Health Warning for Residential Property Investors

Following an increase over the years of landlord owned investment property, coupled with a corresponding increase in the number of disputes and actions over rent deposits, the labour Government introduced legislation surrounding the safe keeping of such deposits during the course of a tenancy. 

It has now been little over five months since the legislation was implemented, making it much more regulated than ever before. Since the 6^th April earlier this year, all landlords, both private and commercial, including even letting agents who require a rent deposit from their tenant of a property let on an Assured Shorthold Tenancy, must protect that deposit by using one of the Governments authorised tenant deposit schemes.

“Must” being the operative word here, as failure to comply will result in the landlord losing the advantage of its automatic right to repossess the property at the expiration of the tenancy under the Section 21 procedure. In addition to this, if the landlord fails to comply with this new requirement, the tenant may apply to the Court for an Order requiring the landlord or agent to pay the deposit into one of the tenancy deposit schemes. Failure to comply may result in the Court ordering the landlord to pay the tenant up to three times the amount of the deposit in compensation.

There are three schemes a landlord or agent can choose from; one custodial scheme and two insurance backed schemes. Under the custodial scheme the landlord or agent pays the whole of the deposit to the Deposit Protection Service at the commencement of the tenancy. They will then hold this money for the duration of the tenancy. Under the insurance-based schemes, the landlord or agent retains the deposit themselves, but pays a fee to the scheme to insure against their failure to repay the tenant on expiry of the tenancy.

Within 14 days of the tenancy commencing, the landlord or agent must notify the tenant as to which scheme is being followed and must give the tenant certain prescribed information.

On the expiry of the tenancy, the landlord or agent should check the condition of the property. If there is any damage that has been caused by the tenant, the parties must attempt to agree how much should be deducted from the deposit and how much should be repaid. The remainder deposit must then be returned within 10 days of such agreement being reached.

If the parties cannot reach agreement then whichever of the three schemes that protects the deposit will provide a free service to resolve the parties’ differences, hopefully reducing animosity and negating the need for any form of litigation. The success of this legislation may dictate similar provisions being introduced for commercial property rent deposits in the future, especially as these are likely to be far greater sums in comparison to residential deposits.

For further information on the above or any matters relating to the purchase, sale or lease of investment property, whether Residential or Commercial, please contact either Joad M. Singh, Elaine Carson, Kirsty Wicks or Bruce Cherrington for leading, commercially based professional advice.

Sandersons, Solicitors

17-19 Parliament Street

Hull

HU1 2BH

Tel:       01482 324662

Fax:      01482 223110

e-mail:  enquiries@sandersonssolicitors.co.uk

 Source:  The Federation of Small Businesses, October 2007