New Tenancy Deposit Ruling Puts Thousands of Landlords at Risk

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Tenancy Deposit Protection (TDP) is a system whereby Assured Shorthold Tenancies (AST’s) have their deposit protected. Deposits are required to be registered by the landlord with a relevant scheme within 30 days from the date of receipt. Furthermore, it is a requirement that prescribed information must be given to the tenant within that same time period.

Failure to register the deposit or give the prescribed information can result in the following sanctions:

  • A court order that the deposit is returned or is placed into a deposit protection scheme
  • A court order that the landlord pays a further sum to the tenant which can be 1-3 times the value of the deposit
  • The landlord is unable to give notice under s21 of the Housing Act 1988 at any time when the deposit is unprotected or the prescribed information has not been given.
  • There is very limited discretion for the court when applying these penalties. This tends to result in decisions being made in the tenant’s favour.

Deposits and Renewal

In the recent case of Super Strike Ltd v Rodrigues (2013) EWCA Civ 669 the Court of Appeal considered the position regarding a deposit taken before the deposit protection legislation came into effect in April 2007.

The facts of the case are, for once, relatively simple. Rodrigues obtained a tenancy from Superstrike which began in January 2007 for a term of 12 months. Rodrigues paid 1 month’s rent as a deposit at the beginning of the tenancy. In January 2008 the tenancy became a statutory periodic tenancy. Superstrike eventually served a s21 notice to seek possession of the property. This was challenged by the tenant and it eventually came before the Court of Appeal.

The main grounds for the appeal were that the statutory periodic tenancy began in January 2008 and a deposit was received which fell under the deposit protection requirements. Failure to protect the deposit by the landlord meant that the s21 notice was invalid.

There were two questions before the court:

Did the statutory periodic tenancy constitute a new tenancy; and

Had the deposit been “received” by the landlord in respect of the January 2008 tenancy.

The court dealt with the first question quickly and held that a statutory periodic tenancy is deemed a new tenancy.

With regard to the second question, as well as the deposit being received in January 2008 the landlord argued that receipt means “physically received”. Physical receipt, said the landlord, has to mean payment by cash, cheque, bank transfer or in some other way from the tenant to the landlord or their agents.

However, the court did not agree and accepted the tenant’s argument that a new tenancy constituted a new contract so the deposit had to move between contracts. If there was no movement of the deposit then the deposit held for the first tenancy would not be able to be used in respect of the new tenancy. This means that there must be a mechanism to transfer the deposit between tenancies and this is what had been agreed – even if it was not expressly referred to.

Theoretically the landlord should have returned the deposit at each renewal, with the tenant then paying the same amount to the landlord as a deposit for the new tenancy.

It was ruled that payment was deemed to have been received in January 2008 – which is after the tenancy deposit legislation came in to force. The new tenancy deposit had not been protected and the s21 notice was therefore invalid.

Superstrike Issues

This ruling raises issues for an unknown number of landlords who took deposits before April 2007. It was estimated by the Department of Communities and Local Government that around 10,000 landlords may be affected. However, there is a wider issue; if a statutory periodic tenancy is a new tenancy then so is a fixed term renewal. A fixed term renewal is where the fixed term of the tenancy comes to an end and the tenancy agreement provides that a new tenancy will be created upon expiry of that fixed term if neither party has served notice for the tenancy to end. If there is a new receipt for each periodic tenancy then this must apply in the same way for a fixed term renewal. The obligations on receipt are two fold; the landlord is obliged not only to protect the deposit but also to serve the prescribed information which. This is supposed to be done within 30 days, otherwise the landlord can incur the financial penalties referred to above.

The initial requirements are not problematic if a deposit has been with a scheme from the start of the tenancy, but if a tenancy is renewed to either be a fixed term or a statutory periodic tenancy then there appears to be a requirement to serve the prescribed information on the tenant again. The landlord will only have 30 days from the renewal of the tenancy to do this. This is an issue that will catch a much wider and ever increasing number of landlords.

Solutions?

Former Housing Minister, Mark Prisk, has stated that it was not the intention of the legislation, when it was drafted, for a requirement that deposit protection information should be served on renewed tenancies.

However, it appears that the only answer will be further corrective legislation. The suggested solution is to insert the word “first” before “receipt” to make it clear that the deposit protection and prescribed information requirements are only intended to apply at the time the deposit is initially received for the first fixed term tenancy, rather than applying to every further renewal of that tenancy.

It has been made clear that this amendment to the legislation will not be dealt with until after the 2015 general action. The position at the moment is that as the Superstrike judgment is a Court of Appeal decision judicial precedent applies and the lower courts in England and Wales shall be bound to follow it. It remains to be seen how many s21 applications will be rejected by the courts due to the landlord’s failure to comply with the legislation and at what cost this will be to those landlords.

Another effect is that if a landlord cannot use s21 they will have to seek to remove a tenant through the s8 procedure, which can be difficult without any breach of the tenancy by the tenant and at a greater cost to the landlord.

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