Protection is better late than never

Charalambous v Ng [2014] EWCA Civ 1604

Summary

Since 6 April 2007, landlords have been required to protect the deposits of residential tenants by entering into one of the Tenant's Deposit Schemes ("the TDS"). If the deposit is not placed within one of the statutorily approved schemes, the landlord will face sanctions. One such sanction is the risk of the tenant being awarded a penalty payment of three times the deposit. Another is the inability of the landlord to serve notice to terminate the tenancy until he has complied with the deposit requirements.

Whilst this is clear-cut for new tenancies, there is still a grey area surrounding older tenancies which were created before the new legislation came into effect.

In this case, at the time that the deposit was originally paid, there was no obligation to pay it into an authorised scheme. The Court of Appeal has now confirmed that the sanctions apply nonetheless. Consequently the landlord was precluded from serving a notice seeking possession, because the deposit had not been paid into a scheme.

The Facts

In August 2002, the landlord and tenant in this case entered into an Assured Shorthold Tenancy for a residential flat near Brick Lane in East London. As part of the terms of the tenancy, the tenants paid a deposit of just over £1,500 to the landlord.

The tenancy was renewed in 2003 and 2004, each time for a further term of one year. On each occasion, the deposit was effectively carried over. When the final one year tenancy ended on 17 August 2005, the tenants remained in occupation, and a statutory periodic tenancy arose. This was some time before the introduction of the TDS in April 2007.

On 17 October 2012, the landlord served a Section 21 notice requiring possession of the property to be given. The tenants did not wish to leave the flat, and disputed the landlord's notice on the basis that it was invalid because the deposit was not held under a TDS.

The Court at first instance found in favour of the landlord, on the basis that there was no such requirement when the tenancy was granted. The tenants appealed.

The Court of Appeal Decision

The Court of Appeal found in favour of the tenants and overturned the initial decision.

It found that the "natural target" of Section 215(1)(a) of the Housing Act 2004 requiring the landlord to protect the deposit or face the consequences was those cases where the deposit was not being held in accordance with a scheme, whether or not the landlord had a preceding obligation to deal with the deposit in any particular way. The right with which the Section is concerned is the right to serve a notice at a time when the deposit is unprotected.

The Court found that there was no real hardship caused to landlords in this interpretation, as they had the option to clear a path enabling the service of a notice in one of two ways. First, they could have put the deposit into a TDS. Secondly, and probably less attractively, they could have repaid the deposit to the tenant. The Order which had brought the statute into force had sought to deal with the problem of timely compliance by giving the landlord a window in which to comply.

The consequence of missing this window was that the landlord could well be precluded from serving a notice unless they repaid the deposit to the tenant. That predicament followed not from any retrospectivity in the statute, but from the landlord's failure to take advantage of the statutory period to rectify the position.

The conclusion in light of this, and the landlord's failure to take advantage of the window to register the deposit, was that the Section 21 notice was invalid.

However, this reasoning did not cover the financial penalty, and thus the landlord was not obliged to make the penalty payment.

Our Views

Whether or not a landlord predominantly owns residential properties or only has a few residential tenancies as part of a wider property portfolio, it is important to bear in mind the potential pitfalls of not protecting deposits whenever Assured Shorthold Tenancies are involved.

Landlords who have residential tenants on periodic tenancies that have been running for a number of years may find that their ability to re-gain possession of the property is fettered, unless the deposit has been returned or protected. It would therefore be wise to seek advice on this point before serving or relying upon any notice requiring possession. This case confirms that, even though a tenancy was created before the new law came into effect in April 2007, the landlord is still required to comply with the legislation and protect the deposit.

It is worth bearing in mind that that this only applies where the tenancy is an Assured Shorthold Tenancy. This means that letting a property to, for example, a company on a contractual tenancy will not trigger the requirements.