Why it's time for landlords to play fair over rental deposits

Government plans to take control of deposits held by landlords to pay for damage to the property may have the unexpected effect of killing off deposits entirely.

Under the Tenancy Deposit Scheme (TDS), deposits will either be held by an independent body or will be backed up by insurance that tenants could claim against if their deposit was unreasonably retained.

Research by the Association of Residential Letting Agents (ARLA) shows that less than a third of landlords are preparing to use the TDS when it becomes compulsory next April. This is despite a rush by their property advisors, including members of ARLA, the Royal Institution of Chartered Surveyors (RICS) and the National Association of Estate Agents (NAEA) to join their voluntary tenants' deposit scheme. The scheme is signing up 75 new members and arbitrating in 60 disputes every month.

Landlords fear the TDS will be bureaucratic, time-wasting and expensive. Many are expected to give up taking deposits altogether, which would also save considerable sums on administration. Rigorous screening of prospective tenants is increasingly seen as a much better way of avoiding future disputes.

Deposits are the subject of more rows than any other aspect of renting. The more unsavoury type of landlord regards them as a non-returnable end-of-lease bonus, and the scummier sort of tenant demands its return in full even after trashing the joint, but even otherwise reasonable landlords and tenants are often willing to go to court over who should pay £30 for a cleaner at the end of the lease.

"I took a straw poll of landlords at a meeting recently, and asked how many were interested in joining the tenancy deposit scheme and nobody put their hand up," says Chris Town, chairman of the Residential Landlords Association and a landlord himself. "I don't see the benefit for the tenant either. Currently, when the tenancy is over they get their money back straight away - under the new scheme there may be a few weeks' delay, which may give them difficulties finding the deposit for their new place. I think that for some landlords it will be the end of deposits. If it is a valuable property with expensive fittings a large deposit will still be necessary, but for lower-value properties I really don't see the point."

Many tenants pre-empt arguments over the deposit by withholding the last month's rent, and this is less likely to happen if no deposit is charged. Recording, banking and returning the money is a hassle, and inventories have to be taken at the beginning and end of every tenancy to assess any damage or loss. "75 per cent of landlords do not take a detailed inventory. For long tenancies it is pointless as things are replaced and repaired in the course of the lease," Town says.

Landlord concerns have already delayed the introduction of the TDS for six months. The scheme has been amended to allay worries that the deposit could be quarantined if the tenant did a bunk or the property was repossessed. There were also concerns that warring parties would refuse to go to the alternative dispute resolution service and end up in court.

One of the bidders to operate the custodial TDS is Lawrence Greenberg of the Dispute Service, which already runs the voluntary scheme backed by ARLA, RICS and the NAEA. Greenberg is confident the TDS will not mean the end of the deposit. "Some landlords have talked about not taking deposits but people who take deposits have some sort of influence over the conduct and behaviour of tenants who occupy very expensive assets," he says. "It is very visceral and I don't think there will be a mass change over deposits."

Rumours of the high cost of the insured TDS have been exaggerated, he says: "Insurers see a range of different risks, from regulated agents operating under a code of conduct to new landlords at the other end of the spectrum, where the premium will be up to £50 at the high end."

Currently, five companies have bid to operate the three proposed TDS schemes - two custodial and one insurance-based. The winners are expected to be announced next month.