Safe as houses

Mandatory protection of residential shorthold tenants' deposits was introduced by the Housing Act 2004 at sections 212-215 in one of three government-approved schemes. Two of these schemes, namely the TDS and MyDeposits, were insurance-based, the other '“ the DPS '“ was a custodial scheme.

The new law also provided that where a landlord failed to comply with the requirements of the Act the courts would have the power to order the return of the whole deposit back to the tenants along with compensation from the landlord to the tenant of three times the amount of the deposit.

There has been much litigation in the lower courts over the precise interpretation of the Act, as well as many thousands of adjudications dealt with by the schemes themselves during which the subject of registration and initial compliance is raised as an issue.

While a number of these county court cases have found their way into the legal press, there was no binding precedent until the judgment in the first appeal to the High Court in the case of Draycott v Hannells Lettings Ltd [2010] EWHC 217 (QB). The ruling, given earlier this month, therefore provides some initial guidance on the view that the courts will take.

Three issues were put before the court in this case:

1. Was there a breach of section 213(6) of the Act in failing to register the deposit and give the prescribed information to the tenants within 14 days?

2. Could an agent himself '“ as opposed to a landlord '“ be held liable for a failure to protect a deposit or was it entirely a matter for the landlord?

3. Can an order under section 214(4) be made once the deposit has been lodged with the scheme?

Initial requirements

The first issue was the most complex and was judged to rest on the actual construction of the individual scheme's requirements. It was agreed that section 214(4) allowed the imposition of a penalty for breaching an 'initial requirement'. Initially, none of the three schemes had formally established that the 14-day period was part of their initial requirements even though it is specifically mentioned in the Act itself. The two insurance-based schemes had, however, amended their rules to remove any potential ambiguity but this was not the case with the DPS.

While the DPS rules had a clause stating that the deposit should be placed with them within 14 days of receipt of the deposit, this was not made an initial requirement. Mr Justice Tugendhat found this to be insufficient and that merely repeating verbatim the words of the Act did not necessarily mean that the 14-day time limit would necessarily be considered an 'initial requirement'.

On the second point, it was decided that any reference to landlord or landlords should 'include references to a person or persons acting on his or their behalf in relation to the tenancy'.

While this ruling was almost certainly expected, it is nonetheless good that agents clearly realise that they cannot avoid the rigours of the Act and therefore must ensure good practice with regard to deposit protection which surely was the intention of the Act.

Regarding the final issue, the court noted that the judge at first instance stated that if section 213 (6) regarding the 14-day requirement did not attract the sanctions of section 214 then this would be tantamount to 'a coach and horses' being driven through the legislation as it would de facto permit landlords not to protect a given deposit until such a time as they were actually challenged in court. The High Court, however, took a different view, accepting the argument that the landlord would still be penalised under section 215 which prevented the serving of a section 21 possession notice while the deposit remained unprotected.

It is worth noting, though, that in cases where the deposits were not registered until after the proceedings were brought or where landlords try other 'avoidance measures' then there is nothing in this case that would stop a judge from wielding the full force of the legislation as happened in the case of Da Costa v Pinter (Bromley County Court, April 2009). The judge was satisfied that the 'initial requirements' of a tenancy deposit scheme were not met and that the remedies of sections 213 and 214 therefore applied, namely the return of the deposit and an award of three times the deposit. Giving judgment, DJ Burn stated:

'Landlords who describe a deposit as something else, who do not secure it promptly in a deposit scheme as required by the Act, then fail to return the deposit when the tenant leaves (especially if this is without good cause, thereby forcing the tenant to start court proceedings to recover the money) but who then at the last minute after the tenant issues proceedings, pay the deposit into a scheme, are clearly flouting the spirit of the legislation and, on my interpretation, the letter also.'