The Tenancy Deposit Scheme

An update on the legislation

Under the Housing Act 2004, the Government introduced measures to protect rent deposits taken in connection with residential Assured Shorthold Tenancies ("ASTs"). These rules have applied since 6 April 2007, although there have been a number of amendments to the original legislation.

The scheme was designed to have two main purposes:

to safeguard tenancy deposits paid in connection with ASTs; and to assist in resolving disputes arising between landlords and tenants in connection with such deposits. There are two types of TDS: custodial and insurance-based.

Custodial Schemes

Under custodial schemes, the tenant pays a deposit to either the landlord or agent who pays the deposit into a "designated scheme account". The scheme safeguards the deposit by holding it until such time as both parties agree on the terms of release and in what proportion, or following the notification of the outcome from dispute resolution.

Where both parties agree, or where notification following dispute resolution is received, the deposit must be paid to either party within 10 days of notification. If no agreement is reached the scheme administrator will retain the deposit until either the tenant or landlord obtains a final court order specifying the proportion of the deposit to which each is entitled. The scheme administrator will then pay out in accordance with the court order within 10 days of receiving notification of the decision.

Where a scheme administrator returns a deposit to either tenant or landlord, they should do so with interest added at a rate specified by the government. Any interest additional to this can be retained by the scheme administrator and can be used to fund the administration of the scheme.

Insurance Based Schemes

Under insurance based schemes, a landlord retains the deposit and only transfers it into a scheme if there is a dispute with the tenant at the end of the tenancy. In those circumstances where there is a dispute, the deposit must be transferred to the scheme within 10 days of being directed. The scheme will then hold the deposit until the dispute is resolved (by agreement or court order). Only then will the administrator distribute the deposit (in the agreed amount) to the relevant party, with interest.

Where notification is received following dispute resolution, the scheme administrator is required to make payment within 10 days (irrespective of the sum paid to the scheme by the landlord or agent).

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