Jonathan Seitler QC and Miriam Seitler debate moot points in property law – this time, it is tenants’ deposits.
Question: Is the balance right on residential tenancy deposits?
NO: Jonathan Seitler QC, barrister at Wilberforce Chambers, says:
1. The law on tenancy deposits requires the landlord to undertake two key steps at the commencement of an assured shorthold tenancy. These rules are found in Sections 212-215 of the Housing Act 2004 (the 2004 Act), and have been amended a number of times, most recently by the Deregulation Act 2015.
A landlord is required, within the first 30 days of receiving a deposit, to (a) protect the deposit in an authorised deposit scheme and (b) give the tenant the prescribed information relating to the scheme. The content of that information is in the Housing (Tenancy Deposits) (Prescribed Information) Order 2007. The courts have taken a tough line regarding the information as of real importance to a tenant which cannot be regarded as mere procedure: Ayannuga v Swindells [2012] EWCA Civ 1789; [2012] PLSCS 236. However, it is unrealistic and uncommercial to expect the landlord to act this quickly with such precision. It’s red tape, and clogs up the smooth working of the lettings market.
2. The financial consequences for the landlord of failing to comply are completely disproportionate. The landlord faces major financial penalties for non-compliance. Section 214 of the 2004 Act provides that, in the event of non-compliance with either of the requirements: (a) if the tenancy has not ended, the court must order the person who appears to be holding the deposit to repay it to the tenant or to protect it within 14 days; (b) if the tenancy has ended, the court may order the person who appears to be holding the deposit to repay all or part of it to the tenant within 14 days; and (c) the court must order the landlord to pay the tenant a sum of money not less than the amount of the deposit and not more than three times the amount of the deposit within 14 days of the order.
The wording of section 214(4) is mandatory: the court must make a penalty order, only the amount is within its discretion (albeit within the limits mentioned). If the landlord has failed in multiple respects, by not protecting the deposit and not serving the prescribed information, it potentially faces multiple penalties, each of up to three times the value of the deposit. Moreover, the effect of the reasoning in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669; [2013] 2 EGLR 91 – that a statutory periodic tenancy which comes into being at the end of a fixed-term tenancy is a new tenancy – means that the landlord could possibly be on the hook for multiple breaches in respect of multiple tenancies and therefore facing an extortionate penalty.
3. The further, and often even more painful, consequence of non-compliance is that a section 21 notice requiring possession of the property cannot be served if the deposit was not protected within 30 days of receipt, and if the prescribed information has not been given: section 215(1).
Late compliance will not be sufficient; in these circumstances the landlord will face a financial penalty and be unable to recover possession of the property. Section 215(1) will even prevent the landlord from serving a section 21 notice in circumstances where the deposit was received before 6 April 2007 (ie before the rules on tenancy deposits were even introduced); the landlord will have to protect the deposit before it can serve a section 21 notice.
4. Aside from the financial impact, a tenant’s claim for deposit penalties is often hugely disruptive for the progress of any claim the landlord may have. The tenant’s claim is often brought as a counterclaim to a claim for possession. If brought in response to a claim based on section 21 of the Housing Act 1988 (the 1988 Act) it will act as a defence to the claim and will seriously delay the possession claim, if not defeat it entirely.
Even if the counterclaim only seeks financial penalties, in practical terms, the landlord’s possession claim can become bundled with other issues and listed for a trial in the future. If brought in response to a claim based on section 8 of the 1988 Act, a section 214 claim is used to set off against rent arrears as a defence where the landlord relies on grounds 8, 10 and 11, and will delay the possession claim if not defeat it.
5. As if the 2004 Act hadn’t caused enough problems, don’t forget the Tenant Fees Act 2019, in force from 1 June 2019. A deposit in excess of (a) the amount of five weeks’ rent, where the annual rent in respect of the tenancy immediately after its grant, renewal or continuance is less than £50,000, or (b) the amount of six weeks’ rent, where the annual rent in respect of the tenancy immediately after its grant, renewal or continuance is £50,000 or more, will be a prohibited payment. There are financial penalties for excessive deposits and no section 21 notice may be given in relation to that tenancy so long as all or part of the excessive deposit has not been repaid.
In the 13th century, the master of Balliol College is reputed to have brought in a rule that anyone who walked on the college lawn would be hanged. He justified it by saying the onerousness of the penalty meant he would never have to hang anyone, and the lawn would be perfect. However, this made life a misery: everyone lived in fear of falling foul of the rule by accident. The same is true with these wretched regulations.
YES: Miriam Seitler, barrister at Landmark Chambers, says: “Oh, come on.”
1. Is it really too much to ask a landlord to protect the deposit through one of a number of user-friendly schemes, and pass on the key information to the tenant about where and for what purpose their money is being held?
In practical terms, this is really an administrative process which can be completed with ease, even without the assistance of an experienced letting agent.
The 2004 Act originally gave the landlords 14 days to complete these simple tasks, but this has since been extended to 30 days.
Given the obvious importance of this sum of money to the tenant, and the limited amount of effort required by the landlord, one month shouldn’t unduly rush the landlord to complete these simple tasks.
2. The consequences on section 21 and the ability to recover possession have been overplayed; in this respect the breaches are remediable. A landlord can avoid the effect of section 215(1) by returning the deposit to the tenant in full or with agreed deductions: section 215(2A)(a). Therefore, a landlord who needs possession quickly and knows, or suspects, it has not protected the deposit correctly should return the deposit before serving a section 21 notice, thus precluding the tenant from any defence based on section 215(1).
The restriction on serving a section 21 notice will also not apply when an application to the county court has been made under section 214(1) (financial penalties) and has been determined, withdrawn or settled by agreement. Finally, if the landlord’s only breach has been failure to serve the prescribed information within the 30 days or at all, this can be remedied by serving the information late.
3. Section 215B should not be overlooked. If a deposit has been received by a landlord on or after 6 April 2007, in connection with a shorthold tenancy (“the original tenancy”) and a landlord protects the deposit and serves the prescribed information during that tenancy, regardless of whether done so within 30 days of receipt, and a new shorthold tenancy comes into being on the coming to an end of the original tenancy or a tenancy that replaces the original tenancy (directly or indirectly) and, when the new tenancy comes into being, the deposit continues to be held in connection with the new tenancy in accordance with the same authorised scheme, the requirements of section 213(3), (5) and (6) are treated as if they had been complied with by the landlord in relation to the deposit.
In short, even where the landlord has complied but complied late, in relation to the replacement tenancy the landlord will be treated as having complied and therefore will be able to serve a section 21 notice in respect of that replacement tenancy and recover possession.
4. The amount of the penalty will be dependent on the particular circumstances. The question of culpability is the most relevant factor in determining what order to make: Okadigbo v Chan [2014] EWHC 4729 (QB). The court is likely to consider many factors, including: whether the landlord corrected the failure; how quickly the landlord corrected the failure; the reason for the failure; and the landlord’s experience or lack thereof in letting property, including any assistance it had or should have had from letting agents or other experienced professionals. It is surely fair that the punishment is tailored carefully to fit the crime.
Further, the county court has been seen to reject the argument that a penalty is payable per breach, rather than per tenancy – see Howard v Dalton (County Court at Dartford, 7 May 2019, unreported) – so the hysteria around the possibility of penalties dozens of times the value of the deposit is unwarranted.
The courts appear unwilling to punish a landlord cumulatively for failing to protect the deposit and failing to provide the prescribed information.
5. The interplay between sections 212-215 of the 2004 Act and section 21 will be up for discussion again given the government’s decision to abolish section 21 of the Housing Act 1988 and improve the implementation of section 8, which is currently undergoing consultation. Failure to comply with the deposit requirements does not currently prevent service of a section 8 notice, so abolition of section 21 without more would sever the connection between deposits and entitlement to possession.
Whether this will change is currently unknown; the balance in relation to tenancy deposits may yet be on the cusp of reform!
