Rebecca Sheriff, Trainee Solicitor
The majority of tenants in the private sector give their landlords a deposit against possible non-payment of rent or damage to the property. This is often an area of dispute with some landlords being slow to return deposits at the end of the tenancy or making unfair deductions.
To address this problem, the Housing Act 2004 contains provision for both the protection of tenancy deposits and the resolution of disputes over their return. After 6 April 2007, every landlord or letting agent that takes a deposit in England and Wales for an Assured Shorthold Tenancy must join a tenancy deposit protection scheme.
In November 2006, the government awarded contracts to three different schemes for this purpose. In addition to protecting tenant’s deposits, each scheme operates their own free alternative dispute resolution service in the event of a dispute over the amount of the deposit to be returned.
The Deposit Protection Service is a custodial scheme that keeps the deposit in a bank account until its alternative dispute resolution service, or the courts, decide how much of the deposit should be returned to the tenant in the event of a dispute.
The other two schemes; MyDeposits and the Tenancy Deposit Scheme are both insurance based tenancy deposit protection schemes. Under such schemes, the landlord or agent will hold the deposit and pay a fee to insure it. If the landlord does not then return the amount owed at the end of the tenancy, the insurer will pay the tenant directly and try to retrieve the money from the landlord.
Who Can Join the Schemes?
Any private landlord or regulated letting agent offering residential property for rent must use one of the three schemes. They will be asked to provide relevant information to determine if they can be accepted as members, for example, not all landlords can be members of the Tenancy Deposit Scheme. The deposit will not be protected in law unless the landlord uses one of the three approved schemes.
How Are Deposits Held and Protected Within The Schemes?
In most cases the landlord will decide on which scheme to use to protect the deposit. Usually a tenant will pay one months rent as a deposit for a property. The way it is held will depend on which scheme is used.
Under the custodial Deposit Protection Service, the landlord has 14 days from the commencement of the tenancy to protect the deposit and provide the tenant with the details of the scheme, although the scheme will accept deposits after the 14 days. The information to be handed over to tenants is set out in the housing (Tenancy Deposits)(Prescribed Information) Order 2007. The deposit will then be held until the end of the tenancy.
Under the insurance-based schemes MyDeposits and The Tenancy Deposit Scheme, the landlord will retain the deposit but they must pay a premium to the insurer. This must be carried out with 14 days of the deposit being received. The landlord must also provide the prescribed information to the tenant. The Tenancy Deposit Scheme also requires the tenancy agreement to contain certain clauses. When the tenancy ends the landlord should then return the agreed amount.
If a landlord or letting agent does not protect a tenant’s deposit and provide the tenant with the prescribed information within the 14 day timescale, they will lose their right to regain possession of their property as any notice served under the Section 21 will not be valid, although if the deposit is later protected with the Deposit Protection Scheme, a section 21 notice served after protection will be valid.
If the tenant applies to court for their deposit to be protected and it is shown that the landlord has not protected the deposit or complied with the initial requirements of the scheme in which the deposit has been protected, including providing the prescribed information to the tenant, the court must order the landlord to pay the tenant three times the amount of the deposit within 14 days.
At the end of the tenancy, if there is no dispute as to the amount, the whole deposit will be returned to the two parties as agreed.
What Happens If There is A Dispute At The End of The Tenancy?
In the case of a dispute, each of the three schemes operate their own alternative dispute resolution service. Only if the landlord and tenant do not agree to use this service will there then be recourse to the courts.
Under the custodial Deposit Protection Service, if there is a dispute, the amount that is disagreed will be held until the alternative dispute resolution service or the courts decide what is fair. The custodial scheme will be completely free, with no charges for money transfers or dispute resolution and interest accrued on deposits held will pay for its running.
Under the insurance based schemes, however, if there is a dispute, the disputed sum is handed to the scheme for safekeeping until it is resolved. If the landlord fails to comply with this, the insurance scheme will return to the tenant the deposit that they are entitled to.
Under both the insurance schemes, deposits must be returned within ten days of agreeing how it should be divided or the dispute resolution service reaching a decision.
The Law in Practice
Unfortunately, the wording of the relevant parts of the Housing Act 2004 is not as clear as either landlords or tenants might have hoped. There has been a substantial amount of litigation in the County Courts on the issue of when the three times deposit penalty should be ordered to be paid and at what stage the landlord must comply with the requirement to protect the tenancy to avoid the penalty. The only part of the legislation that has been straightforward in practice is that the landlord cannot serve a valid section 21 notice until such time as the deposit has been protected and the prescribed information given to the tenant.
Deposit Protection Schemes in Application; Case Law
Late Registration Under Tenancy Deposit Scheme - Draycott v Hannells Lettings 2010 – This was a High Court case and so must be followed by County Court judges unless the Court of Appeal decides otherwise. The Defendant Hannells were the agents acting on behalf of the Defendant landlord who were potentially liable for failure to lodge a deposit. Whilst Hannells registered the deposit with Deposit Protection Service, this was not done within the 14 days following receipt. The court found, however, that the late lodging of the deposit was not in fact a breach of the act or the requirements of the Deposit Protection Service and accordingly the judgment against Hannells of the lower court was set aside.
Failure To Provide Prescribed Information - Baafi v Mapp June 2010 – In this case the landlord registered the deposit with the MyDeposits scheme. He had failed to appreciate, however, that MyDeposits scheme does not and cannot provide all the information required under the Prescribed Information Order. Instead the landlord provided the tenants with only the certificate provided by the scheme which contains a paragraph making clear that MyDeposits scheme does not, on its own, supply all information required by the Order. The tenant subsequently defended possession proceedings on this basis and sought payment of 3 times the deposit. It was held in this case that the landlord’s claim for possession was dismissed and the penalty of three times the deposit was awarded, with return of the deposit to the tenant.
Harvey v Bamforth 2008 – In this case the deposit was protected but the prescribed information was provided after 14 days. It was held that as long as the prescribed information is given before an application is made by a tenant to the court, the penalty of 3 times the amount of the deposit does not apply.
Renewal of Pre 6 April 2007 Tenancies - Bihari v House Trader (UK) Limited January 2010 & Qurat-Ul-ain Zia v Moutada 2010 – in both these cases a deposit was paid by the tenants prior to the introduction of the deposit legislation. After April 2007, when the legislation came into force, the landlord and tenant renewed the tenancy. The deposit was required to be protected, therefore, because of the renewal even though no money actually changed hands. The landlord was ordered to pay three times the deposit.
Considerations for the Future….
- As it stands at the moment, following the Draycott case, it appears that agents will be liable for a failure to register a deposit but late registration will not automatically attract the penalty of the act. This may be set to change, however, as the two conjoined appeals of the cases Universal Estates v Tiensia & Honeysuckle Properties v Fletcher were heard by the Court of Appeal on 7 May 2010. Judgment was reserved, however, as the Court of Appeal recess comes to an end on 1 October 2010, we can expect a decision on this issue shortly.
- On 1 October 2010 the maximum rent threshold for Housing Act 1988 tenancies is to be altered from £25,000 to £100,000. The question that arises, therefore, is what will the position be for tenancy deposits taken in respect of tenancies which start prior to 1 October 2010 and are not assured shorthold tenancies but which will become assured shorthold tenancies on 1 October 2010? There has been some uncertainty as to whether these tenancy deposits will need registration with an authorised scheme or not. At the time of writing, it appears that the DCLG is of the opinion that they will not need registration within 14 days of 1 October as the deposit was not taken in respect of a shorthold tenancy. However, the DCLG also rightly say that this will be a matter for the Courts to decide and so it would be wise for landlords with tenancies affected by this change to consider protecting the deposits and providing the prescribed information by 15 October 2010.
Rebecca Sheriff
Trainee Solicitor
Anthony Gold Solicitors
