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Zero Deposit Scheme - Beneficial for Landlords?

View profile for Josh Millichamp
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A security Deposit is always a fundamental part of any Assured Shorthold Tenancy agreement, providing the Landlord with security in the event of damage to the property or in the event the tenant falls into rent arrears.

Aside from the traditional security deposit, it is now becoming increasingly common for Landlords and Tenants to sign up to a Zero Deposit Scheme which operates by way of a guarantee rather than a security deposit.  Rather than a deposit exchanging hands, the scheme guarantees Landlords six weeks' rent in the event of any damage or arrears the Tenants cause during the term of the AST. The scheme offers a more affordable solution for Tenants, and so Landlords can potentially attract a wider audience of Tenants which can lead to faster renting and higher rents.

The Scheme costs Landlords nothing.

To benefit from the scheme the Tenant must pay the scheme provider one week's rent which is non-returnable and an annual administration fee after the first twelve months. The Scheme provider then guarantees the Landlord up to six weeks' rent in the event of any damage or rent arrears.

On the face of it, this sounds like an attractive option for both Landlords and Tenants, but Landlords would still have to pursue their Tenants in the event that the guaranteed amount isn't enough to cover any damage or arrears.

After a Tenant moves out of the rental property an inventory should be carried out, and provided there are no disputes, the guarantee will expire.  If there is a dispute, then any evidence will be sent for expert evaluation by The Dispute Service (TDS) who are independent of both parties. In the event that the Tenant is found to be at fault, the scheme provider will pay the guarantee to the Landlord and will pursue the costs directly from the Tenant.  However, where the guaranteed amount is insufficient, Landlords may still have to pursue the Tenant for any shortfall as the Tenant will remain liable for any financial loss or damage as set out in the Assured Shorthold Tenancy agreement.

Under the scheme, as no deposit is received by the Landlords, this ultimately means that Landlords do not have to register and lodge the deposit with an authorised deposit protection scheme.

If Landlords and Tenants don't opt to use the Zero Deposit Scheme, Landlords remain bound by their statutory obligations under Section 213 of The Housing Act 2004:  Landlords are obliged to protect a deposit by registering and lodging it with an authorised deposit protection scheme within 30 days, as well as providing the tenant with the Prescribed Information, again within the same timeframe. Failure to do so would entitle the tenant to bring a claim for compensation for up to three times the amount of the deposit for each breach. For example, when the fixed term of an AST expires and the tenancy reverts to a statutory periodic tenancy, if the deposit was not protected there would be a minimum of two breaches.  In such circumstances the Landlord could be required to pay up to six times the amount of the deposit as a penalty to the Tenant.

Ultimately it's the Landlord’s choice to decide whether to use the new scheme or not - using the scheme has its benefits, but Landlords must remember that the guarantee is limited and costs might still be incurred in pursuing the Tenant for any shortfall.

For more information or advice on this or any other landlord/tenant dispute matter, please call us on 0800 118 1500, or email Josh Millichamp directly.

And for more information on written tenancy agreements, please follow this link:  Tenancy Agreements