A section 21 notice was ineffective because the landlord had failed to protect the tenant’s deposit when an assured shorthold tenancy continued after the expiry of the fixed term
New statutory rules aimed at safeguarding residential tenants’ deposits came into force on 6 April 2007 in England and Wales. As a result, deposits paid by assured shorthold tenants must be protected with an approved scheme and tenants must be sent prescribed information confirming that this has been done.
Landlords who fail to comply with the legislation are liable to pay financial penalties and, if the deposit is not protected, cannot serve effective section 21 notices on their tenants. This means that they will be unable to give two months’ notice to terminate the tenancy on the ground that it is an assured shorthold tenancy, which the landlord wants to end.
The issue that arose in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669 was whether the rules apply to deposits paid in respect of assured shorthold tenancies in existence on 6 April 2007, which have since “rolled over” to become statutory periodic tenancies. The legislation requires landlords to protect deposits when they are “received” – but when, precisely, did this occur? Was it before, or after, the legislation came into force? The tenant argued that the legislation was enacted to protect deposits and should be interpreted accordingly.
The Court of Appeal upheld the tenant’s claim. It ruled that the landlord had received the deposit in 2008, when the tenancy became a statutory periodic assured shorthold tenancy. Section 5 of the Housing Act 1988 operated to replace the old fixed-term tenancy with a new and distinct statutory tenancy containing a requirement for a deposit equivalent to the deposit previously paid by the tenant. The tenant’s obligation to pay, and the landlord’s right to receive, such a deposit were satisfied by the landlord continuing to hold the deposit previously paid by reference to the new tenancy (failing which, the deposit would provide security only for liabilities under the original fixed term tenancy, which would make no sense at all). Consequently, the landlord should have complied with the legislation.
What then is the position if private landlords have been caught out by the requirements? The court took the view that late compliance with the requirement to tell a tenant how its deposit has been protected will enable a landlord to serve an effective section 21 notice (see section 215(2)), but that this would not appear to be the case where deposits have not been protected at all. Consequently, the court suggested – without actually deciding the point – that a landlord may have to return an unprotected deposit to its tenant before being able to serve an effective section 21 notice to terminate its tenancy.
The court did not need to consider what the financial penalty for non-compliance should have been, because the tenant did not ask the court to award one. However, landlords will be concerned about the financial penalties for which they may be liable as a result of this decision.
Some have been asking whether the decision also means that landlords must re-protect tenancy deposits, and tell tenants that they have done so, when any assured shorthold tenancy continues after the expiry of the contractual fixed term. Unfortunately the scope of the decision is unclear. It is understood that authorised tenancy deposit schemes are discussing the implications with the Department of Communities and Local Government.
Allyson Colby is a property law consultant
