In practice, of course, most short private residential tenancies these days are assured shortholds. The main exception is for tenancies where the rent is more than £25,000pa (they are not assured shortholds and so will be outside the rent deposit schemes). Note that the deposit scheme only applies to new tenancies. For instance, suppose L granted T a tenancy for six months on 1 November 2006, with T paying a deposit of one month’s rent. When the tenancy expires on 30 April 2007, L and T are both happy for T to remain in possession on the same terms. If nothing further is done, the tenancy deposit scheme will not apply since there is no new tenancy. But, if L and T sign a new agreement (eg for a further six months) then the scheme will apply.

There are two alternative schemes:

• custodial scheme: L must pass the deposit to the scheme provider and must, within 14 days, give T the specified information about the deposit and tenancy. When the tenancy ends, the parties can agree how the deposit should be treated and the scheme provider will pay it out in accordance with that agreement. If there is no agreement then the provider will hold onto the deposit until the dispute is resolved through ADR or litigation. There is no charge for using the custodial scheme (it is funded through the interest on the deposit). The ADR is also free;
• insurance scheme: L keeps the deposit but pays a premium to the insurer. He must give T certain information within 14 days of receiving the deposit. When the tenancy ends, L and T can agree on how the deposit is to be treated and L will return the moneys in accordance with the agreement. If there is no agreement, L must hand the disputed amount to the insurer until the dispute is resolved through ADR or litigation. If L defaults, the insurer pays T. Once again, there are strict time limits for repayment. L pays an insurance premium to use the insurance scheme, but the ADR is free.

It is the penalties for non-compliance that make the scheme particularly important. Indeed, the consequences for L can be serious. If L receives a deposit and does not comply with the initial requirements to notify T within 14 days then T can apply for a court order. The court has no discretion and must order L to pay T a sum equal to three times the value of the deposit. Moreover, for as long as L is in breach, L cannot use the ‘no fault ground’ for terminating the tenancy on two months’ notice (ie he cannot serve an s21 notice requiring possession under HA 1988). In practice, if T thinks L is in default then the best tactic may be to wait until possession proceedings are issued before finding that there has been a breach of the deposit requirements.

What seems likely is that ‘defective deposit’ claims will become significant within the residential sector. For an introductory article to these new provisions in HA 2004 see [2007] NLJ 199; [2007] 183 Property Law Journal 3. © Practical Lawyer