Rental Reforms: A licence to let

Anyone in the lettings business should make sure they know the new rules

The Housing Act, now coming into law, means huge changes for anyone involved in the business of letting property. It means that from the middle of next year many landlords will have to apply for licences to operate and also change the way they deal with tenants' deposits.

The Act changes the definition of what's called a "house in multiple occupation", or HMO, to include properties where more than two unrelated tenants share rented property. For big shared houses - defined as those with three or more storeys and five or more occupants - a licence will always be required.

Smaller rented properties could be affected too, because councils will be able to extend licensing to include other types of HMOs or even insist all private landlords are licensed.

To get a licence, landlords will need to show an annual gas safety certificate, working smoke alarms, safe electrical appliances and furnishings, and that the house is suitable for the number of people living in it. Councils will be free to charge different licence fees.

Landlords have until July 2006 to get a licence. If they don't, they will face fines of up to £20,000 plus having to repay rent they get while unregistered. Also, if an HMO property doesn't have, say, enough bathrooms, the landlord could be asked to install one by a certain date. If he doesn't, he could lose his licence and face a £5,000 fine.

Alex Houston is typical of landlords who worry that the regulatory burden could increase further. He says: "Licensing seems unfair because while private landlords will have to comply, the likes of college-run accommodation and housing associations will not be subject to the same regime, at least not for quite a while."

Mike Stimpson, of the National Federation of Residential Landlords, says: "Since local councils will be able to extend licensing and even continue with some old existing schemes, landlords will have to check with each council in each area whether or not each property will need to be licensed. It's a recipe for confusion."

The other big change affects deposits. From October 2006, deposits will have to be placed in authorised Tenancy Deposit Schemes (TDS) - either in "custodial" or "insurance" schemes, which will be run by independent third-party providers. These schemes will be able to help resolve disputes. Landlords who take deposits will have to join a scheme. If they don't, they risk having to pay a penalty of three times the deposit to the tenant.

In the custodial scheme, landlords will pay deposits into an account where it will stay until the tenancy ends, when either party can apply to have it returned. Once the landlord and tenant agree on how it should be split, the scheme administrator pays out.

The insurance scheme is more complex in that the deposit will be kept by the landlord on the basis that when the tenancy ends, the amount agreed between landlord and tenant will be paid out to the tenant.

The insurance only comes into effect if, at the end of a tenancy, the landlord doesn't pay back part or all of the deposit. If this happens, the tenant can ask the administrator to step in and the landlord will have to pay the amount in dispute into an account until the dispute is settled. The insurance will pay out if the landlord fails to pay the deposit into the account.

David Lawrenson is the author of "Successful Property Letting - How to Make Money in Buy-to-Let", £9.99.