Wear and tear

Tenancy deposits '“ payments taken by landlords to cover any damage found at the end of the tenancy '“ now need to be protected by law.

This was some time coming. Tenants and tenants' organisations had been complaining for years about landlords failing to return deposits unjustifiably, and tenants not being able to do anything about it because they were intimidated by the prospect of going to court.

Landlords' organisations, naturally, lobbied hard against compulsory deposit protection, saying that their research showed that the problem was a modest one not justifying the imposition of a nationwide scheme. To which the tenants' organisations responded that it was not the members of the landlord organisations which were the problem, but the rogue and amateur landlords who operated outside of them.

When the Housing Act 2004 was going through parliament it looked for a while as if the landlords' lobby had won. But then tenancy deposit protection crept in as a late amendment to the Act, and was duly made law. It is found in sections 212-215 of the Housing Act 2004. And therein lay the problem. No doubt due to the haste in which they were introduced, the tenancy deposit regulations have proved to be a nightmare in practice.

In action

This is how they are supposed to work: the tenant gives the deposit to the landlord. He then protects it with a government authorised tenancy deposit scheme and serves a notice on the tenant giving prescribed information (the regulations talk about a prescribed form but none has been prescribed as yet). This all has to be done within 14 days of the deposit being paid.

At the end of the tenancy, the property is checked. If there is any damage, the landlord will want to make a deduction from the deposit. However, if the tenant objects, and they are unable to reach agreement, the dispute can be referred to an independent arbitration where it should be resolved within about ten days of the paperwork being received. The money is then paid out in accordance with the arbitrator's decision. There are three government authorised schemes:

The deposit protection service (DPS): this is the default service. It is free but you have to pay the deposit money over to the scheme administrators.

My deposits: this is one of the two 'insurance based' schemes. It is owned partly by the National Landlords Association and is aimed mainly at landlords. Here the landlord can hold the money, but he has to pay to join the scheme and protect the deposit.

The dispute service (TDS): this is the other insurance based scheme, aimed mainly at letting agents. Here an annual fee is paid and the agent can protect as many deposits as he likes. TDS has had problems recently because of the cost of the arbitrations (apparently some agents have been referring disputes for as little as £5) and their fees were increased dramatically earlier this year. However, it remains the tenancy deposit scheme of choice for most agents.

The problem is that many landlords do not want to protect the deposit. They want to keep the money without restriction as they have always done in the past. However, the scheme rules cover this (or so it was thought) saying (or appearing to say) that if the deposit is not protected within 14 days of the date the deposit is paid, the tenant can go to court and claim a penalty payment of three times the deposit sum. Also, the landlord cannot serve a (valid) section 21 notice until after the deposit had been protected and the information notice served on the tenant.

Deposits in court

Inevitably many landlords failed to protect. Some because they didn't want to; others because they didn't know they had to. Cases began to come through the courts. First a trickle and then a flood.

There were two main problems. First, the penalty appeared to be a strict liability one. This was felt to be unfair as some landlords were technically in breach of the provisions but through no fault of their own. As the tenant had suffered no prejudice, it seemed grossly unfair that they should have a 'windfall' of three times the deposit sum, which for a high value letting can be a considerable sum. So judges were often hostile towards making the award.

Then there is the wording of the section, which, although apparently straightforward, is actually very complex with requirements being specified in one sub-section and then referred to in another in a confusing manner.

Most of the cases which come before the courts are possession claims based on rent arrears, where the tenant defends on the basis that the deposit was not protected and therefore the landlord is liable to pay the penalty, thus cancelling out the arrears and defeating the landlords claim. Other cases are brought after the tenants have vacated, and discover that the deposit is unprotected while trying to challenge the landlord's deductions. There are also quite a few cases about the validity of section 21 notices served when the deposit was unprotected.

Initial judgments

The first and one of the best known cases is Harvey v Bamforth [2008] 46 EG 119. Here the judge found for the landlords despite the fact that the notice was served out of time. However, although this case was an appeal, it was still a county court decision and therefore not binding on other judges.

The first binding decision was Draycott & Draycott v Hannells Letting Limited [2010] EWHC 217 (QB). In this case the judge found for the landlords. The Act, it was decided, did not itself impose any requirement that the deposit be protected within 14 days so long as it is protected before the matter comes to court.

There was then some discussion about section 213(3) which provides for the landlord to comply with the initial requirements of their chosen authorised scheme within 14 days. Did the DPS scheme (used by the landlord in this case) require landlords to protect within 14 days? A close reading of their rules showed that they did, but it was not an 'initial requirement'. And so the judge found for the landlords.

This was a relief for many landlords, but there was much muttering by tenants about a 'coach and horses' being driven though the act. There were also a number of questions still unresolved. A Court of Appeal, or, better still, Supreme Court decision was needed.

Protection not punishment

Tiensia v Vision Enterprises Ltd (t/a Universal Estates), brought jointly with Honeysuckle Properties v Fletcher and Others [2010] EWCA Civ 1224, involved possession claims where the tenant sought to offset the penalty award against the rent arrears. The question before the court was whether the penalty was payable or whether the landlords had redeemed their position by protecting the deposit late. Universal had failed to protect Ms Tiensia's deposit until several weeks after the initial court hearing in the case.

The Court of Appeal decision was not a unanimous one. The leading decision, given by Lord Justice Rimer, was for the landlords. This was on the basis that the language of the legislation (which all agreed was unfortunate) seems to indicate that it is not the failure to protect within the 14 days period which is important, but the failure to protect the deposit at all.

Therefore, the relevant time by which the landlord needs to have protected the deposit is the date of the court hearing. Not 14 days after the deposit money was paid, or the date when court proceedings are issued.

The judge also referred to the general obligation on parties to, so far as is possible, settle out of court, and pointed out that most landlords will protect the deposit if tenants write threatening court action. If they only do so shortly before the court hearing, then the tenant will have his remedy in costs. The purpose of the legislation was to achieve the protection of deposits, not to 'punish landlords'.

As far as landlords complying with the initial requirements of their scheme is concerned, this is only 'those requirements for protecting a deposit other than any time limit for doing so that may be imposed by the scheme'. Any differences or variations in the wording of the schemes' own terms and conditions will not therefore affect the landlords liability.

Tough choice

The dissenting (and elegantly worded) decision of Lord Justice Sedley is interesting. He felt that the majority decision effectively rendered the scheme a dead letter 'as no tenant could ever sensibly be advised to sue or counterclaim for the penalty'.

However, if the penalty was found to be payable as parliament no doubt intended, then this would have the effect of making the other sanction, involving section 21 notices, irredeemable.

'We are left with an intractable dilemma: to drain the legislative scheme of all effect by reducing the remedy for non-compliance to near-impotence, or to give what in my judgment was without doubt the intended meaning to the prescribed 14-day limit, with irreversible economic and proprietary consequences for landlords who fail, even if only through misfortune, to meet it,' said Sedley LJ.

Faced with the choice of emasculating the penalty for non-compliance or the prospect of landlords in default being debarred indefinitely from recovering possession, I think the court probably came to the right decision. However, it was a hard choice and it is right that Sedley LJ raised these issues. If this case is appealed to the Supreme Court, they may still be in issue.

Future hurdles

If this (or another) case goes to the Supreme Court, I hope they will also consider the situation where the failure to protect is discovered after the tenancy has ended and the tenant has moved out.

Some writers have held that it must be a condition of the schemes accepting a deposit that the tenancy is continuing (which would make this one situation where it would be worth bringing a claim for the penalty), but it would be helpful to have this confirmed. Also it would be helpful if there could be some clarification about when advance payments of rent are to be treated as a deposit.

This legislation was passed to protect consumers, and yet three Court of Appeal judges are unable to agree on its meaning. As Sedley LJ pointed out: 'Legislation like this is or ought to be written for lay people.' Isn't it about time it was?