This article was first published in Butterworths Property Law Newsletter (December 2012, Vol 4 Issue 12)
The Tenancy Deposit Scheme came into force on 6 April 2007. After the Court of Appeal handing down a number of controversial “landlord friendly” judgments on the meaning of ss213-215 of Housing Act 2004, Parliament amended these provisions by s184 of the Localism Act 2011. The amendments came into force on 6 April 2012. Since this date, there is a tough new world out there for unorganised or inexperienced landlords. This article seeks to set out what is required by landlords and what happens when things go wrong.
What a landlord must do
When receiving a deposit in connection with an Assured Shorthold Tenancy s213 requires that the landlord, within 30 days of the date he receives a deposit, i) complies with the initial requirements of an authorised scheme; and ii) gives the tenant the prescribed information. So what are the practicalities of this provision?
There are two types of authorised schemes: custodial schemes and insurance schemes. Under the former the landlord will pay the deposit to a scheme administrator, who will hold it until the tenancy comes to an end. Under the latter scheme the landlord retains possession of the deposit, but secures it by paying a fee and insurance premiums to the scheme administrator. The landlord is free to choose which scheme to use.
So what are the “initial requirements”? Section 213(4) defines initial requirements as “such requirements imposed by the scheme as fall to be complied with by the landlord”. There is thus no statutory definition of the “initial requirements” and what these are will therefore depend on the contractual obligation between the landlord and the scheme. In Vision Enterprises Ltd v Tiensia  1 WLR 94 the Court of Appeal defined the “initial requirements” generically as “taking steps to protect the deposit”.
The landlord must also provide tenants with the prescribed information. The particulars of what the landlord must give the tenant by way of information is prescribed by the Housing (Tenancy Deposits) (Prescribed Information) Order 2007. In Suurpere v Nice  1 WLR 1224 the Court of Appeal held that the obligation regarding the prescribed information was of equal importance to the obligation to protect the deposit.
The twofold punishment for failure
If the landlord fails to comply with s 213 to either protect the deposit and/or to provide the prescribed information within 30 days, he will automatically be beyond redemption with twofold consequences.
Firstly, s214 subparagraphs (3), (3A) and (4) provide for the tenant to seek the return of the deposit and an order that the landlord pays the tenant an amount not less than the amount of the deposit and not more than three times the amount of the deposit within 14 days. Since the amendments introduced by the 2011 Act, s214(1)(a) allows the tenant to make an application on the 31st day after paying the deposit. The said amendment reversed the Court of Appeal decision in Tiensia v Vision Enterprises Ltd  All ER that the landlord had a complete defence as long as he had protected the deposit and provided the information before the hearing date. To mitigate the potential harshness of this mandatory penal provision, the court has discretion as to the amount of the penalty. The sum may however not be less than the sum of the deposit. Clued up pernickety tenants may well seek to make a fast buck if dealing with an inexperienced or unorganised landlord.
Secondly, s215 subparagraphs (1) and (2) prevent the landlord from serving the tenant with a s 21 notice under the Housing Act 1988 to regain possession if s213 has not been complied with. Since 6 April 2012, if the landlord has failed to comply within 30 days, he forfeits the right to rely on a s21 notice until the deposit has been returned in full or with such deductions as have been agreed between the landlord and tenant or ordered by a court. A defaulting landlord may therefore be stuck between a rock and a hard place. He cannot serve a notice to regain possession under the mandatory ground of s21, but will have to rely on the Grounds set out in Schedule 2 of the Housing Act 1988. If the landlord returns the deposit in order to be allowed to rely on a s 21 notice, how can he guarantee compliance with tenant covenants for the reminder of the tenancy?
Who to sue – The lacuna in the Act
Many landlords use agents to manage tenanted properties. Section 212(9) has therefore defined “landlord” to include a landlord’s agent; which is helpful as it allows tenants to sue the managing agent directly. The Act has however left something of a lacuna.
Section 214(4) provides that if the court is satisfied that s213 has not been complied with it “must order the landlord to pay to the applicant a sum of money not less than the amount of the deposit and not more than three times the amount of the deposit…”. In addition, the court may, if the tenancy has come to an end, order “the person who appears to be holding the deposit to repay all or part of it..” (s 214(3A)). If the tenancy has not come to an end, the court must order that “the person who appears to be holding the deposit” either repays it to the applicant or pays the deposit into a designated account under an authorised custodial scheme (s 214(3)).
The Act does therefore, rightly in my opinion, give the tenant a cause of action against the person who holds the deposit; the difficulty is that the Act does not give a cause of action against the landlord unless he “appears to be holding the deposit”. So what happens when the person who appears to be holding the deposit has disappeared, as in a case I recently advised on where the agent had taken off with the deposit?
In Draycott v Hannells  WLR 1606 Tugenhat J commented that a restitutionary order for the return of the deposit could only be made against the person holding the deposit. As a matter of constructing this must be correct. The wording of s214 subparagraphs (3) and (3A) clearly appears to limit a restitutionary claim as against “the person who appears to be holding the deposit”. The landlord can of course be held liable for the actions of his agent under ordinary principles of agency. A claim against the landlord in such circumstances will therefore have to be pleaded as the return of a debt under contract by the principal, rather than relying on the statutory provisions.
It is interesting to note that Tugenhat J left the question open whether the penal provision under s 214(4) could be imposed against a person who, although falling within the broad definition of “landlord” under s 212(9), was not responsible for the failure to comply with s 213. Tugenhat J did not have to decide the point, but commented that Art 1 of the First Protocol of the ECHR and the principle of statutory interpretation that the economic interest of a person should not be taken away except under clear authority of the law, may weigh against imposing such penalties on an innocent party.
Disagreement at the end of the tenancy
What happens when at the end of a tenancy the landlord seeks to deduct money from the deposit and the tenant does not agree? Under Schedule 10 of the Act, if the deposit is held in a custodial scheme it will not be paid out by the scheme administrator until there is either agreement between the landlord and tenant or the matter has been decided by the court or the schemes dispute resolution service. If the deposit is held under an insurance scheme, the administrator will require the landlord to pay the disputed sum into a designated account until the issue has been resolved.
All schemes must provide the facilities to enable disputes over deposits to be resolved by an adjudicator, without recourse to litigation. However, the parties cannot be required to use such service.
The amendments which came into force on 6 April 2012 have given s213 of the Act real teeth. My advice to you, if you are a landlord, is to ensure to have your ducks in a row within 30 days.
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