Peace of mind, plus interest, is a win-win for tenants

A new law gives redress in cases where cash is unfairly withheld
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Would you hand over £700 to a stranger and ask them to look after it for an unlimited period?

And would you be happy that, under the arrangement, you wouldn't be earning any interest on your money or have any guarantee of ever getting it back?

It might sound a ridiculous idea but it's what roughly 2.2 million private tenants do each year, without question, when they hand over their deposits to landlords or letting agents.

Happily, all this is soon to change. On 6 April, the Government's long-awaited Tenancy Deposit Protection (TDP) scheme takes effect in England and Wales.

Under the new law, part of the 2004 Housing Act, landlords are held accountable for whatever proportion of the deposit they choose to withhold at the end of the tenancy.

"The average size of a deposit is currently £700, but it could be as much as £2,000 in London," says Phil Alker, head of the TDP team at the Department for Communities and Local Government. "But 17 per cent is not returned to tenants at the end of the tenancy agreement." (This is an average figure based on the Survey of English Housing for 2005-06.)

The new TDP scheme is designed to address this by offering consumers protection and a simple arbitration service. There will be two basic types of deposit scheme, insurance-based and custodial, and landlords must choose to join one or the other.

Under the insurance-based option, they will still be permitted to hold deposits themselves, and - as is currently the case in nearly all deals - tenants won't receive any interest on their money.

In the case of a dispute at the end of the tenancy, landlord and tenant can make use of Alternative Dispute Resolution (ADR) - a free and impartial "sounding board" comprised of property professionals such as solicitors and inventory clerks. They will listen to both sides of the story and come to a judgment. If they find against a landlord who continues to withhold the disputed funds, the tenant will be reimbursed under the insurance scheme.

The alternative to the insurance-based deposit scheme, the so-called custodial scheme, is expected to be adopted by smaller, buy-to-let landlords. Here, all deposits are held collectively by a government-appointed company. Tenants must be informed of where their deposit is being held within 14 days of handing it over to the landlord, and will be paid interest on the money at 2.32 per cent below Bank base rate. If there is disagreement over the deposit, the disputed amount will be retained and the landlord and tenant can use a free, independent resolution service - this time run by the Chartered Institute of Arbitrators - to determine who gets what.

Some landlords might see the new law as an administrative headache, but it creates a win-win situation for tenants. For the first time, they can earn interest on their deposits as well as having free access to a third-party arbitrator if they believe it is being withheld unreasonably.

Landlords who refuse to comply with the new rules could lose the right to give notice to eject the tenant. On moving out, the tenant would be entitled not only to the return of the deposit, but to three times this sum again in compensation.

However, tenants will have certain responsibilities too and need to be aware of these. For example, the scheme protects only those tenants who sign an assured shorthold tenancy (AST) agreement, the most common type of deal for residential lets. So, even if a deposit has been taken, it will not be protected if an AST is not drawn up.

Note that some lets are excluded from the new rules, including corporate lets and university-approved digs, and any property where a landlord "lives in" (if you rent a room with a homeowning friend, say). Properties will also be excluded if they generate over £25,000 a year in rental income. And if no deposit is asked for or taken, the landlord doesn't have to comply with either scheme.

As always, tenants should keep their wits about them, making an inventory and "schedule of condition", and agreeing this with the landlord at the start and end of the tenancy.

"This should be signed by both parties," says Emilie Dawes, an area manager of lettings at estate agent Marsh & Parsons.

The new resolution services will rely on material evidence in any dispute, so taking photographs of the property is also a good idea.

The TDP scheme applies only to new tenancies from 6 April and does not apply retrospectively. So only when new tenants move into their properties do buy-to-let landlords have to sign up to a scheme.

For this landlord, it's time to break with tradition

David Ahearne, managing director of north London-based HAM Estates, has been running his lettings agency since the 1970s.

He plans to scrap deposits altogether when the TDP scheme goes live.

"My view is that relationships are very important, while administration should be kept to a minimum," he says. "If you choose your tenants wisely and do all the proper searches and checks, you shouldn't need to take deposits. In my experience, problems from either party are negligible."

Instead, Mr Ahearne, who manages 80 properties on behalf of 20 landlords as well as being a private landlord himself, sees the new law as a business opportunity. "The market in this area has become saturated with landlords in recent years, so of course you will be ahead of the competition if you don't require a deposit."