Landlord and tenant update

Tenancy deposit regulation is a case of 'if at first you don't succeed, try, try and try again'.

It came onto the statute book with the Housing Act 2004 and the regulations came into force in April 2007. However as the cases started to hit the courts it became clear that things were not working out as planned. Something had to be done.

Tenancy deposit had been a long time coming, and for years tenants organisations have been complaining about landlords pocketing deposit money for no good reason.

I wrote about this in an earlier article in December 2010 (see 'Wear and tear', Solicitors Journal Property Focus, December 2010).

When regulation finally arrived, it did four main things. It:

1. Required all deposits to be protected with a government authorised tenancy deposit scheme within 14 days of receipt

2. Required landlords and agents to serve prescribed information on the tenant, again within 14 days

3. Made 21 notices unenforceable if they were served before the deposit was protected and the prescribed information served and

4. Allowed tenants to claim a penalty of three times the deposit sum, if the landlords or agents failed to comply

Protection with a government-authorised scheme

There are three organisations authorised to run tenancy deposit schemes:

• The Deposit Protection Service (DPS), run by huge multi national organisation Computerserve plc. They operate the 'default' free custodial scheme.
• My Deposits, from the National Landlords Association with Hamilton Fraser Insurance. Originally aimed mainly at landlords their scheme now has a substantial agent membership.
• The Dispute Service (TDS), a not-for-profit organisation. Until recently they just ran schemes for regulated agents and large corporate landlords, but now have a new scheme, 'Deposit Guard', aimed at landlords, run in association with the Residential Landlords Association.

Service of prescribed information

The 'prescribed information' is set out in the Housing (Tenancy Deposits) (Prescribed Information) Order 2007 (SI 2007/797). Unfortunately although the information is prescribed there is no actual prescribed form, which would I think, have made things easier for landlords.

The Act is (for a statutory instrument) reasonably clear, but most landlords would rather gnaw their own arm off than read legislation in the raw, and need help to be compliant.

The DPS and TDS both provide forms for their members to use and My Deposits have an information page on their website. Nevertheless I suspect many landlords are ignorant of this (if indeed they are aware of the rules at all) and that even where the deposit is protected, the prescribed information part of the equation is left out.

This was not a huge problem before April 2012 but things have now changed, as we shall see.

Unenforceable section 21 notices

The section 21 penalty has worked reasonably well. The original regulations allowed landlords to protect out of time, so if a landlord got into difficulties with eviction proceedings, he could arrange for the deposit to be protected, serve the prescribed information, re-serve the section 21 notice and start again. Again though, this has now changed.

The three times deposit penalty payment

It is with the financial penalty that the real problems occurred. Government clearly wanted tenants to be able to bring a claim as soon as the 14th day had passed. However when claims started coming to the courts, judges thought otherwise.

One problem was that (if the penalty was payable) judges had no discretion about the figure awarded. Deposits can be for substantial sums, and judges often considered the award to be unfair. This inclined them to find reasons to avoid making it in the first place.

The matter came to a head with two cases. The first, Tiensia v Vision Enterprises Ltd (t/a Universal Estates) brought jointly with Honeysuckle Properties v Fletcher and Others was a Court of Appeal decision ([2010] EWCA Civ 1224). I discussed it in some detail in my last article, so suffice it to say here, that it decided landlords could protect deposits late, at any time up to the day before the hearing.

This case was in the context of a claim brought before the tenancy ended. What then was the situation after the tenant had moved out?

The subsequent 2011 Court of Appeal decision in Gladehurst Properties Ltd v Hashemi [2011] EWCA Civ 604 looked at this, and held that claims could not be brought after the tenancy had ended, at all.

These two cases thus rendered the penalty more or less unenforceable. Other than in extreme cases such as Boyle v Musso (Bristol County Court 25 October 2010), where the landlord not only failed to comply with virtually any of his legal obligations, but physically attacked and seriously injured the tenant to boot.

The Localism Act 2011 to the rescue

Tenancy deposit enforcement regulations having been left in tatters by the lords, government girded its loins and tried again.

The Localism Act 2011(section 184), which came into force on 6 April 2011, was the vehicle for this, and the rules are now amended as follows:

1. Landlords (and agents) now have up to 30 days to protect the deposit and serve the prescribed information on tenants. This is welcome as the 14 day limit was difficult to comply with, bearing in mind the time it can take for cheques to be sent by post and payments transferred between bank accounts.

2. After the 30 days, although the deposit can still be protected late, this will no longer provide any defence to a claim by the tenant for the penalty payment.

3. The amendments also allow tenants to bring claims after the end of the fixed term. This is good news, as in most cases it is only after the tenancy has ended, and the tenant seeks the return of his deposit, that the non protection comes to light.

4. The penalty sum has changed and is now between one and three times the deposit, the precise amount to be decided by the judge.

5. So far as section 21 notices are concerned, it will now no longer be possible to rectify a notice which is invalid due to late protection of the deposit, by protecting out of time. The only way landlords will be able to serve valid section 21 notices will be if:

• they pay all the deposit money back to the tenant (an unappealing prospect); or
• they are authorised by the tenant to offset all or part of the deposit against rent or damage (unlikely if they are in dispute); or
• if the tenant has brought a claim for the penalty '3 times deposit' award which has been resolved, either by settlement or court order.

Faced with all this, landlords are going to have to get real and protect. There is still a lot of ignorance 'out there' though '“ I spoke to a client only the other day who appeared to think her failure to protect was reasonable because she 'did not know about it'.

Transitional provisions

I am writing this article a few days before the new provisions come into force. The regulations are going to be retrospective and will apply to existing AST deposits as well as future payments. However landlords will be given a 30 days 'grace period', ending on 6 May 2012, during which they can protect and avoid the penalties.

There are however two interesting potential problems which have been identified by solicitor David Smith of Anthony Gold, writing on his firm's blog (https://blog.anthonygold.co.uk).

He has suggested, firstly that: 'the new order states specifically that it will apply to any assured shorthold tenancy in effect on or after 6 April 2012. This would seem to suggest that it will apply to any AST in existence on 6 April 2012, irrespective of when it began or when the deposit was taken.'

So landlords where deposits were taken pre-2007 who believe the regulations do not apply to them may find they are now mistaken.

Second, there may be a problem in the future with tenancies which convert to ASTs from common law or some other tenancy type: 'As these tenancies will come to be 'in effect' after 6 April 2012 then they will presumably be subject to the tenancy deposit protection provisions. As these require the deposit to be protected within 30 days of receipt (which will probably have occurred a long time previously) then it would seem to be the case that a landlord will automatically be in breach of the requirements and at risk of being penalised.' This is a worrying prospect.

What advice should you give to your clients?

I would suggest that you contact all clients who you know are renting property on ASTs. Ask them to check that all deposits are protected and that they have served the prescribed information.

If for any reason this has not been done, they should be advised to protect immediately. If they fail to do this, they will be laying themselves open to a claim by their tenants, which they will not be able to defend, for what could be a considerable sum of money.

You should also suggest that if there are any tenancies, which could for any reason convert to an AST in the future, any deposits paid should also be protected before 6 May 2012.

I suspect however that many landlords will continue to fail to protect, and will have a nasty shock when their case comes to court.