Saturday, March 17, 2007

Tenancy deposit protection avoidance

There are a lot of landlords who are very annoyed about the tenancy deposit scheme (described in previous posts). And many are not just annoyed about it, they are determined to avoid it! Here are some of the ideas I have heard:

Letting property as an assured rather than an assured shorthold tenancy. Well they can do this if they want to, but I think they will be pretty silly if they do. The benefit of an assured shorthold, as opposed to just an assured tenancy, is that you can use the 'no fault' notice only ground for possession to evict the tenant once the fixed term has come to an end. Let the property as an assured tenancy, and they will be able to stay there forever, so long as they keep paying the rent. Mind you if the landlord once lived there, or is going to live there after he gets it back, as his only or principle home, he may be able to use ground one (the owner occupier ground) to get the tenants out if he needs to. But that is not going to help the landlord with a portfolio of several properties – he cannot live in them all!

Taking a guarantee rather than a deposit. Well this would probably work in that they won’t have to comply with the scheme. However neither will they have money to hand – if they need it they will have to extract if from the guarantor. Who may not be willing to pay just now, and may need taking to court. Less trouble than the deposit scheme? I think not.

Putting up the rent instead. Well this again might get around the problem, but it will also make their property more expensive and less attractive to tenants (although of course they will not have to find a deposit). Plus if this brings the rent to above the market rent, the tenants have the right to challenge the rent this by referring to the Rent Assessment Panel, who may decide to put it down again. If this happens the landlord will not be allowed to put the rent back up again until after the end of the fixed term. NB, putting up the rent with a 'cash back promise' to the tenants if they leave the property spick and span is probably a bit too risky. Bearing in mind that there are pretty swinging penalities for non compliance.

The Tenant Guarantee Scheme. This is an insurance solution being developed by Residential Landlord and Letcare, where the tenants will be insured, with the benefit assigned to the landlord, for (we are told) more than a the deposit would have been. This does actually sound pretty good, however if the tenant has to pay the premium, would this be treated as a deposit in disguise? Also the web-site tells us that "only tenants with exemplary credit histories and references are accepted into the Tenant Guarantee Scheme". What about those with a less than exemplary credit history? They have to live somewhere, and I doubt that there will be enough ‘exemplary’ tenants to fill up all the rented property on offer.

No deposit. Finally there is this approach taken by a builder client of mine who says that he is just not going to take a deposit any more on the basis that as he is a builder he can get any repairs done quickly and cheaply anyway, and it is less bother. Probably the least risky course of action (and one I suspect that will be popular with his tenants), but we are not all builders.

But I think that landlords will probably find, once they start using the schemes, that they get used to them, and maybe wonder what all the fuss was about. That is what happened in Victoria, Australia apparently, where they have had damage deposit protection for some eight years now. The same company, Computershare, is running the custodial scheme here, and I suspect that they will run a pretty slick operation. In fact all of the schemes are anxious to cut down on the paperwork and will prefer landlords to register and do as much as possible online. So as long as landlords have a computer and broadband they should be all right!

It is probably also worth remembering that very many tenants (not a majority but still a lot) have had their deposit unjustifiably withheld (stolen some would say) by greedy landlords, and it is only right that they should be given protection.

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Simon Parrott said...

Dear Tessa
I understand that the interest rate to be paid by the Custidial scheme will be set on a formula of 2.32% below Bank of England Base Rate. The interest will be paid to whoever is contracually entitled to it. On this basis, if the landlord prepares his tenancy agreement carefully to give him the contractual right to the interest, I see no reason why anyone should even think about trying to avoid the scheme. The Landlord will lose out on about 1% of deposit interest, but so what - compare that to the loss of control over the tenant which is inherrent in the payment of the deposit and the possibility of the penanlty if the landlord's scheme geos wrong. It's a no-brainer for the vast majority of individual landlords to use the Custodial scheme.
Simon Parrott

Cate said...

To what extent does this new legislation cover existing tenants with an assured shorthold? It's been 9 months since a old housemate moved out once the contract ended...and her deposit still hasn't been returned. As current tenants, do we have any rights under this legislation for when our contract ends, or is it simply for those entering into ASTs after April 2007?

Tessa said...

The new tenancy deposit scheme only applies to deposits taken after 6 April 2007, and to deposits taken earlier where the tenants are given a new tenancy agreement.

Anonymous said...

I questioned one landlord who said that he would have an admin fee of £35 to enter the house and then another £35 to get the deposit back! £70 in their pocket for a few forms and a postage stamp!

In fact many landlords are now considering not taking deposits at all and simply making a one-off charge of approximately £180 as an administrative fee to cover the vetting of tenants, the drafting of contracts and the check-in and checkout inventories - this figure is the currently recommended figure by the Guild of Residential Landlords. (apparently?!)

These "work-arounds" need to be exploited as landlords are trying to get more than their money's worth!

They are also upset that they don't get interest on our bonds - funny that seeing as it isn't their money to make cash from!!