For many people buy-to-let continues to look an attractive income investment at a time of low saving rates and stock market volatility.
Despite the introduction of higher stamp duty purchasing costs, the recent scrapping of the wear and tear allowance, the pending removal of landlords’ mortgage interest tax relief from next year, and the fact that the average rental yield in the UK has eased slightly, investors continue to be drawn to the buy-to-let market as the returns routinely outperform those of other investments.
Buy-to-let returns continue to beat all other mainstream investments, including commercial property, UK government bonds and cash, while remaining a highly popular alternative to the volatility investors often risk when investing in the stock market.
Yet, many landlords are putting their property investments - probably their biggest assets - at risk by failing to comply with basic legislation, such as placing their tenants’ deposits in a government-backed tenancy deposit scheme.
Tenancy deposit schemes
When renting out a property, most letting agents choose to take a deposit from the tenant prior to the tenancy starting. The deposit gives a level of protection to landlords and means that should the tenant breach the terms of the tenancy agreement, such as causing damage or not paying rent, your client (the landlord) can then make appropriate deductions from the deposit.
Deposits taken on assured shorthold tenancies in England and Wales by landlords or letting agents must be protected within 30 days in any one of three government-backed insurance based or custodial deposit protection schemes operated by MyDeposits, Deposit Protection Service (DPS) and the Tenancy Deposit Scheme (TDS).
The insurance product enables landlords or agents to retain the deposit during the tenancy but in return pay a protection fee to the scheme.
The custodial scheme allows landlords or agents to hand over the deposit for protection during the tenancy, with no fees attached. The scheme is funded entirely from the interest earned from the deposit pool.
There are separate tenancy deposit protection schemes in Scotland and Northern Ireland.
The three appointed scheme administrators in Scotland are Letting Protection Service Scotland, Safedeposits Scotland and MyDeposits Scotland.
In Northern Ireland, the schemes are Deposit Scheme Northern Ireland, MyDeposits Northern Ireland and Letting Protection Service NI.
But although it has been mandatory to hold a tenancy deposit in a tenancy deposit scheme since 2007, as many as 300,000 landlords are estimated to be running the risk of a heavy fine for not placing money into a government authorised scheme, research reveals.
A report by the Centre of Economics Business Research conducted earlier this year found that a total of £514m worth of deposits was believed not to have been placed in one of the three schemes in England and Wales.
It comes despite the risk of a penalty for the landlord, potentially running into thousands of pounds for not doing so.
“While deposit protection schemes protect tenants, there is little or no policing to ensure landlords and agents are compliant,” said Jane Morris (right), managing director of online letting agents PropertyLetByUs.com.
Many tenants are genuinely concerned that their deposit has not been placed in a tenancy protection scheme and fear that their landlord or letting agent has kept the deposit, fresh research by PropertyLetByUs.com shows.
The study found that 70% of tenants are worried about their deposit, while just 50% of tenants have never received confirmation that their deposit is in a protection scheme and three quarters of tenants believe their landlord, or agent, will try and keep the deposit at the end of the tenancy.
Morris continued: “Our research shows that tenants simply don’t trust landlords and agents with their deposits, which is disappointing in light of the fact that the schemes have been around for many years.”
Potential penalties for non-compliance
Tenants can apply to a local county court if they think their landlord has not used a deposit protection scheme when they should have, and if found guilty, the court can order the landlord to pay up to three times the deposit within 14 days of making the order.
Landlords could also face penalties if their agent failed to comply with the tenancy deposit regulation.
“We are still receiving on average three to five calls a day from landlords who have failed to protect their tenant’s deposit, which is quite alarming since this legislation was introduced in 2007,” said Paul Shamplina, the founder of Landlord Action. “The deposit gives landlords a financial safety net in case a tenant causes damage to the property.”
The tenant eviction specialist (left) continued: “If a landlord fails to protect a tenant’s deposit and it is reported, they could face substantial fines – and their position is considerably weakened where a dispute does arise, whether it is over property damage rent arrears.
“Landlords should also bear in mind that it is possible that a judge may not grant a landlord a possession order when trying to evict a tenant if their deposit is not protected.”
While the majority of landlords and letting agents do act responsibly by using a government-backed tenancy deposit scheme, there does appear to be an issue surrounding a lack of deposit protection awareness, certainly among amateur landlords, which may explain why so many deposits remain unregistered with a tenancy deposit scheme, according to Sarah Bush, head of letting at Cheffins.
“More needs to be done to educate both landlords and tenants when it comes to the tenancy deposit scheme,” she said.
“The deposit scheme is there to protect both parties and ensure that the deposit is dealt with fairly, and as a firm we go to extensive lengths to ensure that both landlords and tenants fully understand this arrangement,” Bush added.
Even of those that do manage to protect their tenant’s deposit, many still require educating on the importance of accurate and detailed paperwork, including an inventory.
The property’s condition
For a long time, fair wear and tear has been a grey area for landlords and letting agents alike, and because it tends to vary from case to case, it is among the least understood areas of the lettings process, and one which can create much ambiguity and cause a high level of disputes at the end of a tenancy.
Disputes can sometimes end up involving a formal Alternative Dispute Resolution service that generally tends to side with the tenant if the landlord or agent is unable to provide suitable evidence to support their claim. This is because the adjudicators’ starting position is the tenants deposit belongs to the tenant, so if a landlord wants to claim for any part of the deposit, they have to prove the condition the property was in at the start of the tenancy, as well as the end.
“Many landlords and agents feel tenants are not held to account when damage is caused and that there is little they can do to protect their property. Furthermore, landlords and agents have a poor record in winning tenant dispute cases,” said Jax Kneppers (right), founder of Imfuna Let, who claims that landlords in the UK are out of pocket to the tune of over £4.5bn every year because of damage to property.
But clear property damage and poor cleanliness or anything that is different from the property’s original state, is far easier to identify if there is an inventory management report and schedule of condition in place, enabling the landlord to use the tenant’s deposit to compensate.
Since the introduction of mandatory deposit protection schemes, an accurate schedule of condition has become almost as important as the tenancy agreement itself.
As well as being used as evidence in a dispute, a detailed and precise inventory completed at the start of the tenancy, and again when the tenancy ends, also underlines exactly what is expected of the tenant, while it can also help landlords avoid a disagreement in the first place.
Vivienne Harris (below), managing director at London-based Heathgate estate agents, said: “To demonstrate the point, a landlord of my company was recently ruled against via arbitration, because she did not have a professional inventory with details of condition, as well as, listed items included within the property.
“The adjudication was clear that had she provided a full inventory check-in and check-out report she may well have received some recompense. As it was, the tenants were given back the entire deposit and the landlord has to suffer the costs.”
To help enjoy a risk-free tenancy, it is generally good practice for a landlord to have an inventory, which records the condition of the property with written notes, photographic evidence, as well as details of the contents, including fixtures and fittings.
While some landlords may wish to conduct their own inventories, it is strongly advised that they use an independent inventory firm to compile a factual report and detail of the schedule of condition to ensure that it is impartial and objective, with the cost of this service starting from less than £100.
“It seems that sometimes in an effort to be cost conscious, landlords in particular will do their own report thinking it will be adequate. There is an old saying that sometimes cheap is expensive and in this case it is never more true,” Harris added.
Your expert advice
A formal tenancy deposit dispute could be defused by something as simple as basic communication and sound advice.
Only by advising your landlord clients to properly follow rental procedures, which includes complying with the tenancy deposit rules and getting an independent detailed inventory of the property done, can you help avoid potential discrepancy between landlords and tenants escalating to a formal dispute, ensuring a smoother tenancy for all parties involved.
Offering good quality professional advice and information should ultimately strengthen your relationship with clients, creating greater faith in your business and the letting service that you provide, helping to secure landlords’ business for the long term, and maximising rental commission in the process.
my|deposits - www.mydeposits.co.uk
Deposit Protection Service - www.depositprotection.com
Tenancy Deposit Scheme - www.tds.gb.com
Landlord Action - www.landlordaction.co.uk
Heathgate - www.heathgate.com
PropertyLetByUs - PropertyLetByUs.com
Imfuna Let - www.imfuna.com
Cheffins - www.cheffins.co.uk
*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno