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An Introduction to Alternative Deposit Schemes
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Before you start:
Before reading this guide you should first read our Essential Guide to Tenancy Deposits which explains ‘traditional’ deposits and the rules which apply to them.
1. Why alternative schemes were developed
The main reason is affordability. Deposits are normally around 4 to 5 times the weekly rent. Which can be a lot of money for someone, say on minimum wage, to find.
Landlords will normally require the deposit money to be paid up front at the start of the tenancy. The money is then refunded to tenants after the tenancy ends, less any deductions for allowable damage, replacements for items broken during the tenancy, rent arrears and the like.
Sometimes, if there is a dispute, there may be a delay in the deposit being paid back to the tenant – which means that if they are moving to a new rented property they will have to find ANOTHER deposit sum. This is often done by way of a loan which is paid back once the original deposit money is repaid – but loans cost money, so this is all more expense.
This led people to wonder if there might be a different way of doing things – which is how the alternative schemes came to be developed.
Note that these schemes are also sometimes called deposit replacement schemes.
2. So what happens with an alternative scheme?
It varies from scheme to scheme, but in essence, they tend to be run along the following lines:
- The tenant will pay a fee (generally this will be for about 1 week’s worth of rent), to the landlord’s agent or the scheme owners (although sometimes the letting agents ARE the scheme owners)
- That fee is almost always non-refundable.
- At the end of the tenancy, the parties will try to negotiate the cost of any damage, etc., which is payable
- If a sum is agreed, the tenant must pay this to the landlord (or his agent). It cannot be offset against the fee paid at the start.
- If the deductions are not agreed, the matter can go to adjudication
- Often, the adjudication service is provided by the traditional deposit schemes – for example, the My Deposits adjudication service provides adjudication for a number of the ‘alternative’ schemes
- However, unlike traditional deposits, there is often a fee to pay for the adjudication
- Once the adjudication is complete, the tenant must pay the sum awarded to the landlord by the adjudicator
- If the tenant fails to do so, the scheme will pay the landlord and then pursue the tenants for reimbursement
Note that, unlike the traditional deposit schemes, which are heavily regulated, the precise workings of any scheme will depend upon its own terms and conditions. So you need to read the material provided by the scheme very carefully.
3. Some important points about alternative schemes
You must be offered a choice
Under the Tenant Fees legislation, you MUST be offered a genuine choice between an alternative scheme and a traditional deposit scheme. So if you prefer to pay a traditional deposit, this option must always be available to you.
If this is not done, then the fee for the alternative deposit scheme will be deemed to be a prohibited payment, which has the following penalties for landlords:
- You have the right to recover the payment – if the landlord refuses, you can claim this via the First Tier Tribunal
- The landlord may be fined or prosecuted by the Local Authority.
They are not an insurance product
Unless the scheme terms and conditions state otherwise – these schemes are actually providing a guarantee service to the landlord. It is not an insurance product – meaning if damage is found at the end of the tenancy, you will have to pay it.
You will not be able to offset the fee paid at the start against the money you owe to the landlord.
Many schemes are unregulated
You should check this. For example, some of the schemes will be covered by the Financial Services Compensation Scheme and will allow you access to the Financial Ombudsman Service.
Is that the case with the scheme YOUR landlord wants to use? (Tip – if it’s not mentioned on the scheme website, it almost certainly won’t be).
Additional fees
Unlike traditional deposit schemes, you may find that you are being charged a fee at the end of the tenancy, for example, if the case goes to adjudication.
So before you agree to sign up to a scheme – check whether there will be fees- and if so, what they are.
Issues with adjudications
In most cases (check your scheme terms and conditions), you will HAVE to use the adjudication scheme for any dispute, and will not have the option (as you do under the traditional deposit schemes) of going to the County Court.
This could work against you if you have made legitimate deductions from your rent, as adjudicators in most cases are not able to deal with that type of dispute – so will just make an award for the landlord for the outstanding rent.
Many of the alternative schemes will use the adjudication services provided by the traditional deposit companies. However, their contract is normally with the deposit scheme.
You should check carefully what procedures are in place for your version of events to be passed on to the adjudicators. Remember – you will have to pay whatever sum the adjudicator decides is due to the landlord. So if the landlords claim is unreasonable or wrong – it is important that you can put your version of events to the adjudicator. Otherwise, they will not be able to take them into account when coming to their decision.
Note also that if you have an issue with the adjudication – you cannot contact the adjudicators direct. You have to do this via the scheme.
Be aware also that the adjudicators’ decision is binding. You will not be able to challenge it later.
4. Some good points about alternative schemes
The main good point is that it is so much cheaper at the start of your tenancy.
If you have limited cash reserves, this may make a more expensive property affordable for you.
5. Some bad points about alternative schemes
You may end up paying a LOT more than you would under a traditional scheme. For example:
The initial fee
This is not refundable. You are essentially paying for a guarantee service for your landlord.
Other fees
You may have to pay other fees, e.g., for an adjudication service, whereas there are no fees payable by tenants for traditional schemes.
The cost of damage
If you cause damage or loss to the landlord under a traditional deposit scheme, the landlord will normally be satisfied with the deposit sum. If the sum due to the landlord is more than the deposit sum, they will frequently write it off on the basis that it is too much bother to pursue.
The traditional deposit is for a maximum of five times the weekly rent (or six times where the annual rent is over £50,000).
However, some of the alternative deposit schemes are for more than this. Some are for as much as 12 times the weekly rent.
If you are found, e.g., by adjudication, to be liable for this, the scheme will pay out to the landlord and will then pursue you to recoup the money they have paid. Unlike individual landlords, they will not be willing to write anything off, and you may find yourself being chased by debt collectors or pursued through the courts for years.
If that happens, you will also be liable for the court fees as well as the claim itself. And you may end up with a County Court Judgement registered against your name, which will affect your credit rating.
6. How to choose
All of the different schemes are slightly different and operate in different ways.
So it is really important that you read carefully the terms and conditions for the scheme you are being offered – and not assume that it will be the same as a different scheme you used in another property which worked well.
Check:
- The amount of the initial fee
- The amount that the scheme will guarantee the landlord – as this is the maximum you will have to pay back to either the landlord or the scheme
- Whether there are going to be any other charges, and what they are for
- Whether the company providing the scheme is regulated, and if so, how. Remember – if they do not say on their website that they are regulated, e.g., by the Financial Services Authority, then they probably won’t be.
- The arrangements if there is a dispute about the sum claimed from you at the end of the tenancy, and what you will need to do to submit your evidence to the adjudicator
- If there is a complaints service built in
Generally, these schemes work well if no damage is claimed at the end of the tenancy, as, although you lose the initial fee, the tenancy as a whole is more affordable.
However, if there are claims made against you and particularly if there is a dispute about those claims, you may find that you are more out of pocket than you would be under a traditional scheme.
Note that it is the landlord or agent who decides which, if any, alternative scheme is on offer. Not you. However, if you are unhappy about the scheme they are offering you but have had a really good experience with another scheme, it may be worth suggesting this to your landlord. They may be prepared to consider it.
7. What can you do if it all goes wrong?
If there is a complaints process as part of the scheme, you can use that.
Otherwise, if the landlord is using a letting agent, you may be able to bring a complaint against them with their Property Redress Scheme. By law, all letting agents must belong to a properly authorised Property Redress Scheme.
At the time of writing, there are two:
If your landlord is self-managing, then, in due course, they will be required to join the new Landlord Ombudsman scheme being set up under the Renters Rights Act. However, at the time of writing, this is not yet in place.
If they are a member of a landlords’ organisation, such as the National Residential Landlords Association, you may be able to complain to them – although these schemes do not have any statutory powers, e.g., to award compensation, so there is a limit to how they can help you.
Otherwise, there may be little, practically, that you can do about it. Other than, perhaps, speak to your MP.
This is the end of this article.
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