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Renting? How not paying a deposit could lose you money

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Renters might think they’re bagging a bargain if their landlord doesn’t ask for a deposit.

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Since 2007, landlords operating Assured Shorthold Tenancies and taking in less than £25,000 in annual rental income have been legally obligated to protect tenant’s deposits by putting them into the deposit protection scheme.

This serves two functions, firstly, to protect the tenant against a rogue landlord who may try to withhold a deposit. And secondly, to act as a back-up for landlords against any tenants who default on rent, or cause damage to their property.

But some landlords avoid the system by not taking a deposit at all.  Whilst this isn’t illegal, there are certain exceptions that, as a result of a hazy law, could land landlords in court.

What are the consequences?

If a landlord is found to have taken a deposit, or any money that could be deemed as a deposit without protecting it, then a tenant can take him/her to the County Court and claim back three times their monthly rent.

When is a deposit not a deposit?

Some landlords draw up tenancy agreements that do not include a deposit but instead, take an extra month’s rent in advance.

Tessa Shepperson, a solicitor specialising in property law, says the argument surrounding deposits and advance payments is something currently being fought out through the Court of Appeal.

“If you pay one month in advance but then pay another month’s rent to float along until you end the tenancy, then that’s where it gets fuzzy. There’s a question mark over that floating rent,” she explains.

“There have been a couple of cases where a judge has ruled that an advance rent payment is a deposit. It might be alright but it is potentially dangerous for landlords to leave that money unprotected. ”

Policy officer for the National Landlords Association, Chris Norris, says a rule of thumb for determining whether money held by a landlord is a deposit or not is whether the money could be returned to the tenant.

He adds: “Irrespective of what description is given to this money, if it could be returned to the tenant - assuming all is well, no damage is done, rent is paid - then it is a deposit and should be protected as such.”

The future of deposit protection

The issue of deposit protection is to some extent, still a bit of grey area, but it seems the government is taking it more seriously. From 2 October 2010, the legislation will extend to landlords taking in up to £100,000 a year in rent which means essentially that more landlords will have to pay attention the rules.

So what can you do to protect yourself?

To be safe, Gary Cleland, spokesman for the Deposit Protection Scheme (DPS) says they strongly advise all landlords to ensure that their tenants pay a deposit.

The Tenancy Deposit Scheme (TDS) also urges renters to take responsibility for their money. According to TDS, paying extra rent in advance, instead of a deposit, is a loophole in the deposit protection system that both landlords and tenants should be aware of.

“This is the grey area. Even if it’s not being labelled as a deposit, the landlord might be acting illegally. A tenant has to be very aware of where the money they handover is going.” a spokesman said.

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