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7 Mar 2007 : Column GC1

Grand Committee

Wednesday, 7 March 2007.

The Committee met at quarter to four.

[The Deputy Chairman of Committees (Lord Lyell) in the Chair.]

The Deputy Chairman of Committees (Lord Lyell): Before the Minister moves that the first order be considered, I remind your Lordships that in the case of each order, the Motion before the Committee will be that it do report that it has considered the order in question. I make it clear that the Motion to approve the order will be moved in the Chamber in the usual way. I add as a footnote that if there is a Division in the Chamber while we are sitting, we shall adjourn for 10 minutes, but I shall give the Committee notice of that if it arises.

Housing (Tenancy Deposit Schemes) Order 2007

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The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Andrews) rose to move, That the Grand Committee do report to the House that it has considered the Housing (Tenancy Deposit Schemes) Order 2007.

The noble Baroness said: With the order, I intend to discuss the two related negative orders, the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 and the Housing (Tenancy Deposits) (Specified Interest Rate) Order 2007. All the orders are designed to come into effect as part of the general implementation of the Act on 6 April. I thank noble Lords for the crucial part that they have played in effecting the changes that will shortly come into force. That has been slightly delayed—I will explain the reasons for that—but I know that we all take pride in what will be achieved now through the Housing Act 2004.

I warn that I have a slightly long speaking note, but I have received so much encouragement that I will probably have to cut it back at least a little. However, let me rehearse briefly the history of the scheme and how we have moved to put the process in place since the Act. As Members of the Committee know, great concern was expressed in relation to the Act about the bad practice of a minority of landlords and agents regarding tenants' deposits. We are all aware of cases in which deposits have been withheld. Those continuing problems were confirmed in the responses to a government consultation document, Tenancy Money: Probity and Protection, published in 2002.

I shall bring that story up to date. Last year there were about 1.7 million assured shorthold tenancies—the standard tenancy in England and Wales—to which TDP applied. A deposit was paid in 85 per cent of those tenancies, or by 1.4 million tenants. The average deposit was £700, which is a big investment. In 2003-04 and 2005-06, the Survey of English

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showed that 17 per cent of tenants questioned felt that some or all of their deposit had been unfairly withheld. That is 246,000 deposits. If only half of those deposits averaging £700 had been unfairly withheld, that would amount to £86 million. The rented sector is expanding, and the losses could only have increased. We would all miss that sort of money, but in many cases the result has been severe hardship.

As a result of those issues, the Government decided—with cross-party agreement, and strong support by Citizens Advice, Shelter, the NUS and, in principle, the landlord and agent organisations themselves—that it was time to give statutory protection to tenants’ deposits. That decision was taken through the Housing Act via new clauses and a new Schedule 10. It is good to see so many noble Lords who were involved in that. Paragraph 11 of Schedule 10 provides for the appropriate national authority—the Secretary of State in England, and the National Assembly in Wales—to amend any part of the schedule as appropriate. We have used that power to make the order.

Before I get on to the details, I want to remind noble Lords what the Act set out to do. Under Section 212(1), the appropriate national authority must make arrangements for securing that one or more tenancy deposit schemes are available for the purpose of safeguarding deposits paid in connection with shorthold tenancies. Section 212(8) defined the shorthold tenancy. The Act made provision for two types of schemes. Paragraph 10 of Schedule 10 deals with a custodial scheme, whereby the tenant’s deposit to the landlord is handed over by the landlord to a scheme administrator and held until the end of the tenancy, at which point it is returned wholly or in part to a landlord or tenant. The second option was the insurance-based scheme, whereby the tenant’s deposit to the landlord is kept as it is now by the landlord but on the basis that, at the end of the tenancy, an amount agreed between the tenant and the landlord will be repaid to the tenant. Any amount not agreed with then be paid by the landlord into the scheme administrator’s account until the dispute is resolved. Should the landlord fail to transfer the disputed amount to the scheme, the scheme’s insurance will repay the tenant any amount of the deposit that is found to be due to him.

Paragraph 10 of Schedule 10 requires the scheme to provide facilities to enable the resolution of disputes about deposits. Section 213(3), under which a landlord receives a tenancy deposit in connection with a shorthold tenancy, requires him to comply within 14 days, beginning with the date on which he receives that deposit, with requirements imposed by an authorised scheme that fall to be complied by him. Under Section 213(5), (6) and (10), a landlord who receives such a deposit must, within 14 days beginning on the date on which he receives the deposit, give to the tenant or any person who has paid the deposit on behalf of the tenant prescribed information in an order made by the appropriate national authority.

The Act was an enabling Act, and the details were left to be worked out. Since then, those details have

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been determined on the basis of advice from consultants who took advice very widely on the form of the schemes. They agreed that a single national custodial scheme, accessible to all landlords and agents, should be procured, but the consensus in the lettings industry was that there was a need for one or more insurance-based schemes. The process of determining the form of the scheme and the need to consult played a key role in delaying the introduction of the scheme. We had originally planned to introduce it last July. We scheduled it for October 2006, but it also emerged that it was essential that the stakeholders in the private rented sector had enough time to prepare for the implementation of the scheme. Therefore, I decided to commence the tenancy deposit scheme on 6 April 2007—a common commencement date. It also gave us more time to put together a very effective publicity campaign, which I shall refer to later, and to reflect the concerns of landlords and agents.

Central to the success of the scheme is the provision of information to the tenant, so that they know their new rights. I shall say a little about the prescribed information order, which we are considering in relation to this order, and about the extensive consultation that we have undertaken. Clearly, the provision of that information is absolutely crucial to enabling the tenant to know how their deposit is now protected. Landlords will have to provide their tenants with full details of which scheme is being used to protect the deposit, how the scheme works, and how they should go about seeking the return of their deposit if they consider that they are entitled to it. That information must be provided within 14 days.

Some tenants are poor, some are easily intimidated, others may not speak much English, and many will be students. They all need to know their rights, so we have worked closely with Citizens Advice, Shelter, the NUS and local authorities throughout the design and implementation of the whole scheme. The result has been to limit the prescribed information to what is required to ensure the essential safeguarding of deposits and to keep the paperwork to a minimum, as well as to limit the burdens on landlords and agents to ensure compliance with the legislation. For example, we have been very clear that we need simple forms for the prescribed information and for the model tenancy. We need the scheme’s rules to be published on websites and on paper forms, which will also summarise rights under tenancy deposit law. The whole process must be as clear and as accessible as possible. Even the forms which landlords and agents will use to register their details or to apply to the alternative dispute resolution service will be clearly set out on paper and online.

Noble Lords know that once a custodial or an insurance-based scheme has been chosen, the process will be slightly different. The custodial scheme is free to all landlords and agents. It involves the landlord giving up the deposit and telling the tenants within 14 days which scheme is being used and whether the deposit will be returned at the end of the tenancy intact or divided, as agreed, between tenant and landlord. If there is a dispute, the scheme will hold the disputed amount until the dispute resolution service or the courts decide what is fair. A percentage

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of interest will also be returned to the person, either the landlord or tenant, who is entitled to the deposit at the end of the tenancy. The rate of interest is set out in the Housing (Tenancy Deposits) (Specified Interest Rate) Order 2007 and will be fixed at a rate equivalent to the base rate of the Bank of England, less 2.32 per cent.

The insurance-based scheme is different, in that the tenant pays the deposit to the landlord, who retains the deposit but then pays a fee to the scheme administrator to insure against his misappropriation of the deposit. Again, within 14 days of receiving a deposit, the landlord must give the tenant prescribed information about the scheme being used. At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, all or some of the deposit is returned to the tenant. If there is a dispute, the landlord must hand over the disputed amount—say, £200 out of £1,000, because he disagrees about the state of the furniture—to the insurance scheme for safekeeping until the dispute is resolved. If for any reason the landlord fails to comply, the insurance arrangements will ensure the return of the deposit, or part of it, to the tenant, if they are entitled to it.

Let us look at how the dispute resolution will work in practice. Both landlord and tenant agree to the ADR, so the disputed £200 will be transferred to the scheme. A dispute in the custodial scheme will work in a similar way, except that the money is there already; £800 will be paid to the tenant and £200 will remain in the custodial scheme until the dispute is resolved.

In each scheme, the deposit must be returned within 10 days of the landlord and tenant agreeing how the deposit should be divided, or within 10 days following notification of a decision from the ADR or court service. That is a statutory maximum; there is nothing to prevent the deposit being paid back on the last day of the tenancy agreement if the parties so decide.

I am confident that from this arrangement, which has been worked out in consultation with the key players, the majority of landlords will benefit hugely from the clarity and certainty that the schemes provide. Rather than that nagging worry about whether they will get their deposit back at the end, it will establish relationships between tenants and landlords on a more transparent and predictable footing, encouraging best practice in the private sector. But the best scheme in the world needs to protect against the non-conforming landlord or agent, so the enforcement procedures provide stiff penalties in Sections 214 and 215 of the Act against those landlords who either fail to protect their tenants’ deposits in the first place or fail to provide their tenants with details of the information about their deposits.

In those cases, a tenant can make an application to the county court if his landlord has either not protected the deposit or not provided the information within 14 days. If the court is satisfied that the landlord has not complied with the requirements of the Act, these sanctions apply. First, the landlord or agent will be unable to regain possession of the

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property using the usual notice-only grounds available in respect of assured shorthold tenancies, if he has either failed to protect the deposit within 14 days of receiving it, or failed to provide the prescribed information to his tenant within 14 days of receiving the deposit. Secondly, and even more severely, if the court directs a landlord or agent to pay the deposit into a scheme and he refuses, the court must order the landlord to pay the tenant three times the deposit amount. These are very serious penalties.

I move on to who is running the schemes and how they will do it. The deposit protection scheme—DPS—is the only custodial deposit protection scheme. Its parent company is Computershare Investor Services, which has successfully delivered the Australian State of Victoria's custodial tenancy deposit scheme for the past eight years and is a very reputable and considerable agency. The scheme is free to use and open to all landlords and letting agents, who will be able to register and make transactions online or on paper. It will be supported by a dedicated call centre and an independent dispute resolution service, which will be provided by the Chartered Institute of Arbitrators. The scheme is funded entirely from the interest earned from deposits held. Only in extreme circumstances would the Government need to provide any financial support. The interest on the pool of deposits will be used partly to pay the contractor for running the scheme and partly to pay interest to the tenant or landlord.

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There are two insurance-based scheme providers. The first is Tenancy Deposit Solutions Ltd, which is a partnership between the National Landlords Association, which sponsors the scheme, and Hamilton Fraser Insurance, which will administer it. The scheme enables landlords, either directly or through letting agents, to hold deposits. Letting agents can also join the scheme. The independent dispute resolution service will be provided by the Chartered Institute of Arbitrators. The scheme is underwritten by a major international insurance company, AXA Assistance Ltd, which will ensure that deposits are paid in the event of misappropriation. The second insurance-based scheme is the tenancy deposit scheme. It builds on a voluntary scheme established in 2003 to provide dispute resolution and complaints-handling for the letting industry. It is also a reputable and experienced organisation. It is underwritten by Norwich Union and Royal Sun Alliance.

The tenancy deposit scheme has published four fee levels for agents on a per-office basis, which range from £521 for self-regulatory bodies to £1,609 for an unaffiliated agent. The fees are on a pay-as-you-go basis. For the vast majority of individual landlords, there will be a one-off joining fee of £58.95 plus a deposit protection fee of £30 per deposit and an annual renewal fee of £14.70. I am giving the Committee this detail because I want it to be assured that the scheme has been worked out in sufficient detail for us to be sure of its workability.

The crucial thing is getting the message across to tenants, landlords and agents. The 1.4 million tenants are hard to reach because there are very few tenant

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forums. There are also 870,000 landlords and 12,000 letting agents. To reach those groups, we are employing a range of media. Leaflets for tenants and for landlords and agents are available in nine core languages. A telephone number to order the leaflets is available. Advertisements began on 26 February on radio and will run across national, regional, ethnic and trade press. That is how we propose to inform tenants and landlords of these new rights.

I now turn to the order. I said that we needed time to reflect on what we were being told were important changes to ensure that the scheme works to maximum efficiency. We had a consultation exercise in November 2005 on the prescribed information to be given to a tenant by a landlord or agent. Over the past 18 months, three key concerns emerged on the operational aspects of the Act. First, the requirement for joint agreement to release the deposit in the custodial scheme made it impossible for a scheme to release the deposit without a court order in circumstances where the joint agreement was not possible—that is, if the tenancy had been abandoned, one party was not contactable and one party was genuinely entitled to reclaim the deposit. Secondly, a landlord or agent in the insurance-based scheme was able to frustrate a tenant’s efforts to resolve a dispute by not bothering to indicate how he wished a dispute to be resolved at the end of the tenancy, thereby forcing the tenant to take the dispute to court. Thirdly, there was the requirement for the insurance-based schemes to protect deposits even if the landlord had transferred protection elsewhere and the scheme was not receiving any membership fees. We acted on each of those concerns and brought forward the three amendments to Schedule 10.

I shall start with the single claim. Article 3 of the order amends paragraph 4 of Schedule 10 to the Housing Act 2004 and adds new paragraphs 4A, 4B and 4C. They enable the release of the deposit from the custodial scheme at the end of the tenancy without joint agreement from the tenant and landlord. The Act currently requires joint agreement. If one party cannot contact the other, the only recourse would be to go to court, which is no better than the existing system. There would be no improvement, just a time-consuming and costly process.

The amendment allows a landlord, agent or tenant to make a single claim. To do that, the claiming party obviously should try to obtain agreement from the other party. But after 14 days, if he cannot contact the other party, he can submit a single claim with a statutory declaration which has to include information that is set out in the order about the tenancy, the communication attempts that have been made by him to reach agreement, and why a single claim is being made. The scheme administrator will send the application and the declaration to the last postal address he has for the other party to try to contact him too. If he receives no response, he will pay the amount of deposit applied for to the applicant. Of course, if the tenant turns up and objects to the claim, the dispute will have to be resolved before the administrator.

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The second change would make the use of the alternative dispute resolution automatic for disputes in either scheme when both parties are still able to contact each other, but one is refusing to communicate or to say how he wishes any dispute to be resolved. New paragraph 4C(7) of Schedule 10, inserted by Article 3, makes this change in respect, again, of the custodial scheme. New paragraph 6A, inserted by Article 7, does that in respect of the insurance-based schemes.

As the Act stands, if the landlord and tenant cannot agree who is entitled to the deposit at the end but one of them does not say whether he wants to use the alternative dispute resolution or the courts, the default position is that the dispute must go to the courts. Again, that is no improvement on the present system, so the changes now require the parties to indicate to the scheme administrator how they wish any dispute over the deposit to be resolved. If the whereabouts of both parties is known and one has agreed to resolve the dispute through the scheme’s free alternative dispute resolution, but the other party has refused or failed to indicate whether he wishes to resolve the dispute, the scheme would treat the non-communicating party as having agreed the use, so it is obviously a default position. This should encourage parties to stay in contact with each other, but it would also enable the majority of disputes to be resolved more cheaply than if the courts had to be used. Under the insurance scheme, it would be unusual if a landlord disappeared. Nevertheless, we have made that change, which is important.

The third and final key change deals with a situation where either a landlord or a scheme administrator wishes to cease protecting a deposit through an insurance-based scheme even if the tenancy is not at an end. That is achieved through Articles 4 and 5 of the order, which inserts new paragraphs 5A and 6A into the schedule and adds some powers to existing paragraph 6.

Schedule 10 currently requires an insurance scheme to continue to protect a deposit held under it until the end of the tenancy and the deposit has been repaid, even though a landlord might want to use an alternative scheme, or the scheme might wish to expel a landlord from the scheme—for example, if he has breached rules or has not paid his membership fees. It is an absurd situation that under the Act that can be achieved, especially for a commercial insurance organisation. Therefore, the order amends Schedule 10 to allow a landlord to secure the deposit in one of the other schemes and for the scheme administrator to end protection of the deposit before the end of the tenancy.

The order sets out exactly the steps that need to be taken. If the scheme is proposing to stop protecting a deposit, it must give the landlord two weeks’ notice before making its final decision and provide at least two months’ additional cover after it decides to terminate protection, so that the landlord can make alternative arrangements, including providing ongoing alternative dispute resolution services in that period and beyond for disputes which come to light in that period. It is very important that the scheme must let the tenant know what is happening with the deposit. From the

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date of the termination, the landlord has to start all over again and comply with all requirements in Section 213 of the Act as if he has just received the deposit. That, of course, starts with providing information for the tenant.

In addition to the three key changes there are some small amendments. The order clarifies what notices need to be served and how service of these notices is effected. Finally, it expressly allows the schemes to provide for the adjudicator tasked with resolving disputes under the ADR service to decide whether or not it should continue to consider a case. The ADR is the default position, but the adjudicator will have discretion to decide whether he should proceed or continue with a case referred to it. That is important where matters come to light subsequent to a matter being referred.

I am at the end. I am sorry to have taken so long, but it is worth having this on the record. Through this order and the Act, we have attempted to end some long-standing problems and vulnerabilities on protection of deposits in the private rented sector. Thanks to noble Lords across parties we have had the opportunity to amend the Act. That was extremely important, and demonstrates what can be achieved with all-party consensus on something dealing with fundamental human rights. I am grateful to noble Lords for that. It will improve the working of the Housing Act and make things better for tenants and landlords. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Housing (Tenancy Deposit Schemes) Order 2007. 9th Report from the Statutory Instruments Committee and 11th Report from the Merits Committee.—(Baroness Andrews.)

Baroness Hanham: I thank the Minister for her extensive explanation, not only of the tenancy deposit scheme but of the amendments. I notice the noble Lord, Lord Rooker, in his place. He and I were dealing with the then Housing Bill, and about the only item of agreement we had, fairly late in the proceedings, was that this tenancy deposit scheme should be included. There is no dispute over the principle of the tenancy deposit scheme.

I know, and I am sure that many other noble Lords here know, both sides of the history of this. First, there were landlords who quite unreasonably sat on deposits for long periods and were extremely reluctant to return them, with endless excuses, often unjustified, as to why they should not. That caused great difficulty to tenants. Equally, however, tenants were not blameless either, because they quite often withheld portions of rent on the basis that they might not get their deposit back. We all know that this has been a long-running problem with local authorities. I understand that. I am also clear that the voluntary system set up in 2000 did not work, and that this statutory system was therefore essential.

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