Changes to Tenancy Deposit Rules

It is well known that since 6 April 2007 landlords of assured shorthold tenancies have been required to protect the tenant’s deposit in an approved tenancy deposit protection scheme. If the landlord failed to protect the deposit correctly (s)he would be ordered to pay a penalty of three times the amount of the deposit and either repay the deposit or pay it into an approved scheme. In this article we will refer to this as “the penalty payment”.  In addition, the landlord would be unable to serve a Section 21 Notice requiring possession.

This was interpreted very strictly in the tenant’s favour in the lower courts and as a consequence became a very important weapon for the tenant, with sometimes harsh results for the landlord who may have paid the deposit into the scheme late or paid it in but failed to provide the tenant with all of the required information.

However, in the case of Tiensia v Vision Enterprises Ltd [2010] EWCA Civ 1224 the Court of Appeal interpreted the provisions in such a way that the tenant’s sword was to be dramatically blunted. Thus, if the landlord pays the deposit into an approved scheme before the court Hearing, the tenant’s claim will fail and the tenant will not be entitled to the penalty payment although the landlord is likely to be penalised by having to pay the tenant’s costs where the deposit is protected only after the claim has been issued.

Further in the decision in a case Gladehurst Properties –v- Hashemi (2011) EWCA Civ 604 the Court of Appeal decided the Tenant’s right to seek the penalty payment was lost where even though the Landlord had been in breach, the tenancy had already been lawfully determined and thus had come to an end and the tenant had vacated the property.

However the High Court recently on quite similar facts found in a Tenant’s favour (Suurpere –v- Nice [2011] EWHC 2003). In Suurpere whilst the Tenant had left the property, at the date of the Hearing although in legal terms the tenancy had not determined.  The Tenant was found to be entitled to the penalty payment of three times the deposit for even though information had been provided to the Tenant before the Court Hearing (you would have thought therefore complying with Tierisia), but the information had been provided not by the Landlord but by the deposit scheme provider, and was not in the correct terms.  Therefore the Landlord had not complied with the prescribed information requirements at the date of the Hearing and as a result was required to pay the penalty payment of a sum equal to three times the deposit to the Tenant.

These three cases illustrate the minefield these deposit provisions still are and the need at the first sign of trouble to obtain legal advice.

Section 184 of The Localism Act 2011, which is likely to come into force in April 2012, will make yet further changes to this situation:

1. The landlord will have 30 days rather than 14 days to pay the deposit into the approved scheme and provide the required information to the tenant;
2. If the Landlord is in breach the court will have discretion as to the amount of the penalty payment which will be between one and three times the amount of the deposit;
3. The penalty will be payable even if the landlord complies with the scheme requirements before the hearing of the tenant’s claim;
4. The Tenant will be able to apply to the Court for a penalty payment even if the tenancy has ended.
5. The landlord will be able to serve a Section 21 Notice even if he did not comply with the scheme requirements within the set time limit as long as the deposit has been returned in full (or with agreed deductions) or following the tenant’s claim being decided, withdrawn or settled.

This part of the Localism Act 2011 is not yet effective and we understand the government intends to clarify these provisions before they come into effect.  The worry is they could be of retrospective effect, so a Landlord who thought under the old law (s)he  had until the Court Hearing to comply with the deposit scheme might find the law has changed and (s)he is retrospectively in breach.

The best advice, which we give every Landlord client of ours, is that they must comply strictly with the tenancy deposit provisions at the outset of the Lease and within 14 days of payment protect the deposit in the prescribed way and give the Tenant the correct notification.  Failure to do so has always been very problematic and if the Localism Act comes into effect retrospectively can be very costly indeed to a Landlord and very bothersome to the Tenant.

Again, the best advice is that these are complex rapidly changing provisions which if in doubt should be discussed with a solicitor. 

For advice at the outset of the tenancy, Julie Hughes or Doug Armstrong in our property department will be happy to help.  If later down the line it appears there may have been a breach and litigation is going to ensue, Rachel Stewart or Catherine Gamblin of our litigation team will be the people to speak to.