In 2007, the Government introduced legislation which was designed to protect residential tenants under Assured Shorthold Tenancies (ASTs) from unscrupulous landlords. The legislation, which is found in the Housing Act 2004, requires landlords to comply with certain requirements in relation to any deposit taken under an AST. The key requirements are:

  • to "protect" the deposit in an authorised scheme. Currently there are three schemes authorised by the Government
  • to give notice to the tenant setting out details of how the tenant's deposit is protected (the prescribed information).

There are two main sanctions for a failure to comply with the Act. The first is that the landlord can be required to pay a "penalty" of three times the amount of the deposit to the tenant. The second is that the landlord may be unable to recover possession of the premises under section 21 of the Housing Act 1988 (which would normally allow a landlord to recover possession under a fixed term AST on giving two months' notice to expire on or after the fixed term has come to an end).

The legislation can affect developers and investors in mixed-use schemes (such as a parade of shops with flats above), where they receive deposits either directly from tenants, or as part of a transfer of rent deposits on an acquisition.

In the November 2008 edition of property update we reported on the case of Harvey v Bamforth. This case confirmed that a landlord who protected a deposit within 14 days of receipt, but did not provide the prescribed information to the tenant until some time later, was not liable to pay the penalty to the tenant. The case left open the question of how the rules would be applied where the deposit had not been protected within 14 days. We now have some further guidance on the point from the High Court.

In Draycott v Hannells Lettings Ltd, the tenant entered into an AST on 28 February 2008. It paid a deposit to the landlord's agent. The deposit was lodged with the custodial scheme on 19 May 2008; more than 14 days after it was received. The tenant was given the prescribed information on 21 May.

Section 213 of the Housing Act 2004 does not expressly impose a requirement that the deposit be lodged with a scheme within 14 days of receipt. However, this would appear to be the intention, as the Act does require the prescribed information to be provided to the tenant within 14 days. What the Act does say is that the "initial requirements of an authorised scheme" must be complied with within 14 days of receiving a deposit. The Act does not identify what these requirements are, because it envisages that more than one type of scheme may be authorised (as is indeed the case).

Clause 9 of the terms and conditions of the custodial deposit scheme provides:

"The Landlord or Letting Agent is responsible for ensuring that Deposits are submitted for protection within 14 calendar days of the date of receipt by the Landlord."

The tenant argued that protection of the deposit within 14 days was therefore an "initial requirement of the scheme". The result of this would be that the penalty of three times the amount of the deposit would be applied.

The High Court ruled that the requirement that the deposit be paid into the scheme was the initial requirement of the scheme, and not the requirement that it be done within 14 days. As a result the letting agent did not have to pay a penalty to the tenant.

Things to consider

The decision in this case is extremely helpful for investors purchasing properties which include residential units let on ASTs, where the buyer's investigations reveal that one or more of the deposits have not been protected under the legislation, or have been protected late. The buyer can ensure that the deposits are protected, either before it buys, or immediately afterwards. According to the decision in this case, no penalty will be payable to the tenants.

While this is undoubtedly helpful for purchasers, it does leave the door open for unscrupulous landlords to hang onto deposits until challenged by their tenants. Provided at that stage the deposit is then protected, no penalty will be applied. However, the court pointed out that the penalty was not the only sanction in these circumstances. The landlord would not be able to recover possession at a time when the deposit was unprotected. (Of course this does not assist a tenant who wants to leave and get his deposit back.)

However, the more fundamental point is that if, contrary to the court's finding, the initial requirements of the scheme did include the requirement to protect the deposit within 14 days, then those initial requirements could never be complied with where the deposit was protected late (even though the custodial scheme clearly envisages circumstances in which deposits will be lodged with it after 14 days have elapsed). Section 215 of the Housing Act 2004 provides that no section 21 notice to recover possession can be served at a time when the initial requirements of a scheme have not been complied with. If it were impossible to comply with the initial requirements of a scheme once 14 days had elapsed, this would mean that the effect of the tenancy deposit legislation in these circumstances would be to convert the AST into a fully assured tenancy with security of tenure - an extremely harsh result, which one would expect to have been set out more clearly if it had been intended.