News Review: Scotland


Scottish tenancy deposit protection will change market by


Stuart Pender, partner, Lomond Capital


Four years after the introduction of tenancy deposit protection in england and Wales the Scottish parliament has given the green light to extend the scheme to north of the border. it is scheduled to come into effect early next year.


While the decision to


extend the scheme to Scotland is to be welcomed it does provide some major challenges, as well as opportunities, to the Scottish landlord and agency sector. the two schemes have


one significant difference. in england and Wales landlords must safeguard tenants’ deposits by using one of three government approved schemes: the deposit Protection Scheme, tenancy deposit Scheme or my deposits (formerly tenancy deposits Solutions) another insurance backed scheme. the crucial difference


with the regime proposed for Scotland compared to that currently operating in england and Wales is that agents south of the border can continue to hold their tenants’ cash but buy insurance to protect their interests. in Scotland landlords


and agents will no longer be able to hold the cash. cash presented as deposit must be handed over for safekeeping. However landlords will incur no costs when handing over


the deposit to a third party. this inability to operate as a cash-holding body has worrying implications for firms.


A capital problem Scottish landlords are used to operating under a model where tenants’ deposits have been available to be utilised as working capital to a large extent. this was not an irresponsible assumption to make. given the nature of the business it was always highly unlikely that all deposits that they held would need to be returned in one go, so using the large cash balances held to fund working capital was a rational business decision. the introduction of the


tdP makes this model redundant. For many firms this will now mean an urgent need to inject new capital and funding into the business. and quickly, because


after only nine months of the scheme becoming operational all landlords and agents must have transferred all deposits they are holding on behalf of tenants into the administrator’s scheme. those landlords with relatively few properties will not come into any undue hardship as the sums involved will not be significant. Similarly, for those agents who are well- capitalised and who manage clearly segregated client deposit accounts this will not be an issue. But if an agent has been


relying on utilising the large cash balances he or she holds to fund working capital this may well now mean an


urgent need to inject new capital and funding into the business.


A tight timetable By the start of 2012 landlords and agents will need to have fully reconciled every deposit that they are holding for each tenant and have the cash sitting available to hand it over to the administrator as the tenancy renews or the nine month deadline is reached. this could have unforeseen consequences should the landlord or agency sector have difficulty in complying with this timescale. Hotspots like edinburgh are already experiencing a severe shortage of available, good quality property to let. the average deposit is


usually one month’s rent plus in some cases an initial holding deposit. With the average rent for a two- bedroom flat in edinburgh now in excess of £700 per month this means the average deposit held is around £900. that means for even a moderately small letting agent, managing say 400 properties, the sums they will need to transfer equates to somewhere in excess of £350,000.


Find the cash or exit Such sums will inevitably have some businesses searching for a capital injection or even questioning the rationale of remaining in the market – especially in the Scottish property hotspots. Firms finding themselves


in this predicament need to partner with a well- capitalised


organisation mortgage introducer APRIL 2011 19


that can help them comply with the new requirements or, should they still feel the demands are too onerous, offer an exit strategy. Landlords looking to


expand their portfolios and new landlords considering entering the sector already face challenges in raising the funding due to the restrictions of supply of buy- to-let mortgages. any further increase of bureaucracy could leave would-be landlords feeling that it is just too much hassle for the returns available. one solution would be


to utilise a reputable agent to manage this on their behalf. in doing so, landlords can accurately budget for year-on-year income and expenditure and be secure in the knowledge that their investment will be well- managed and their tenants of the highest quality.


KEY DIFFERENTIALS OF THE TENANCY DEPOSIT SCHEME IN SCOTLAND


• Provisions are only made for a custodial scheme. In England and Wales landlords can retain deposits for the duration of the tenancy having used an insurance backed scheme • The scheme or schemes must be free for landlords and tenants to access • Dispute resolution must be provided at no cost to landlord or tenant • Landlords will have 30 days to protect a newly received deposit and notify the tenant


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