This is a question that comes up time and time again and one that, frankly, is becoming a little tiresome. I have a couple of polite options for answers, so if that question is burning on your mind, here are your answers:

1. Buy a shop instead of a residential property
2. Buy a property with a protected tenant under the 1977 Rent Act
3. Buy a property where your rent exceeds £25000 for the tenancy
4. Put a company tenant in your property
5. Buy a farm
6. Take out an insurance policy instead of a deposit

You see, if you have a standard, common, run-of-the-mill Assured Shorthold Tenancy, (AST), where you’ve taken a deposit, you cannot legally avoid the tenancy deposit scheme regulations (Schemes) and, more importantly, would be mad to avoid using one of the schemes.

If you think I’m joking about the ‘mad’ bit, imagine breaking the law and then the potential of your ‘victim’ being able to take you to court for the rest of your life…!

Because that, my friend, is the reality of the Schemes. Yes, the law has many stings in it’s tail and one of the bigger stings is that there is no statute of limitation written anywhere in the Schemes section of the Housing Act 2004.

Therefore, if you currently have an AST that’s about to expire where the tenants are leaving, and you haven’t complied with the Schemes’ rules, you should hope that the tenant doesn’t ever have a reason to come after you for his statutory compensation (something we’ll look into shortly).

What Is an AST and How Do I Avoid Using One?

This is quite a common question, and your answers are listed above (‘a’ to ‘e’). An AST is formed in law, not on paper. Some of you are surprised and I can hear a confused intake of breath! It’s an easy concept, once you know the framework. There are certain ‘tests’ in law that establish whether or not a tenancy is an AST and if you’ve set up a tenancy where you feel it’s not an AST and then end up in court, the court will use the tests and make a judgment.

The court will not care if you have ‘Licence’ or ‘Contractual Tenancy’ stamped at the top of each page in font size 40 as an ‘avoidance tactic’, nor will it care if you haven’t provided a tenancy agreement. If the tests prove it’s an AST, it’s an AST. Then guess what? You may find you’ve fallen fowl of certain rules, like your repair obligations under Section 11 (to be discussed in another article) or indeed the Schemes.

The tests are relatively simple and include questions like ‘Is the tenant paying rent?’; ‘Do they have exclusive use?’; ‘Is the rent less than £25,000 for the tenancy?’ etc. (All these can be discussed if you need to by contacting me via my website).

So, it’s very likely that if you try to avoid the Schemes by not using an AST, a court will rule against you, if you haven’t carefully thought it out.

I know of landlords who use licenses instead of ASTs for HMOs, and for some circumstances that is OK, but using a license entails a couple of complications and if you get it wrong, guess what…?

Background to the Schemes

I can’t go into too much detail about the Schemes here due to limited space, so here’s a brief summary:

The Tenancy Deposit Scheme was an idea that was born quite a few years ago, based on information provided to the government by the Citizen’s Advice Bureaux, which said that 90% of its ‘clients’ who complain about being ripped off with their deposit, are indeed victims.

Think about that for a moment. How small a proportion of all tenants in England and Wales actually complain to the CAB, and if they have complained about their deposit, they probably have good reason. Now think about this:

It’s been hinted that the legislation came in because a minister in government somewhere interpreted the above stats to read ‘90% of ALL tenants have their deposits ripped off.’ Gives a different slant, doesn’t it!

So, a set of rules have been imposed upon the majority of landlords as a result of a few shysters. It’s a bit rich, but…

If you know the rules you can play a great game. If you don’t, or wish to ignore them, the game will ultimately go against you.

Complying With the Rules is Easy

I meet a lot of landlords who break into a sweat, trying to avoid the Schemes and ultimately put more energy into avoidance than complying. Compliance takes a few thoughtful minutes.

Complying is SIMPLE and the rules are there for a reason. No, you shouldn’t use the deposit for anything other than… a deposit. You see, it’s not your money, it’s the tenants. I’ve had landlords on the phone complaining that if they lodge their £500 deposit with the Custodial Scheme (more about that later), they then can’t use it for… ‘other things’. My question is always, ‘So, has the tenant lent you £500?’

Yes, we’re all in property to make money, but if you make money honestly, by bending the rules and not breaking them, you can sleep at night. Here’s what will keep you awake at night:

The Penalties For Breaking The Schemes’ Rules (if you are ever taken to court by a disgruntled tenant):

1. During the term of the tenancy, a court will prevent you from serving a Section 21. In other words, if the tenant proves you’ve broken the rules, you could be stuck with that tenant for life, if they continue to comply with the provisions of your AST. Think about it: what if you wanted to sell the property, move back in or do anything with the property that didn’t involve that tenant?
2. There is an automatic, mandatory fine of 3 x the deposit value. A judge cannot overrule this fine, if it’s proven you’ve broken the rules. The fine goes to the tenant as compensation.
3. The judge can ask you to refund the deposit immediately to the tenant.

So let’s do a quick analysis, using the modest amount of £600 as an example.

1. The tenant is still in the property: you’ve broken the rules and now you’re stuck with the tenant for as long as they wish. You’ve had to pay them £2400 (3 x £600 fine + £600 deposit) AND you now have no security on that property. Or:
2. The tenant left the property 4 years ago and decides he has a good case for compensation. The judge agrees and you have to fork out £1800 (3 x £600 fine) and any deductions you made from the deposit when he left. Or:
3. You’ve broken the rules on ten of your properties (do the maths!).

None of the options are good. And there is no appeal. It’s worth pointing out that a few very left wing bodies have been set up by local councillors (notably Brent!) that help tenants challenge any issues with Scheme compliance, with the express intention of gaining compensation.

So, how hard is it to comply with the rules? Not very.

Here are the main rules:

Firstly, you must be a part of one of the three, government regulated schemes, listed at the end of this article and must lodge the deposit within 14 days of RECEIPT of the deposit (not within 14 days of the start of the tenancy, something which some landlords and agents assume).

Secondly, you must tell the tenant the scheme where their deposit is registered within 14 days of RECEIPT of their deposit.

Thirdly you must refund their deposit at the end of the tenancy within 10 days of the end of the tenancy, or within 10 days of any settlement, should there be a dispute over deductions.

Fourthly, should there be a dispute, the tenant has the right to either go to a nominated arbitrator (each scheme has a free arbitration service) or to go to court. Court is lengthy and costly and therefore it’s normally in both the landlord’s and tenant’s interests to elect for arbitration.

Is that it, I hear you cry?!

Well, no. There is one other consideration for anyone who thinks they’ve found a way of avoiding the Schemes whilst using an AST. If you feel by doing any of the following, you can bypass the regulations, I’m afraid you’re wrong because of one clever legal geek and because of one simple sentence in the Housing Act 2004:

a. Taking two months rent up front
b. Taking 6 months rent up front
c. Taking something else instead of money as a deposit
d. Selling the tenant furniture then buying I back at the end of the tenancy
e. Anything else, apart from not taking a deposit ;0)

In the legislation there is a clause that basically says that anything done to mitigate the tenant’s liabilities will be seen as a deposit. That phrase discounts any avoidance tactic other than not taking a deposit or issuing an Assured Tenancy (AT), something to be discussed in a future article and not recommended for these circumstances.

I briefly touched on taking out an insurance policy in the first section above. You are up against two potential negatives with a policy:

1. How small is the small print? In other words, how likely are they to pay out in a claim? There are no detailed cases as yet to refer to, but watch this space.
2. Ask yourself this: if you were a ‘professional tenant’, someone who likes to play games with landlords’ livelihoods – yes, there are quite a few of them out there – or a complete numbskull, and your landlord charges you not £600 deposit, but £60 for an insurance scheme at the beginning of the tenancy, would there be a potential at the end of the tenancy, after a few cans of Special Brew, to have a ‘laugh’ and wreck the property? It’s not going to cost you anything and you’ve already paid £60 for the right to do so!

Clearly there are legal remedies to the second situation but, frankly, I like to avoid stress if possible.

In Summary

I’d recommend you play by the rules on this one. There are ways the rules can be slightly bent, but the penalties for breaking them are not worth the risk.

The Schemes Details

As discussed, there are only three schemes that can be used:

1. The Deposit Protection Service, administered by Computershare.
www.depositprotection.com

There is no cost to this – the fee is paid by a small part of the interest earned. The deposit is lodged online with the Scheme and is commonly known as the ‘Custodial Scheme’.

2. Tenancy Deposit Scheme, administered by ARLA, RICS, etc.
www.thedisputeservice.co.uk

There is a cost to this. See the website for details. The deposit can be kept by the landlord or agent and it is recommended it is kept in a nominated account.

3. MyDeposits, administered by the NLA, Fraser Hamilton, etc
www.mydeposits.co.uk

There is a cost to this. See the website for details. The deposit can be kept by the landlord or agent and it is recommended it is kept in a nominated account.

For more information, either contact one of the Schemes or contact me via my website.

Until the next time…

Gavin Williamson