Recent Tenancy Deposit Scheme rulings explained

Tessa Shepperson

Tessa Shepperson

Landlords take a tenancy deposit from tenants as the prospect of losing it exerts a powerful influence on tenants to make more effort to leave the property in an acceptable condition when vacating.

Initially the problem was that unscrupulous landlords were just pocketing the money and refusing to return it at the end of the tenancy. This practice was highlighted by the Citizens Advice Bureau in their report Unsafe Deposit1. Partly, as a result of this report, the tenancy deposit protection scheme legislation was introduced as a late addition to the Housing Act 2004, and the scheme was introduced in April 2007.

For the most part the scheme worked well upon its introduction. However, there were problems with tenants claiming against landlords who, it turned out, had failed to protect the deposit. As a result of this the rules for the scheme were amended as part of the Localism Act 2011.

The amended rules now provide as follows:

  • All deposits must be protected within 30 days of the date of receipt with an authorised scheme.
  • Prescribed information, which is all information regarding any tenancy deposit, must be provided to the tenant within 30 days.
  • If the landlord fails to protect the deposit then the tenant can go to court and claim a penalty of 3 times the deposit sum plus (in most cases) the return of the deposit or an order that it be protected in the custodial scheme (s214).
  • If the deposit is not protected within 30 days then the landlord cannot serve a valid Section 21 notice unless they have paid the deposit money to the tenant or the tenants have already brought a claim for the penalty which has been resolved (Section 215). After this the landlord can only offset money owed by the tenant if the tenant agrees to it.

These rules can be seen as a bit tough on landlords as, for example; if a landlord is late in protecting the deposit – even for an understandable reason – they are at risk of a claim and can then be ordered to pay a minimum of the deposit sum.

This means that if a landlord protects the deposit late then he will have to pay the deposit money to a tenant who could, hypothetically, owe him thousands of pounds of rent.

You could say that 30 days is plenty of time, and that landlords need to get their act together, but I have known situations where this has appeared very harsh to landlords.

As with any rule or scheme there have been, and remain to be, interpretation problems.

Recently two Court of Appeal decisions have helped clarify certain points of contention that had arisen.

The prescribed information

Many landlords consider the requirement to serve prescribed information to be a bit of an irrelevance.

However, after the case of Ayannuga v Swindells, the Court of Appeal made it very clear that it is an essential element. In this case the landlord had failed to serve all of the prescribed information, thinking it unnecessary as the information was available on the tenancy deposit scheme website.

The Court of Appeal disagreed and stated that the prescribed information was of real importance; as it told tenants how they could seek to recover their money and how they could dispute deductions, without having to go to court.

This should make it crystal clear that there is no excuse for not serving the prescribed information. ALL of the prescribed information as well, just to be on the safe side.

What is a deposit?

Perhaps a more persistent problem is the question of what a deposit actually is. Some rogue landlords seek to circumnavigate the regulations by taking a payment and describing it as rent.

Piggott v. Slaven

In this county court case, from 2009, a landlord retained the deposit paid to him but did not protect it because he described it as ‘future rent’.

In this case the judge found that the money was indeed a deposit, and I don’t think many people will disagree with him. Although this case is a county court decision, and therefore not binding on other Judges, it does set a precedence that can be used in the decisions of other such cases.

The legislation surrounding deposits defines a deposit as follows (s212(8)):

“Tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for:

(a) the performance of any obligations of the tenant
or
(b) the discharge of any liability of his, arising under or in connection with the tenancy.
It is important to note that the payment of rent is an obligation of the tenancy, so saying that money can only be used for rent and not damage will not stop it being a deposit.

Johnson v. Old

This recent decision from the Court of Appeal helped to define what constitutes a deposit. In this case the tenant (Ms. Old) had paid three separate sets of six months rent in advance (as she had failed to pass the landlords referencing) as well as a separate deposit which had been properly protected.

However when the landlord tried to evict her under Section 21 she claimed that the rent in advance was really a deposit which, as the landlord had failed to protect it, rendered the Section 21 notice invalid.

In the first instance a Judge agreed with the tenant and ruled that the rent paid in advance was in fact a deposit.

The landlord, looking at being on the receiving end of a hefty fine, appealed the ruling and this time the judge ruled in his favour. Ms Johnson then acquired legal aid and was able to bring her case in front of the Court of Appeal.

Much to the relief of landlords nationwide, many of whom have taken rent in advance when their tenant failed to pass referencing, the Court of Appeal upheld the landlord’s claim.

Deposits – where are we now?

At the one end of the scale we have situations such as in Piggott v. Slaven where the landlord was clearly trying to evade the regulations by calling a payment ‘future rent’ when it is really a deposit.

At the other end of the scale we have large payments made in advance, when tenants fail to pass referencing, which most people consider to be rent.

I am sure that, even after Johnson v. Old, situations will arise where the precise status of the money may be uncertain.

Checklist

In order to help people come to a conclusion in regards to these tricky matters, I offer up a simple checklist of points to consider:

1. Has the money been credited to the rent account?

I remain firmly of the view that if, after a lump sum has been paid by the tenant, it is immediately credited to their rent account – and they are not asked to pay any further rent until after the end of the period of time covered by that payment has passed – this means that it is rent and not a deposit.

If everyone thinks it is rent and if it is treated as rent, then it will almost certainly BE rent!

2. What does the tenancy agreement say?

One of the problems with the Johnson v. Old case was that the tenancy agreement was badly worded.

If a landlord makes it clear that the rent is:

£XYZ payable in advance by a payment of £XYZ x 6 on [date]

Then I don’t think anyone will be able to claim that the payment would constitute as a deposit.

3. Is all, or part, of the money likely to be paid back?

The essence of a deposit is that it is a sum of money paid in relation to a rented item to ensure it is returned in good condition. Provided certain specified things do, or do not, happen then it would be returned to the person who paid it.

So it does not matter if the type of thing being protected by the payment is limited to, say, replacement of the keys, or something else equally specific. If there is any prospect that in some circumstances the money could be returned to the tenant – it is a deposit and must be protected.

If both parties understand that the money is NOT going to be paid back – then it can not be a deposit.

4. Red herrings

In the case of Johnson v. Old, the money was paid to the landlords agents who then paid it over to the landlord on a month by month basis. This point was used by the Ms. Old’s legal team in their argument but, as the Judge said in the case, “The arrangements between the agents and the landlord are neither here nor there…”

This means that rent paid to an agent is the same as rent paid to the landlord himself and the arrangements between them will not have an effect on the tenant’s position.

Conclusion

What is often seen as the main problem with Tenancy Deposit Protection legislation is its complexity. Even for trained lawyers it can be difficult to follow the mish mash of cross referencing, something which has been made worse by the amendments inserted by the Localism Act.

This means that ambiguities and problems in interpretation will arise, we will all have to wait for someone to be in a position to fund a case to the Court of Appeal before we can know the proper interpretation. This is not a happy situation, but this is how our system works.

We can only hope that most of the issues with this particular legislation have now been resolved. But I doubt it!

Landlord Law

Landlord Law

Tessa Shepperson
Solicitor, Landlord Law

www.landlordlaw.co.uk
www.landlordlawblog.co.uk

1 –
www.citizensadvice.org.uk/index/campaigns/campaign_success/tenancy_deposits_campaign.htm

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