Why some landlords are doing away with deposits

Next Friday, a new law will make it compulsory for landlords to use some kind of Tenancy Deposit Protection (TDP). The aim is to prevent them pocketing the money given in advance by tenants to cover accidental damage. But it may have an unexpected effect: landlords may start doing away with deposits all together.

When TDP comes into force, all deposits will either be held by a neutral third party or covered by an official insurance scheme. The third-party scheme, run by Computershare, is free - the company makes its money through interest on the deposits. The insurance-based schemes, backed by the National Landlords Association and the Association of Residential Letting Agents, will pay out to tenants if the landlord unreasonably refuses to return the deposit, and will be used by big landlords and professional letting agents. Disputes will be settled by arbitrators rather than the courts, to keep legal costs down.

Landlords will be obliged to produce evidence that the deposit is protected, or face a fine equal to three times the value of the deposit and lose their rights to evict the tenant.

Critics of TDP say the paperwork involved is complex, and disputes may take weeks to resolve before money is released for repairs. So it is little wonder that alternatives are springing up to abolish the need for deposits altogether.

New "no deposit" schemes are being set up by companies that vet tenants for landlords by taking up references, running credit checks and looking through court records for previous evictions. They are offering to reimburse landlords if tenants they have approved fail to pay the rent or leave the place dirty or damaged, so there is no need for the landlord to take a deposit at all.

Abandoning the deposit entirely will mean the landlord will have no fear of accidentally falling foul of the TDP rules, for example if the form is mislaid. And the tenants will not have to find a large sum of money at the very time they face the expense of moving.

TenantAssure.com, a web-based tenant-checking service launched this week, offers to guarantee their approved tenant free, although the vetting service itself costs a hefty £150 including VAT, which will be passed on to tenants.

The sales director Simon Cutting, himself a buy-to-let landlord, says the official tenancy deposit schemes are too cumbersome and slow. "They are a sledgehammer to crack a nut," he says. "The problem is that administration is likely to be a big headache for landlords - I have seen the dispute form and it is quite complicated."

To get free cover up to the amount of two months' rent, landlords must download TenantAssure.com's standard tenancy agreement, under which the company stands guarantor for the approved tenant.

LetsXL, a tenant vetting company based in North Wales, is offering a " no deposit" scheme called Zero In to letting agents. Tenants will be charged a fee of £75 at the start of the tenancy to cover the vetting process, and will also pay a 3 per cent premium for the first six months of the tenancy instead of having to provide a deposit. For a typical rent of £500 a month the total premium would be £90, instead of having to find a deposit of six weeks rent, which would be £750.

Ian McDougall, sales director, believes that the inevitable delays in settling disputes will turn landlords against the official tenancy deposit schemes.

"The problem is when damages are disputed; our best estimate is that disputes will take 45 days to resolve, so it could be two months during which the landlord either cannot re-let the property or has to pay for repairs," McDougall says. He also expects the number of disputes to rise because they are free. The Zero In service will pay up immediately if approved tenants cause damage.

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