The custodial scheme:

The insurance-based option:

Currently a fair sum of money is taken from a tenant, held safely for the duration of the rental, and returned minus any costs for non-wear and tear type damages (the textbook answer). In reality this does not work and gives rise to endless disputes and potential unwanted costs.

How Will the New Scheme work? What will it mean in practice for landlords and tenants?

From 6th April 2007 all landlords in England or Wales renting out property under an assured short hold tenancy (AST) will have to sign up to the scheme and abide by its regulations. Designed to safeguard tenants' money, the new scheme hopes to put an end to the protracted wrangling between landlords and tenants through a new alternative dispute resolution (ADR) service.

There will be a legal obligation for landlords who take a deposit to join one of two types of scheme: -

A custodial Scheme and an Insurance Based Version

The deposit given by the tenant is handed straight over to the custodial scheme. At the end of the tenancy, if the landlord and tenant agree how the deposit should be apportioned, either party can notify the scheme, which will pay out the money as agreed.
 

The custodial scheme is free for both sides to use, but part of the interest accrued on the deposit will be used by the administrators to pay for the running of the scheme. The remainder will be given to the tenant/landlord. If there is a disagreement over the deposit, they can turn to the alternative dispute resolution service (ADR). But if both parties agree to use the ADR service, they have to respect its verdict.
 

If one or more sides want to opt out of the ADR, they are free to take their differences straight to the legal system

It is thought likely that landlords will prefer to join an insurance-based version of the scheme, where they pay a fee to an appointed third party, but hold onto the deposit themselves. If there is a problem at the end of the tenancy the landlord will be obliged to hand the disputed amount of money over to the administrator until both parties come to an agreement, usually via the ADR service.
 

Penalties For Avoidance

Big penalties are planned for landlords who take deposits without joining a tenancy deposit scheme, but the hassle and costs involved could mean some landlords will try to avoid the schemes entirely.

They may, for example, forgo a deposit but insist on there being a guarantor to foot the bill if the tenants have damaged the property. And some may be tempted to ask for two months' rent in advance instead, but, if challenged in court, this may be viewed as a hidden deposit.

The New Deposit Scheme: What Will It Mean For Landlords?

If you choose the insurance-based scheme you will need to pay a fee (as yet undecided). If there is a dispute you will have to transfer the amount that is under dispute to the scheme until an agreement is reached.

The custodial scheme will be free to you, but you will have to pay over the whole amount of the deposit.
In the event of a disagreement the disputed amount will remain in the scheme until a decision is made.
If you don't lodge the deposit with a scheme, you may be unable to regain possession of the property, and be fined three times the deposit amount.
When the new law comes into operation, if there is a disagreement between landlord and tenant at the end of a tenancy, all details of the dispute, along with the deposit money that cannot be settled, will be sent to the Independent Case Examiner for the Scheme.
This will then be subject to independent third party adjudication, which will then apportion the deposit money. They will make their decisions based on standard and detailed tenancy documentation. Inventories and check out reports are vital to this process and without them there will simply be no case to answer.

The tenant will undoubtedly receive their full deposit back and the landlord could be seriously out of pocket.

Independent inventories will undoubtedly carry the greatest weight in these cases.