James Driscoll considers the limitations of tenancy deposit schemes
Deposits are often taken by landlords when they grant an assured shorthold tenancy (AST). This provides the landlord with some redress at the end of the tenancy if the property has been damaged or rent is owing. However, experience has shown that many tenants find it difficult to recover the deposit and there was little by way of dispute resolution if the parties could not agree on its return.
Significant reforms were introduced by the Housing Act 2004 (sections 213 – 215 and Schedule 10). Any deposit taken must be protected with one of the tenancy deposit schemes (TDS) set up under the Act and dispute settlement is available. Failure to comply allows the tenant to recover the deposit and a penalty of up to three times the deposit. A further sanction is that the landlord cannot use the mandatory possession ground for ASTs under section 21 of the Housing Act 1988 if the landlord has not protected the deposit or has breached other TDS provisions.
The raising of the upper rent limit for ASTs from £25,000 to £100,000 in October 2010 extended the TDS to more tenancies and the TDS is by now well known. Landlords that accept a deposit must protect it either by paying it into a custodial scheme or retaining it and taking out insurance to protect the deposit. Under the initial requirements of the TDS, the landlord must notify the tenant of where and how the deposit has been protected within 14 days of receipt. Prescribed notices have been made in secondary legislation. Alternative dispute resolution is available if a dispute arises over the return of the deposit at the end of the AST.
It all sounds simple, so what has gone wrong? A series of decisions, including two in the Court of Appeal, revealed shortcomings in the legislation. In Vision Enterprises (t/a Universal Estates) v Tiensia [2010] EWCA Civ 1224, the landlord failed to comply with the initial requirements but later complied by returning the deposit. It was held that compliance before the tenant started proceedings or by the date of the hearing afforded a defence and the penalties do not apply. In Hashemi v Gladehurst Properties Ltd [2011] EWCA Civ 604, the Court of Appeal held that the penalties no longer apply once the tenancy has come to an end.
Localism Act 2011
How have the provisions been amended? Section 184 of the Localism Act 2011 amends sections 213 (requirements relating to tenancy deposit schemes), section 214 (proceedings relating to tenancy deposits) and section 215 (sanctions for non-compliance) of the Housing Act 2004. These changes came into force on 6 April 2012.
Section 213 of the 2004 Act sets out the initial requirements for a landlord when it receives a deposit on granting an AST. One of these is to give the tenant information about the scheme. The information, as prescribed, includes the contact details of the scheme and a statement of the tenant’s rights. Originally this had to be done within 14 days from the date the landlord received the deposit, and this period has been increased to 30 days of receipt. No changes have been made to the information prescribed.
The next set of changes are to section 214 of the 2004 Act. Under the amended version the tenant may make an application to the county court if the provisions of section 213 have not been complied with in relation to the deposit. Under a new section 214(1A) this also applies in a case where the tenancy has ended, and in such a case the reference to the tenant is to a person who was a tenant under that tenancy.
Under additional amendments to section 214 a distinction is drawn between court applications where the tenancy has not ended and cases where the tenancy has come to an end. In the former case the court must be satisfied that the landlord has not taken steps to protect the deposit or has failed to give the prescribed information within 30 days of receipt of the deposit. In the latter case, the application can be made whether the tenancy ended before or after the date of the application (new section 214(2A)).
As a result, a former tenant whose deposit has not been returned or dealt with in accordance with the statutory provisions can take court proceedings even though the tenancy has ended, whether it ended before or after the application.
What of the orders that can be made? It remains the case that the court must order the return of the deposit but the additional sums, representing three times the deposit, is changed. Now the court has a discretion to order the landlord to pay a penalty of not less than the deposit and not more than three times the deposit. As a result, a court can now draw a distinction between a case where the landlord genuinely made a mistake and where the failure to comply was quite deliberate. The courts are often hostile to “penal” sanctions, particularly where they consider that the defaulting party simply made a mistake.
As to the prohibition of serving a section 21 notice seeking possession, the 2011 Act amends the provisions in section 215 of the 2004 Act. As amended, there is no such prohibition where either the deposit has been returned to the tenant (or a lesser sum, if this is agreed between the parties) or where either the court has made a determination on any application under section 214 or the application has been settled or withdrawn.
A workable scheme?
These largely technical changes may make the TDS appear fairer to landlords and tenants.
However, the transitional provisions on implementation are far from clear. Reading them along with the statement on the changes published on the Department for Communities and Local Government’s website ( http://tinyurl.com/cd24onc ), it appears that the amended provisions will apply to all ASTs granted on or after commencement where a deposit is taken, or where an existing tenancy comes to an end on or after 6 April 2012.
The amended provisions also apply to ASTs where a deposit was taken before 6 April 2012 with modifications (paragraph 16 The Localism Act 2011 (Commencement No. 4 and Transitional, Transitory and Saving Provisions) Order 2012). If the landlord has failed to protect that deposit, or having protected it has yet to give the tenant the prescribed notice, in either case landlords have just 30 days from 6 April 2012 to put matters right. For any landlord who fails to act within this deadline, the consequences could prove expensive.
James Driscoll is a solicitor, author and visiting professor of law at the University of Essex
