Residential: tenancy deposits

An improving situation

26 August 2015

Robert Mullarkey explains the current situation regarding tenancy deposits

The law of tenancy deposits has caused headaches for landlords and agents since its introduction in the Housing Act 2004 (HA 2004). Unexpected decisions and changes in later legislation intended to reverse them have meant that the law surrounding this area has altered significantly since it came into effect.

Since 6 April 2007, a landlord or letting agent who receives a deposit in relation to an assured shorthold tenancy (AST) must protect it in an authorised scheme. Chapter 4 of the Act sets out the requirements relating to tenancy deposits (section 213) and sanctions for noncompliance (sections 214 and 215).

Failure to protect a tenancy deposit and serve the ‘relevant person’ with the prescribed information (PI) holds both practical and financial penalties. If the landlord or agent has not complied with the initial requirements of the scheme, then a valid section 21 notice cannot be served; the tenant can claim for the return of the deposit plus the equivalent of 1 to 3 times the original sum.

Localism Act 2011

This amended the Housing Act 2004. The changes meant that a tenancy ‘in effect’ on or after 6 April 2012 also fell within the remit of the 2004 Act, which allowed a grace period for non-compliant landlords to protect the tenancy deposit within 30 days.

Court tests

The decision in Superstrike v Rodrigues clarified the position on deposits taken before the legislation came into effect. It held that landlords must serve PI on tenants and relevant persons on every renewal and when the tenancy becomes periodic. This has had long-term effects and left many landlords and agents in breach of the requirements for past renewals, potentially facing multiple financial claims.

The Court of Appeal decision in Charalambous v Ng surprised both landlords and lawyers. Previously, it was thought that a tenancy deposit taken prior to the legislation coming into effect was not captured in the Housing Act 2004; the Court of Appeal decided that this was not the case, distinguishing between the financial penalties under section 214 and the practical ones in section 215.

It was held that if a deposit taken prior to 2007 was not protected in an authorised scheme, the landlord could not serve a valid section 21 notice until the deposit was either returned in full or protected. The court made it clear that in this situation a landlord would not be liable for the financial penalties under section 214.

Deregulation Act 2015

This introduces the most recent change on tenancy deposit protection. The Deregulation Act 2015 aims to address uncertainty in the legislation and compounded by recent court decisions.

Section 31 inserts new section 215A to 215B into the HA 2004. If a deposit was taken for a tenancy commencing before April 2007 and it becomes a periodic tenancy after that date, the landlord has 90 days from the amendments coming into force to protect the deposit and serve the relevant PI. In this case, it will be as if it was always served and the risk of a Superstrike-like claim will be averted. If a deposit was taken after April 2007 and protected and the PI properly served at some stage during the tenancy, then it will be deemed to have been served on every renewal. These amendments are effectively retroactive so any court proceedings relating to these situations will therefore be terminated when the provisions come into force.

The second amendment clarifies the Court of Appeal decision in Charalambous. Despite the UK government taking the view that this was not what was intended, it has left the situation unchanged and codified Charalambous into the Act. Where a deposit is taken prior to April 2007 and the tenancy becomes periodic before that date, it must be protected prior to serving a valid section 21 notice, thus the landlord will not be liable for the financial penalties under section 215. The positive aspect is that all AST deposits will now need to be protected, removing lingering uncertainty and sending a clearer message to the industry.

The final change is to the PI structure. The Act has amended this so that it is now clear that where the PI says the landlord’s information must be given, then giving the details of an agent who protected the deposit for the landlord at the outset is also acceptable. In relation to current or ongoing claims, these changes also have an element of retroactivity in that they accept that previous provision of an agent’s details will be acceptable. Although not resolving every issue with tenancy deposits, these changes do lead to clear improvements. However, it is unlikely that the courts or Parliament will have seen the last of tenancy deposit protection.

Robert Mullarkey is Housing Paralegal at Anthony Gold Solicitors

Further information