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Do You Need To Re-Protect Your Tenant's Deposit?

View profile for Lara Murrell
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A recent decision in the Birmingham County Court that has applied the Court of Appeal ruling in Superstrike Ltd v Marion Rodrigues (“Superstrike”) has changed the way in which it was understood the legislation relating to tenancies and deposits was meant to operate.

The Statutory Background

Under the Housing Act 2004 (“HA 2004”), landlords must place deposits paid to them under assured shorthold tenancies (“ASTs”) into a recognised tenancy deposit scheme (“TDS”) and provide their tenants with prescribed information about the TDS (“the Prescribed Information”). As a sanction for non compliance with the statutory regime, section 215 of the HA 2004 prevents a landlord from obtaining a possession order if they have not followed the correct tenancy deposit procedures. Under section 214 of the same Act, the tenant is also granted a right to bring a claim against the landlord requiring the registration of the deposit or its repayment to the tenant as well as a right to seek compensation of up to three times the amount of the deposit. These legal requirements came into force in April 2007.

The Superstrike Case

In Superstrike, the tenant entered into a 12 month fixed term AST in January 2007. In accordance with the terms of the AST, the tenant paid one month’s deposit. The deposit was not placed in a TDS scheme as the requirement to do so had not yet come into force. At the end of the 12-month fixed term, the tenant remained in occupation and as the parties had not entered into a new AST, the tenant became entitled to a statutory periodic tenancy that rolled on a month by month basis.

Some six months later, the landlord served a section 21 notice for possession to end the periodic tenancy and on expiry obtained a possession order. The tenant challenged the this and argued that the possession order should be set aside as the landlord had not protected the deposit within the TDS regime as per the sanction in section 215 HA 2004. The landlord argued that the sanction should not apply as the agreement predated the deposit protection regime.

The Court of Appeal held that where a fixed term tenancy expires and the tenancy thereafter continues as a statutory periodic tenancy, a new tenancy is created at the date the conversion of the tenancy takes place. In this case, the fixed term had expired and converted to a statutory periodic tenancy in January 2008. As such, the new tenancy was formed on a date after the deposit protection regulations under HA 2004 had come into force and the landlord was therefore under an obligation to protect the deposit from that date. As the landlord had not protected the deposit, the statutory regulations had been breached and the possession order overturned.

Recent Developments

The Birmingham County Court decision in Gardner v McCusker (“Gardner”) has taken the findings in Superstrike one step further, and many consider, a step too far.

Where in Superstrike, the deposit had never been protected with TDS; the landlord in Gardner had protected the deposit in accordance with the statutory requirements at the beginning of the fixed term. When the fixed term ended and the statutory periodic tenancy arose, the deposit continued to be protected with TDS. The County Court ruled that the landlord was still in breach of his obligations as he had not re-served the Prescribed Information on the tenant when the periodic tenancy had arisen.

What Are The Implications Of These Decisions For Landlords?

While the Gardner case was only decided at County Court level, taken alongside the ruling in Superstrike, there is a risk that a court could find that the statutory regulations have not been complied with where a fixed term tenancy expires and continues as a statutory period tenancy unless tenancy deposits are registered as new deposits with TDS and the Prescribed Information is re-served on the tenants. The consequences of a court finding non-compliance mean that landlords may prevented from obtaining possession orders as well as being made subject to financial penalties.

It is hoped that the law will be clarified by Parliament who have addressed the issue in the Deregulation Bill 2013-2014 (“the Deregulation Bill”). Clause 31 of the Deregulation Bill in its current form would remove the obligations on the landlord to re-register the deposit and re-serve the Prescribed Information where a fixed term AST has rolled into into statutory periodic tenancy where these TDS requirements were deal with at the start of the original tenancy. However, there is no time frame for consideration of the Deregulation Bill and moreover, no guarantee that these proposals will be made law.

In the meantime, in order to ensure full compliance with the statutory requirements, landlords should re-protect all deposits held with the TDS and re-serve the Prescribed Information relating to these deposits on all of their tenants whose tenancies have converted to statutory periodic tenancies. The practical implications of this approach are that deposits will need to be withdrawn from the TDS and then re-registered as fresh deposits. However, landlords are only able to do this with their tenants’ co-operation as the TDS will not release deposits until all parties’ have agreed for them to do so. As such, it is likely that landlords will face difficulties in being able to go through this process.

If you are a landlord and feel that you need advice on your current tenancies contact the Real Estate Team on 020 7404 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.