The developing scandal of misappropriated tenants’ deposits has exposed landlords to millions of pounds of liability.
Landlords bear the legal responsibility, even though it is letting agents that have spent, lost or vanished with tenants’ deposits, a London agent has said.
Eric Walker, managing director of Bushells, says there are massive flaws in the tenancy deposit legislation, which leave innocent landlords breaking the law.
He believes that all letting agents should submit to regular auditing or pay all clients’ money in to a custodial scheme.
He said: “The real time-bomb is where agents hold the money in their own account and register it with a scheme, then for whatever reason cease to be members of that scheme.
“This leaves the landlord with a huge liability in the event that the tenancy is extended or renewed, as the deposit is legally no longer registered.
“A clients’ account may well be ring-fenced, but there is no way of knowing whether the correct amount of money is in it unless it is independently audited. Simply, the amount which should be held is registered with a scheme but is never reconciled with the actual balance of the account.
“If the Tenancy Deposit Service, for example, added up the deposits that they have registered for an agent and asked for a statement confirming what the balance was, or alternatively an accountant’s report, the issue would be exposed.
“But they won’t do that, as it would be floodgate city – not to mention the effect it would have on its insurance, and on the compliant agents who will foot the bill when premiums inevitably increase.
“Instead, they bury their heads in the sand and now expel agents who don’t join an accredited organisation.”
He went on: “Many of these agents are using rents and new deposits to pay outgoing tenants and landlords, and are trading insolvently – yet audited accounts required by Companies House do not show liability to landlords.”
He said landlords he had tried to advise were shocked when they were told that where their agent had misappropriated the tenant’s deposit, the landlord would have to make good the money, or risk breaking the law – and a penalty three times the amount of the deposit.
Walker said: “Really, the solution is that the ONLY agents who should be able to hold clients’ money are those accredited by ARLA, RICS or the Law Society. Otherwise all monies should be held in a custodial scheme. The problem is that no one will enforce this as there will be so many agents who will be found out and this will highlight the flaws in the 2004 Housing Act.
“This needs to be addressed. I know of four well-known independents who between them have deficits exceeding £1.5m. That’s a potential liability to landlords of £6m if you take into account the repayment plus fine for not being registered.”
Estate Agent Today has launched a campaign aimed at highlighting problems over tenancy deposit protection to Communities and Local Government. In particular, we believe urgent action is needed to make it illegal for letting agents to operate without ring-fenced client accounts.
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Comments
Country wide agents such as Martin & Co or Belvoir?
The potential of misappropriated deposits is bad news for smaller independent letting agents. With a fear of Agents "dipping into the till" or going into liquidation, more landlords may prefer to use the Countrywide style letting agents of this world as they may be perceived by Landlords in the same way as the major banks as being too big to fail.
The potential of misappropriated deposits is bad news for smaller independent letting agents. With a fear of Agents "dipping into the till" or going into liquidation, more landlords may prefer to use the Countrywide style letting agents of this world as they may be perceived by Landlords in the same way as the major banks as being too big to fail.
My friends business was in trouble as the banks pulled their overdraft facility. He either made 10 people redundant and went bust or used some clients account money to replace the facility. He is paying it all back now - slowly. No-one has lost any money and he is well covered with equity - but it was a fight for survival. I know it was a last resort and its wrong - but I can at least understand it. Where I work, we only ever have paid into a custodial scheme, to temptation was taken away!!
Ray Evans of Sheringham - they are indeed - which is the point of the article. The problem is that agents who were member of the TDS from 2006 until they were unable to renew as not members of a body who requires audits, are not checked. They could have pinched the entire contents of the clients account and there is no way of knowing. Just because the account is ring-fenced, it doesnt mean to say the money is safe from the agent themselves.
Please read the NALS article on here as well, even if you're not a member - is it a sign of things to come?
Without being too specific, the agents my girlfirnd works for has over £600k missing from its clients account. In their best year they only made a small profit. They are trying to pay it back, but it will take forever. They aren't members of any body and pay tenants from new monies received. They got kicked out of the TDS but have gone elsewhere. I cant believe they get away with it - but at least she has a job!
Stable doors are being bolted, but too late. There are a number of agents who were with the TDS and whose membership ceased as they failed to comply with the new regulation compelling agents to be members of ARLA, NAEA, RICs or Law Society. One such agent with whom we are dealing couldn't join as they couldnt allow an audit of the clients account as it was £400k short. So, the migrated to another scheme. They havent touched these deposits and they operate a ring fenced account. nevertheless, it is still short. When the receivers were called in, one landlord called the OFT - but they dont investigate individual complaints (unless your name is Connie Huq). Trading Standards referred them to the TDS. The TDS said - "the agent is a member - nothing to do with us". Now there are 80 odd landlords, many of whom believe their deposits are registered still oblivious to that that they are not and that sooner or later, they will have to repay this money to the tenants. Do you really believe this is a one off?
The government's eye is off this ball at the moment, but at some point they will start looking very carefully at this and any agent without the deposits is going to be out of business. This could then lead to compulsory licensing or the end of the insurance schemes, so they may want to put this matter in order or lose their businesses! Ofcourse this is going to demonstrate what a great industry this is again.......
'This is not good for the reputation of Letting Agents in general.'
I agreem it isn't but what a fantastic opportunity for ARLA to use our membership money to REALLY promote to the public why they should use an ARLA agent, rather than, I suspect, to lobby the Government for even more regulation!!
Are not all NAEA, ARLA and RICS agents required to have their clients accounts audited and certified, at least annually, by a chartered accountant?
All agents who protect deposits with mydeposits.co.uk are credit checked and must provide evidence of a segregated client account. Importantly, the client account must show that it tallies with the value of deposits protected with mydeposits.co.uk. This audit is annual for all agents but mydeposits.co.uk also undertakes audits on agents at random. All agents must agree to this as part of the mydeposits.co.uk scheme rules.
However, it is also key that landlords are made aware of their responsibilities under the legislation. Mydeposits.co.uk is writing to landlord clients of agents using the scheme, to make them aware that even though they have instructed the agent to act on their behalf, they (the landlord) are still ultimately liable for the tenant’s deposit. If landlords understand the law they are in a better position to make informed decisions about how and where the tenant’s deposit is protected.
As the landlord is ultimately liable for the deposit they need to ensure their agent is financially robust and check that the deposit is being held in a ring fenced account - ask for evidence. If unsure, landlords can insist that they hold the deposit (and protect it themselves) - the agent cannot refuse.
When Mydeposits renewed my account with them last year I had to provide bank statements that showed the correct amount of money was on deposit.
Am I the only one?
It will take time for the British Government to wake up to this loophole in the law. Many more deposits are bound to be mis-appropriated before the law is changed. This is not good for the reputation of Letting Agents in general.