Important warning to Landlords about deposits

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  • Important warning to Landlords about deposits

    As most Landlords know, tenants' deposits must be held in one of the three government approved schemes. I had hitherto assumed that this legislation was good and protected all concerned. However, the TDS and mydeposits are non-custodial. They only protect the tenant, but not the landlord. If an LA registers deposits with either the TDS or mydeposits, then runs off with the money, the landlord becomes liable to the tenant. TDS and mydeposits will only pay out if both the LA and landlord go bust. My friend used an LA who recently sold their business, which was a franchise of a very major name in Estate Agency, to a third party. The seller and third-party are both stating that each other has the bank account with the deposits in. A total of £38,000 has gone missing and solicitors have been employed. Nonetheless, my friend has to pay the tenants' deposits back out of his own pocket. The legal situation is complex and he and his fellow landlords may well lose all their deposits. Apparently, it is not an uncommon situation. My advice would be to place deposits with the DPS as it is the only custodial scheme. I have absolutely no relationship with the DPS, but have been astounded by the situation my friend has found himself in.

  • #2
    That's interesting

    Is/was the agency a member of an Agency body such as ARLA, NAEA or NALS ?

    I would be interested to know what those organisations would do in such a situation.
    All posts in good faith, but do not rely on them

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    • #3
      Good question. I don't want to open myself up to legal action by naming the agent or people involved. The agent is one you will have heard of, with offices nationally and internationally and been trading for 180 odd years. I didn't realise before, but lots of their offices are franchises. Hence individual branches may or may not be members of professional bodies. Even if they were for instance ARLA members, I don't think that ARLA would have any legal authority. All that such bodies can really do is revoke membership.

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      • #4
        Tell your friend to sue new owner to recover money: Presumably contract he has with agent states that agent will hold deposit.

        They only protect the tenant, but not the landlord
        That's clearly not true as landlord holds deposit.
        Now, if your friend trusted a third party to hold the money on his behalf, that's quite a separate issue.

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        • #5
          Hi jjlandlord,

          My friend can't sue the new owner as the new owner states that they did not receive the 'Deposits' account from the vendor of the business. The vendor of the business is stating that they have transferred the acccount. From a lot of investigation, it seems that the old owner is the one being untruthful. My friend has filed a small claim against the old owner who has dismissed it on the grounds that there was no contract between the two parties. The matter has been reported as fraud to the police, but they are not interested. They wrongly dismiss it as civil matter, even though it is a case of fraud. Solicitors all round have been involved, and its seems to get more and more slippery.

          You state: 'that's clearly not true as landlord holds deposit.' Really? that's never been the case in my experience, and I doubt it is for most of this forum's users! If a LL employs a Letting Agent (LA) then the LA draws up the AST between the T & LL, and steps away. However, the LA usually holds onto the deposit in a ring-fenced account and registers it with the TDS or mydeposits. The rub is that there is no agreement between the LL & LA. The deposit was never in the custody of the LL, but the LL is ultimately liable if the LA runs off/goes bust. It's a loophole that is being exploited by dodgy LAs. Hence my advice to other LLs that they should insist on receiving the deposit from the LA and then deposit it with the only custodial scheme i.e. DPS. Following is the text from a very interesting article in The Guardian:

          Amateur landlords have been warned to hold on to tenants' deposits themselves rather than leave them with a lettings agent after it emerged that the government's much-vaunted deposit protection scheme offers them no compensation if the agent disappears with the money.

          The alert comes from Marjorie Benn, an English teacher based in the far east, who lost £1,236 when the agent she used to rent out her flat in Romford, Essex, went into liquidation, taking her tenants' deposit with it.

          She thought the protection scheme would come to her aid, but was shocked to discover that it failed to shield landlords from lettings agents that take tenants' deposits, leaving landlords liable to return the cash at the end of a tenancy.

          It was July last year when Benn (not her real name) asked Tower Property Services, a well-established lettings company in east London, to find her tenants and manage the Romford rental. It was the third time she had used Tower.

          Tenants were duly found and Tower said it would hold their deposit in a separate bank account. Benn was told it would be protected according to the government's rules by an approved protection firm, MyDeposits. A £70 protection fee was paid by the agent and charged to her.

          Then last November, Benn received a letter from MyDeposits stating rather ambiguously that it "no longer acted for" Tower Property Services. After investigation, and despite initial denials by Tower staff, it finally emerged that the agent had gone into liquidation.

          Liquidator SFP, which has written to landlords who have lost out, is investigating whether deposit money was used by the collapsed letting agent to fund its ordinary business activities.

          Benn was told by the liquidator that most of the £70,000 the agent had held in deposits – all but a few thousand pounds – was untraceable and effectively lost.

          Assuming that the deposit protection scheme would offer some redress, Benn approached MyDeposits only to be told that there was nothing it could do for her.

          She has since been forced to pay back her tenants' deposit of £1,236 out of her own pocket. "I feel extremely upset over this," she says. "I was forced by the government to have the deposit 'protected' in an approved scheme, yet the scheme does not protect the money in such a situation.

          "Looking back, I should have investigated the deposit scheme more diligently. What is particularly galling is the fact I am a scrupulously honest person who would never dream of keeping a tenant's deposit without good reason. When I realised it was my legal duty to pay the money back, I did so. However, I don't understand what I was getting for the £70 that it cost to protect the deposit."

          Steven Hilton, of the National Landlords Association, which owns a 50% stake in MyDeposits, says her story, sadly, is all too common.

          "I have a great deal of sympathy for Ms Benn, but the problem is the deposit protection scheme was never intended to protect landlords – it is only there to help tenants get their money back. To be blunt, the scheme doesn't care about the landlord."

          He says the £70 fee paid by the agent would have covered the costs in any dispute that might have taken place as the tenant vacated. Had Benn held the deposit and gone bankrupt, the tenant would have been compensated via the scheme's insurers.

          "Under the terms of the protection scheme, there is nothing to stop a landlord keeping a tenant's deposit for the duration of the rental, as long as it is kept in a ring-fenced account and protected via the scheme," Hilton says.

          "Landlords need to be aware that the scheme offers them no protection in the event the letting agent disappears with the money. It was a badly worded law and, until the lettings business is properly regulated, these problems will continue to arise."

          A spokesman for the Association of Residential Letting Agents (Arla) says that had Tower been a member of Arla, Benn could have claimed from the association's Client Money Protection Scheme. "Landlords choosing an Arla member, or an agent who's part of its sister body, the National Association of Estate Agents, would be covered in the unlikely event that the agent disappeared along with the deposit."

          Although 90% of lettings agents are not affiliated to either body, Arla says its members account for about 500,000 of the 800,000 new tenancies signed each year.

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          • #6
            Originally posted by D Denby View Post
            My friend can't sue the new owner as the new owner states that they did not receive the 'Deposits' account from the vendor of the business. The vendor of the business is stating that they have transferred the acccount.
            What they claim is not important.
            What is important is what the contract between friend and agent says about who's holding deposit, which seems to be the agent, so that'd the buyer now and he'd be liable.
            Even if he's telling the truth that seller did not transfer money to him it only shows that he did not do his due diligence during the purchase, and that's coming back to hit him.

            It is the same as for your friend and his tenant: He did not receive the deposit but was still liable to the tenant.

            Originally posted by D Denby View Post
            The deposit was never in the custody of the LL, but the LL is ultimately liable if the LA runs off/goes bust. It's a loophole that is being exploited by dodgy LAs
            Exactly what I said: If you trust a third party to hold on to deposit that not a deposit scheme issue, and not a 'loophole'.

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            • #7
              Steven Hilton, of the National Landlords Association, which owns a 50% stake in MyDeposits, says her story, sadly, is all too common.

              "I have a great deal of sympathy for Ms Benn, but the problem is the deposit protection scheme was never intended to protect landlords – it is only there to help tenants get their money back. To be blunt, the scheme doesn't care about the landlord."
              That's not good enough. Little wonder we always recommend the DPS, at least we know the money is going to be there when needed.
              I offer no guarantee that anything I say is correct. wysiwyg

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              • #8
                Originally posted by D Denby View Post

                A spokesman for the Association of Residential Letting Agents (Arla) says that had Tower been a member of Arla, Benn could have claimed from the association's Client Money Protection Scheme. "Landlords choosing an Arla member, or an agent who's part of its sister body, the National Association of Estate Agents, would be covered in the unlikely event that the agent disappeared along with the deposit."
                Always chose an agent with client money protection insurance


                If the office was a franchise then surely they would still have rules about deposit money or client money protection.

                IMO the new office should pay and then claim from the old. They should be forced to pay by the franchisor; or they risk bringing the whole chain into disrepute.
                All posts in good faith, but do not rely on them

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                • #9
                  Originally posted by Bel View Post
                  Always chose an agent with client money protection insurance

                  If the agent is not a franchisee though then who would be able to make the claim if he did a bunk?
                  I offer no guarantee that anything I say is correct. wysiwyg

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                  • #10
                    Originally posted by jta View Post
                    That's not good enough. Little wonder we always recommend the DPS, at least we know the money is going to be there when needed.
                    Don't be so sure. We recently had a dispute with a tenant who had caused quite a lot of damage; the tenant wouldn't engage in the adr at first but when they eventually did the DPS said they would send out evidence forms - which they did on the 25th December, yes, christmas day, according to their paperwork.

                    We contacted them when we returned to work on the 4th January to say we had still not received anything from them. No response. Eventually it turned up a couple of days later; we turned it around the same day and it arrived back to them one day later on the 15th day. A week later we received a letter from the DPS to say that as we hadn't returned it within the 14 days they had given the tenant the deposit back in full and considered the case closed.

                    When we called them about it their stance is as follows: they maintain it went out on the 25th (even though they were closed according to their own website) and the landlord must comply with the 14 day rule 'regardless of whether or not it arrives in the post' When asked why they didn't respond to our call to say it hadn't arrived - which they agreed they received - or send it out via email, they said there was 'no need as a form had already been sent out'.

                    We asked whether they had made any allowance for the fact it was a bank holiday on the 25th and 26th and that there was another bank holiday the following week. Their reply was 'there is no need to as there was ample time for it to arrive even taking into account the bank holiday'

                    An official complaint was ignored and sent back with a repeat of the "read the terms and conditions" type reply.

                    So beware, even if you tell them a document hasn't arrived it doesn't stop the clock from ticking.

                    Our client is out +£600 with no where to go but to consider Court action against the tenant; simpler to blame us and ask us to cover the costs - which he did!

                    If anyone plans to use the DPS I would advise you read through the small print of the Terms and Conditions very, very carefully. There are a lot of trip hazards for the unwary landlord
                    My advice is not based on formal legal training but experience gained in 20+ years in the letting industry.

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                    • #11
                      There's also the option to sue the DPS.

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                      • #12
                        There are no grounds really.

                        We had already looked at that route via our solicitors in case the landlord wanted to do that; they thought we would have less than a 10% chance of success as they technically hadn't done anything wrong and had abided by their own rules, the same rules that we had to abide by - they'd just ignored the common sense approach to sending stuff out over the bank holiday season.

                        It would be throwing good money after bad, fortunately its one of the last deposits held by the DPS so we'll soon be rid of them and their version of the legislation..
                        My advice is not based on formal legal training but experience gained in 20+ years in the letting industry.

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                        • #13
                          You said:
                          DPS said they would send out evidence forms - which they did on the 25th December, yes, christmas day, according to their paperwork.

                          We contacted them when we returned to work on the 4th January to say we had still not received anything from them. No response. Eventually it turned up a couple of days later; we turned it around the same day and it arrived back to them one day later on the 15th day. A week later we received a letter from the DPS to say that as we hadn't returned it within the 14 days they had given the tenant the deposit back in full and considered the case closed.
                          This is hardly following their rules, imo.

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