BUY TO LETS: DON’T OVERLOOK THE DEPOSIT

Peace of mind

With traditional banks and building societies offering a poor rate of return, many business owners either have or are looking to invest in the buyto-let market. To safeguard landlords against potential breaches of the tenancy agreement, e.g. damage to the property or a failure to pay rent, it is normal practice for security deposits to be taken from tenants. This is usually in the region of two months’ rent.

Deposit rules for all

When the Housing Act 2004 came into force mandatory tenancy deposit rules were introduced for the first time in England and Wales. They apply to any assured shorthold tenancy (AST) – which is the most usual type of residential tenancy agreement – entered into or renewed on or after 6 April 2007.

Note. However, under the new Deregulation Act 2015 ASTs which commenced before 6 April 2007 (including those which have converted into a periodic tenancy) are now subject to the same rules. Deposits taken in respect of those tenancies must be properly registered by 23 June 2015.

Your obligations

The mandatory deposit rules state that the landlord must register the deposit with a government-approved scheme within 30 calendar days of it being received. Government-approved schemes include Tenancy Deposit Scheme, My Deposits and The Deposit Protection Service (see The next step ).

Tip. You don’t necessarily have to hand the deposit over to the scheme provider; some allow you to keep it but charge a small admin fee instead. This is arguably better as you’ll benefit from the interest the deposit earns whilst it’s in your account. Plus, where you continue to hold the deposit, you won’t be at the mercy of a third party in the event of a dispute.

Providing prescribed information

As well as protecting the deposit by the 30-day deadline, you must provide all tenants with key information relating to the deposit protection. This is called the “prescribed information” (PI) and includes details about the scheme that’s being used to protect their deposit, instructions about disputes and key contact information. Regardless of which scheme provider you use, each has PI documentation you can download.

Fail to do so and…

If you don’t carry out both of these correctly, you can be fined up to three times the deposit amount (depending on the circumstances). Plus you’ll lose the right to obtain a court order to regain possession of the property – known as a “section 21 eviction notice” – until the tenancy deposit is fully protected and the PI has been properly served.

Tip. If you appoint an agent but they fail to do the above, or they make an error, you won’t have a leg to stand on. So don’t take this for granted; always ask to see firm evidence of compliance.

 

Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500