New scheme will safeguard tenant deposits from shady landlords but could result in rents increase

Tenants face a new surge in rental costs when Scotland’s tenancy deposit scheme comes into force over the summer, it has been claimed, while responsible letting agents are set to pay a high price for the actions of an unscrupulous minority.

The scheme is being finalised at a time when demand from would-be buyers frozen out of the housing market continues to drive up rents in Scotland.

Disputes between tenants and letting agents are on the rise too. Scottish complaints about letting agents soared by 40 per cent in 2011, outstripping a UK-wide increase of 26 per cent, the Property Ombudsman revealed last month.

Most complaints concerned deposits, administration failures and tenancy agreements.

The new rules are aimed at reducing disputes over downpayments. Under the Scottish government’s tenancy deposit scheme – similar to the system already operating in England and Wales – any deposit paid to a landlord must be transferred to an approved scheme within 30 days of the tenancy starting.

Landlords will be obliged to give the tenant confirmation of the amount paid in deposit and the scheme in which it is held. They must also provide proof of registration with their local authority at the time of paying the deposit.

The money will be held by the scheme administrator in an account set up for the purpose and an independent dispute resolution service will be on hand in the event of disagreement over the return of the deposit.

The Letting Protection Service (LPS) Scotland is the first scheme to be approved and will begin on 2 July. Two further schemes are expected to start on the same date, although landlords will not be legally required to begin using the scheme until November.

Kevin Firth, director of LPS Scotland, said: “The introduction of the tenancy deposit legislation is a positive step forward in Scotland. I would encourage those in the private rented sector to take appropriate steps to ensure that they are prepared for its introduction.”

The development was welcomed by Graeme Brown, director of Shelter Scotland.

“Each year millions of pounds from deposits are unfairly withheld by landlords and agents in Scotland, causing hardship to tenants and the very real threat of homelessness due to a lack of funds to secure their next property,” he said.

“Against a backdrop of increasing financial hardship and a growing private rented sector we hope the tenancy deposit scheme achieves a transparent and fair system for all,” Brown added.

But many letting agents are unconvinced and warn of unintended consequences. One is that rents could be pushed up as landlords pass on the costs associated with complying with the scheme.

David Alexander, owner of lettings and estate agency DJ Alexander, said: “The scheme has been running very successfully in England and Wales, but the difference is that here it is custodial, which means it will be harder for landlords to claim a sum of money from the deposit at the end of tenancy if they need to.”

Consequently the onus will be on landlords to provide more detailed inventories and condition reports, perhaps from third parties – and it seems inevitable that the costs will be transferred to tenants through rent hikes. Chris Blair, director of Onside Inventory Management in Edinburgh, said: “Regardless of whether a letting agent or private landlord uses an independent company there will be additional costs associated with the introduction of the scheme to ensure that the quality of evidence is sufficient to support any claim.”

“It is an additional cost for the landlords of residential private rented property and undoubtedly landlords and letting agents will endeavour to recover this additional cost by trying to increase the rent.”

Under current rules it’s illegal for tenants to be charged a “premium” covering administration charges and other costs, although evidence suggests that many letting agents charge up-front fees anyway.

The rules around charges are under review, with the Scottish Government currently consulting on potential changes.

Alexander has long called for landlords to be allowed to charge a fee covering their costs.

“We feel it’s only reasonable that the cost of a credit check, for example, should be covered by the tenant. Fair and reasonable charges, as in England and Wales, would be welcome.”

For tenants, however, the scheme will help shift the balance of power, said Alexander.

“Historically they have felt hard done by but tenants will now have the knowledge that an independent third party will decide what happens with their deposit.”

But others accuse the Scottish Government of being too heavy-handed in the new legislation.

Diarmid Mackenzie Smith, director of letting and management at Rettie & Co, said the establishment of the deposit scheme failed to take account of guidelines already in place, such as Royal Institution of Chartered Surveyors regulation.

“Our deposit accounts are reconciled to the last penny every single day and annually audited,” claimed Mackenzie Smith.

“The Scottish Government would have been better spending time, money and energy seeking out the few unscrupulous landlords and letting those who have already proven their standard to get on with the job they do well.”

Ross Hadden, partner at solicitors Hadden Rankin, agreed. “The tenancy deposit scheme is a huge sledgehammer to deal with a relatively minor problem. As with a lot of letting regulation, the ‘good guys’ are being punished along with the bad.”

He warned that the scheme could also create new problems for tenants.

“I suspect they are going to be surprised by how long it takes to get a deposit released in the future through no fault of theirs or the landlords or their agents and compromise is going to have to be the operative word if funds aren’t going to be tied up by disputes for several months at a time.”

The lettings industry does have to accept some blame for failing to tackle those agencies using tenant deposits to ease their own business cash flow, Hadden conceded.

“That has been a problem which should have been dealt with many years ago.”