boiled dry and made the element melt can and will be. Ditto drains blocked by fat or toilets jammed with... well whatever.

If you leave the place dirty or with damage, cleaning, repair and replacements are not cheap when done by contractors – landlords aren’t your devoted parents. We don’t work for love.

However ...

Tenants with genuine abuse on their hands have, until the establishment of the new scheme, only had access to the Small Claims Court, thus tying the disputed funds up for months on end. Winning eventually is small consolation when a decent tenant needs the old deposit to fund their next rental. And of little interest I suspect to an industry grown fat on high charges for everything they could possibly excuse as chargeable.

Nevertheless, if you believe that, under the old system, you have been either overcharged or unfairly treated by any landlord or their agent, use the Small Claims Court system. It’s cheap, simple and highly effective. Look up Courts in your Yellow Pages, ring and ask for forms for a claim. Court staff can’t give you legal advice, but they are very helpful at getting you off on the right track. Alternatively, everything can be done online.

Read that lease

And preferably before you sign it! If you don’t understand something, ask for an explanation. Because whatever you’ve agreed to will be in your lease and you’ll be held to it.

Every single time you decide to hang a picture with a hammer and nail, think carefully about your precious deposit. In some instances you can lose huge sums of money, especially in expensive properties where well-plastered walls don’t look their best with inches of shattered plaster. Fitting a unit or shelves to the wall, or having a cable TV system installed, may seem like excellent ideas... until you come to remove them when you leave. You will be charged for all damages you cause installing permanent fixtures. In some cases these fitted items can actually become the property of your landlord. Always remember, landlords/agents exist to make a profit. The arrangement you have entered is purely commercial, and your deposit can and will be utilised to pay the genuine cost of any repairs necessary as a result of your conduct.

Doing ‘little jobs around the place’

So try to remember that story whenever you decide to do ‘a little job’ in any rented property. These contracts are tight, and you need to be very careful. If you think that a bathroom without a mirror will be a problem (and who wouldn’t?) ask the landlord/agent to put one up before you move in or find a more realistically equipped unit. If agents/landlords give permission for alterations, ask for it in writing. (Sorting details like this via email is a brilliant way for tenants to create a paper trail without raising hackles.)

The system for deposits taken before 6 April 2007

Deposits and deductions from them are a hugely contentious area – meaning that I am trying to advise you across a huge variety of practice: from the small landlord who respects their tenants’ realities, to the big agents, responsible to nothing but a high level of profitability, no matter how they achieve their targets. (What I say in this section will largely remain the case under any deposit system. Only the way your deposit is held and how disputes are resolved are changing.)

Under the pre-April 2007 system

No landlord or agent has any right whatsoever to deduct any of your deposit without good cause. Familiarise yourself with both this Lesson and Lesson 4 on inventories. Then you should be better protected from some of their worst practices until the new Tenancy Deposit Scheme is in place.

When will I get my deposit back?

There is often a time lag between leaving and receiving any deposit return. A short delay of several days is quite reasonable. Landlords and agents have to check that all outstanding bills and accounts associated with your tenancy have been settled before they organise refunds. Of course, if you leave the property without having given proper notice, or before the end of the fixed term, your deposit will almost always be utilised to cover rent owed (at least until your landlord has found a satisfactory replacement tenant).

Some landlords do manage to get back deposits very promptly, but never expect a landlord to hand over your deposit before they’ve had a chance to check that you’ve paid all your bills, let alone as you move out. Many will do their best to get money back quickly, but no landlord is a hole in the wall.

Protect your deposit

Tenants must learn how best to protect their deposit rather than throwing it away then complaining vociferously afterwards. Damage will always be charged for – and the cost of workmen can make your eyes bleed – you have been warned!

Coffee spilled on beds and carpets is not routine wear and tear, but damage. Expect to be charged. Cigarette burns, dirty beds, brown toilets – someone has to clean them up before a new tenant can move in. Therefore tenants who took a nice clean building have to don rubber gloves and get scrubbing before they move out. Just running a Hoover over the middle of the carpets is not enough. Toilets, inside cookers and fridges, bathroom floors, under beds and yes, windows, all need to be washed before you go. Don’t forget to replace light bulbs.

And again, another word of warning, put everything back where you found it. I know plenty of landlords who’ll throw a couple of hours freebie at a unit just to get it straight back on the market and save hassle, but agents have multiple subsidiary companies just aching for you to leave a mess, and cause some redecorating and they charge top whack for everything.

Interest on your deposit under the old system

A basic legal principle applies to tenancy deposits. Many tenants do not realise that they are entitled to interest on their deposits. Your entitlement is at wholesale bank deposit rate, which you can find out through your own branch, or from your citizens’ advisory services. Do make a claim for this money at the end of your tenancy. Just imagine how much interest the tenants’ deposits in a nationally based estate or lettings agents are generating every year if no one even asks for it back.

Unfortunate changes are underway to fund the new system.

The new Tenancy Deposit Scheme from 6 April 2007

Just to confuse matters there are two new types of tenancy deposit protection ‘schemes’, each of which operates in slightly different ways. Your landlord/agent (not you) decides where to safeguard your deposit under whichever scheme they prefer. All that’s legally required is that they use a scheme. These new rules apply to every single deposit taken on an assured shorthold lease (in other words the overwhelming majority of tenancies) after 6 April 2007. Since that date all assured shorthold deposits need, by law, to be safeguarded under one type or another of tenancy deposit schemes.

It’s the landlord’s/agent’s job to find out about schemes and how to use them, not the tenant’s. Strict penalties exist in tenants’ favour against landlords/agents who don’t protect your deposit. All tenants are legally entitled to official documentation of where their deposit is ‘safeguarded’ within 14 days of handing over a tenancy deposit. So, ask for the paperwork. It’s yours by law. However, where there’s clarity on some things, others are much less clear as you’ll see.

Note

The government is not holding deposits – this powerful position is to be given to private companies who will – sigh – need to make a profit on deposit management.

Option 1 the insurance based scheme

Based on nothing more than a hunch – I suspect that this scheme will prove the more popular with independent landlords. My reasoning? It feels much more familiar than option 2 (explained in a minute).

Under this scheme landlords will choose a supplier of ‘guarantees’ i.e. a company that insures their tenants’ deposits and the landlord/agent will then pay some form of joining fee. When a tenant hands over a deposit under this system, landlords will continue to hold onto it. They will however have to also do the following things.

• Landlords/agents will be legally obliged to register this specific deposit and (presumably) pay an additional charge to their insurer to specifically insure the sum of your deposit.
• This must be done within 14 days of accepting any deposit (on an assured shorthold tenancy) (14 days after receipt of deposit – not 14 days into the tenancy).
• Having registered the deposit as held, the landlord’s/agent’s chosen insurer will then issue paperwork to the tenant via the landlord. This document must state exactly who is safeguarding your deposit where they can be reached, etc and documentation must reach you within those 14 days.

If everything proceeds well, the insurers will have little to do. Landlords and tenants will have to discuss deposit refunds together. A novel idea for many!

• If a full refund is due the landlord is obliged to refund your money within ten days, but can do so much earlier as they have access to it.
• If any deductions are required, these must be agreed with the tenant before a penny of your deposit is touched.
• If mutual agreement is reached about how much can fairly be deducted to cover agreed costs, the landlord is again obliged to refund the deposit balance within ten days.

So, theoretically, under this scheme so long as landlords and tenants behave themselves they should be able to sort all these matters out amicably. That way, a legal maximum of ten days should occur between leaving any unit and getting back the money you are genuinely owed.

Disputes

Only if disputes arise will the safeguarding insurance company need to become significantly involved. So, if landlord and tenant do not agree how much deposit deduction can fairly be made, they must engage in a legal process.

• At the stage of any dispute the landlord/agent will be legally obliged to inform their insurance service immediately.
• And landlords must hand over the whole of the disputed amount to their insuring company immediately. Make sure that your landlord knows that you are aware of this – and of their obligations.
• Any undisputed balance must be handed back to the tenant within ten days.

So, say your landlord holds a £600 deposit and you are at loggerheads over a proposed £200 deposit deduction, then the landlord must immediately hand over the disputed £200 to their insurance scheme and return the undisputed £400 to you direct within ten days.

• With disputed money safely back in the hands of the company safeguarding your deposit a dispute resolution service will kick in. Schemes, not the landlord, will decide who owes what to whom and it will disperse money accordingly. Of course, first both landlord and tenant must jointly agree to use the dispute resolution service – unless they do, arguing parties will be back to the small claims courts – and the scheme will hold onto the money, then only disperse it according to a court’s ruling. Courts, I suspect, will not be delighted to see claimants who’ve refused to use a perfectly fair arbitration system.

The insurance aspect of these schemes means that defaulting landlords will no longer be able to abscond with tenants’ cash. The insurer will pay out what is owed to tenants direct and it will be responsible for chasing up its debtor landlords/agents – not tenants via the Small Claims Courts. Applause!

Advantages of the new system

Now if all this seems complicated – that’s because it is a bit. But it’s a whole lot better protection than tenants have ever had before and that can only be good news all round. We’ll all soon get used to these changes and won’t be able to believe we ever relied on the existing roughshod system.

These systems will also involve tenants in a new way. Adult negotiation between parties is to be encouraged to avoid disputes. So too is the new realisation for tenants that they can’t leave a totally decimated dump in their wake then threaten the landlord with court if he doesn’t pay up on the spot, then clean up for free.

Option 2 the custodial scheme

This is a single national scheme: the Deposit Protection Service. Contact www.depositprotection.com. Again despite the service style name, this is another purely commercial organisation, part of Computershare Investor Services Plc. Unfortunately, this service is not being paid for by fees from landlords/agents, but – believe it or not – from the interest generated by tenants’ deposits. So I guess that any interest returns to tenants will take a nosedive. Ho hum.

Under this system, landlords/agents will simply put the entire deposit into the single national custodial scheme immediately (or as before within 14 days of receipt). And again, tenants have a legal right to specific documentation telling them exactly where their precious deposit is being safeguarded. End of tenancy situations will be very similar to the ones explained earlier – except where landlords/agents use this scheme, do not expect instant refunds as a whole system needs to be gone through before tenants’ money is refunded.

Again, I expect the ten-day norm to bed down and that’s a long time for many tenants. The process with disputed deposits will be similar and offer a dispute resolution service as an option instead of court. And again, both parties must at least be able to agree to use arbitration.

To help you understand this system, try contacting your Citizens’ Advice Bureau, the local authority’s private lettings officer or www.tds.gb.com who have very helpful telephone staff, on 0845 226 7837.

Obvious pitfalls

I’m not alone in making sure that good tenants who’ve cleared up get a full deposit refund a jolly sight quicker than ten days. Many tenants need their old deposit to fund their new one – that’s why they did such a good clear up. Now, there’s nothing in the insurance based system to prevent this from happening with landlords who held onto deposits, but I am concerned that prompt deposit refunds will become even rarer and ten days become the norm.

My second concern is more serious. I’ve come across some pretty unsavoury characters who love lettings because it generates a low profile, high control, cash only business. Tenants may find themselves pushed by some landlords into accepting a higher deposit deduction than is fair by the threat of tying funds up for some time in a system. When tenants are as cash strapped as they often are, this type of threat – especially where large deposit deductions are being demanded – may well intimidate tenants into accepting a lower refund on the spot. We shall see. But I wish I’d seen a way round this discussed on any of the official websites, who still seem in complete denial about the some of the characters who’ve been attracted to being landlords over the decades.

My third concern is how I wish that our legislators lived in the real world, where everyone wasn’t some ‘nice, reasonable guy’ (above) who’d happily comply with a new law – indeed with any lettings law. The very tenants who suffer lousy landlords (usually those at the bottom of the cash pile) are the worst placed people of all to tackle a strapping landlord who fails to safeguard their deposit – especially on six months’ security of tenure! How in the world a tenant enforces this with some landlords is beyond my powers of imagination. Theoretically, you can challenge them.

Reasonable behaviour for both parties

Reading this lesson has already shown what will always be reasonable conduct on both sides of these contracts.

• Look for a unit that someone cares for, then respect that in how you live there.
• Make sure that you know enough about the new 2007 mandatory scheme to protect your deposit.
• Don’t do home improvement!
• Cleaning up after you isn’t a miraculous quid pro quo. You’ll get a hefty bill – calling in a team of cleaners to get a place shipshape for reletting costs real money.

It costs four hours labour minimum to clean out a disgusting cooker. Hours to redecorate and get carpets professionally cleaned if you spilled coffee all over them or never took off your shoes when they were dirty.

Very often, tenants see the true costs of cleaning up, redecorating or replacing a bed as theft, when the reality is that household work, repairs and decorating cost huge sums of money – the kind of money that tenants simply hadn’t appreciated. However, in truth, this isn’t actually a finance issue. Some of my most glowing references have been written for people who had relatively modest weekly budgets, but cared about their environment, respected other people’s property and never had any difficulty in working out that clean meant really, really clean.

One final tip

If you live as promised and get a full deposit refund, ask your old landlord/agent for a personal reference. The only piece of paper that I and most independent landlords take seriously is a glowing reference from someone else who’s rented out to you before – they’re worth more than gold!