Picture the scenario. You’re flat-hunting. You find the perfect flat to rent and the landlord presents you with a tenancy agreement for 12 months, which you take home and read thoroughly before signing your name at the bottom. You pay the landlord an amount equivalent to one month’s rent by way of a deposit and you get the keys to move into your dream pad. The tenancy provides that the deposit will be held by the landlord to protect him from any damage that you cause to the flat or to offset any arrears in rent. If neither arises during the course of the tenancy, the landlord will return the deposit to you when you move out.

Now fast forward a year. You pack up your belongings, give the flat a good clean and hand the keys back to the landlord. Then you ask him for your deposit back only to find that: (1) the landlord keeps making excuses/sending you cheques that keep bouncing/avoiding your calls because he has spent your deposit and doesn’t have it to hand to return to you; or (2) the landlord tells you that he needed to carry out repairs and/or engage professional cleaning services that conveniently amount to your entire deposit. Until 2007, this scenario was all too common in the rented accommodation sector. Tenants were left out of pocket with no choice other than to issue proceedings at court, which was expensive, time-consuming and very stressful.  

However, the landlords were not always the bad-guys. Many tenants devised their own ways to protect their financial position, including failing to pay their final month’s rent and forcing their landlord to use the deposit to make up the shortfall. This left landlords without any security to pay for genuine repairs at the end of the tenancy and again required them to resort to court proceedings. All in all, it was a highly unsatisfactory system that culminated in the National Association of Citizens Advice Bureaux producing a report in 1998 that called for reform.  

In 2000, the Government launched a pilot Tenancy Deposit Protection Scheme for an initial period of two years. The scheme was voluntary for landlords in the pilot areas which meant that take-up was relatively low. As a result, provisions were added to the Housing Act 2004 (the “Act”) for a mandatory tenancy deposit scheme.  

Tenancy deposit schemes are born…

On 6 April 2007, statutory tenancy deposit schemes went live for all assured shorthold tenancies created on or after that date. The schemes aimed to encourage good deposit management by offering landlords two types of scheme, custodian and insurance schemes (see table below). They also offered an alternative dispute resolution service to the courts.  

Under section 213 of the Act, all deposits paid in connection with these tenancies must be paid into an authorised deposit scheme. Within 14 days of receiving the deposit, the landlord must comply with the “initial requirements” laid down by the scheme. He must also, within 14 days, give certain information to the tenant.  

If the landlord does not comply with the initial requirements or provide the prescribed information, the tenant may apply to a county court. If the court finds that the requirements have not been complied with, the court must, under section 214, order that the deposit is repaid to the tenant or into an authorised scheme. The court “must also order the landlord to pay to the applicant a sum of money equal to three times the amount of the deposit within the period of 14 days.”  

This penalty is the “teeth” of the scheme.

… but they make a swift visit to the dentist

In two Court of Appeal decisions over the last year, the teeth have been ripped out of the schemes.

The first case to reach the Court of Appeal was Tiensia v Vision Enterprises Ltd, Honeysuckle Properties v Fletcher in 2010.1 This case consisted of two appeals: Tiensia and Honeysuckle. The facts of the two cases are similar. The tenant paid a deposit to the landlord who failed to pay it into a tenancy deposit scheme or provide the prescribed information within 14 days. The tenant then fell into arrears on their rent and the landlord issued court proceedings. The tenant made a counterclaim for the penalty under section 214. By the hearing date, the landlord had paid the deposit into a tenancy deposit scheme. The question for the Court of Appeal was whether late compliance was sufficient to avoid payment of the penalty.

In a surprising judgment by the majority, the Court held that a court’s obligation to impose the penalty was triggered by either (a) a failure to comply with the initial requirements, ie to pay the money into an approved tenancy deposit scheme; or (b) a failure to provide the tenant with the prescribed information. However, it was only triggered by a failure to do either of these things by the date of the hearing, rather than within the 14 day period set out in section 213. Lord Justice Rimer reached this conclusion despite recognising that:

  • in addition to the statutory period to comply with the initial requirements, it was also a term of the tenancy deposit scheme that deposits must be protected within 14 days of receipt;
  • it robs the penalty provisions of virtually all of their force as they will only bite “in the most exceptional and unusual cases”; and
  • it would leave tenants in an unfortunate position of having to issue court proceedings to ensure that its deposit has been properly protected by the landlord but would be left out of pocket on the question of costs.  

Lord Justice Rimer applauded the judgment given by Mr Justice Tugendhat in the High Court in Draycott v Hannells Letting Ltd.2 In that case, Mr Justice Tugendhat had engaged closely with the legislation and found, on a literal interpretation, that the penalty provisions were drafted in such a manner to ensure that landlords could comply with the initial requirements after the 14 day period without triggering the penalty. On a strictly literal interpretation, I have to say that I agree.

Wider considerations

However, the courts rarely decide an issue on literal interpretation alone. An issue lurking in the background was the impact on section 215 of the Act. This section provides that a landlord will not be entitled to serve a section 21 notice under the Housing Act 1988 to recover possession of the property on or after the expiry of the tenancy if the initial requirements under section 213 have not been complied with. As section 215 is drafted in a similar way to section 214, if the Court had taken a purposive approach and held that compliance must be within the 14 day period to avoid the penalty provisions taking effect, the knock‑on effect would be that a landlord would never be able to serve a section 21 notice if it had not paid the deposit into a tenancy deposit scheme within that period. It would have the effect of transforming an assured shorthold tenancy into a fully assured tenancy with security of tenure. This would impact upon innocent landlords who had mistakenly missed the deadline as well as unscrupulous landlords who deliberately disregarded it.

So, as Lord Justice Sedley put it, the Court was faced with:  

“an intractable dilemma: to drain the legislative scheme of all effect by reducing the remedy for non-compliance to near-impotence, or to give…the intended meaning to the prescribed 14-day limit, with irreversible economic and proprietary consequences for landlords who fail, even if only through misfortune, to meet it.”

Whilst Lord Justice Sedley preferred the latter, the majority did not agree and chose to safeguard landlord’s rights under section 21 of the Housing Act 1988. The Court held that the purpose of the legislation was not to penalise landlords but to protect tenants’ deposits and if this protection had been obtained by the date of the hearing, the purpose had still been achieved.

Another trip to the dentist for tenancy deposit schemes

In May 2011 this sliver of silver lining was further eroded in Gladehurst Properties Ltd v Farid Hashemi.3 In this case, the tenant’s deposit had not been paid into a tenancy deposit scheme and the tenancy expired. The landlord had returned the bulk of the deposit to the tenant but there was a dispute over £618. The tenant applied to court for payment of the penalty under section 214. Unlike Tiensia, the landlord had not paid the disputed amount into a tenancy deposit scheme by the date of the hearing.

The Court of Appeal refused to order payment of the penalty. It held that the tenancy deposit schemes were not set up to accept deposits post-expiry of the tenancy and the legislation required compliance with the initial requirements only to the extent that the landlord was capable of doing so. When considering the disputed amount that had not been returned to the tenant, Lord Justice Patten found that it would create uncertainty and anomalies if that part should be paid into a tenancy deposit scheme.

Yet, if the tenancy had been continuing and the landlord had returned 50% of the deposit to the tenant for whatever reason, I do not think that the Court would struggle to decide how much should have been paid into a tenancy deposit scheme by the date of the hearing: surely it would be 50%?  

The tenant had argued that if sections 213 and 214 did not apply to a landlord post expiry of the tenancy, an unscrupulous landlord could deliberately delay matters so that the tenant did not issue proceedings and get a hearing date during the life of the tenancy. The Court was unsympathetic to this argument: the tenant has a remedy under section 214 (during the period of the tenancy) and it is up to him to make use of it.  

A toothless beast

So where does that leave us? The purpose of the tenancy deposit schemes was to encourage good deposit management and reduce the need for court proceedings. However, if a tenant wants to ensure that its deposit is properly protected and its landlord does not do so within 14 days of receiving it, he must be prepared to engage in court proceedings as early as possible and be out-of-pocket on costs. If it doesn’t, his only option will be to apply to court after the tenancy has expired to recover any disputed amounts of his deposit.

Click here to see a summary of tenancy deposit schemes.