Tenancy deposit schemes

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Tenancy deposit schemes were created under the Housing Act 2004. Sections 212-215 of the Act came into force on 6 April 2007 and made provisions for the protection of deposits received by landlords in connection with assured shorthold tenancies.

These provisions have been the subject of a number of court cases, including Vision Enterprises Ltd v Tiensia [2010] EWCA Civ 1224 and Gladehurst Properties Limited v Farid Hashemi [2011] EWCA Civ 60, which casted doubt on the Government's initial intention.

The position has now been clarified following a number of major amendments to the Housing Act 2004 which were introduced under section 184 of the Localism Act 2011. These amendments came into effect on 6 April 2012.

This note provides an overview of the key changes, together with their implications. Any references to legislative provisions below are to the Housing Act 2004, unless otherwise specified.

Requirements and time limits

Under section 213 of the Act, any landlord taking a deposit in connection with an assured shorthold tenancy is required to:

  • safeguard the deposit with an authorised tenancy deposit scheme (section 213(1));
  • comply with the initial requirements of the scheme (section 213(3)); and
  • provide the tenant with information relating to these requirements and the landlord's compliance with them(section 213(5)).

While the time limit for complying with these requirements used to be 14 days, this has now been extended to 30 days (sections 213(3) and 213(6)). This time period starts to run when the deposit is received, rather than at the commencement of the tenancy.

Non-compliance

If a landlord fails to comply with the above requirements within the specified time limits, a tenant or any other relevant person who has paid the deposit is entitled to make an application to a county court under section 214(1) for the repayment of the deposit and the imposition of a penalty.

It used to be the case that if a tenant brought a claim under section 214, the landlord had until the date of the hearing to comply with the section 213 requirements. This acted as a complete defence to any claim made by a tenant and no penalties were imposed upon landlords who had complied with their obligations before the date of the hearing. (Vision Enterprises Ltd v Tiensia [2010] EWCA Civ 1224).

Section 214 of the Act has now been amended to enable the penalties contained within it to be imposed on landlords where they have failed to fulfil their obligations within 30 days of receiving the deposit. Thus, although the time limit has been extended, it is now absolute.

This means that on the 31st day, a tenant is entitled to make an application if the deposit has not been protected and no extra time will be given to the landlord to comply. This reverses the Court of Appeal decision in Vision Enterprises Ltd v Tiensia [2010] EWCA Civ 1224.

Protection after the end of the tenancy

Another amendment to section 214 of the Act has been introduced to allow for tenants' protection even after the end of a tenancy. This reverses the decision in Gladehurst Properties Limited v Farid Hashemi [2011] EWCA Civ 60, where it was held that once the tenancy has come to an end, the court could not impose penalties under section 214.

The newly introduced subsection 214(1A) now clarifies that penalties for non-compliance will apply after the tenancy has ended. This offers extra protection to tenants who will now be entitled to make an application to a county court even after the end of their tenancy provided that the landlord has not fulfilled their obligations under the scheme within the specified time limits.

Orders and penalties

If the court is satisfied that the landlord has not fulfilled their obligations, it has power to impose penalty orders under section 214.

With respect to ongoing tenancies, the court may make an order that the landlord (or another person holding the deposit) repays the deposit to the tenant or pays the deposit into an authorised scheme (section 214(3)).

Where the tenancy has ended, the court may order that the landlord repays all or part of the deposit to the tenant (section 214(3A)).

The level of penalty that could apply, which used to be three times the amount of the deposit, has now been amended to be anything between one and three times the amount of the deposit. This gives courts discretion about the level of the penalty that may apply depending on the circumstances (section 214(4)).

All orders specified above need to be complied with within 14 days of the date of the order.

Section 21 repossession orders

Another major amendment to the tenancy deposit schemes provisions has been made in respect of repossession orders under section 21 of the Housing Act 1988.

Prior to the amendment, section 215(1) provided that no recovery of possession under section 21 could be sought by a landlord if the deposit had not been safeguarded with an authorised scheme or if the initial requirements under section 213(4) had not been complied with.

Section 215(1)(b) has now been amended to state that no section 21 notice may be given when there is non-compliance with section 213(3). This means that not only would a landlord have to comply with the initial requirements, but they would also have to do this within the specified time limits, in order to be able to seek repossession.

The importance of this amendment is that under the original legislation, late compliance with the requirements of the scheme could entitle a landlord to reacquire the right to give under section 21. Under the current law, if the 30-day time limit to comply with the scheme has not been met, the only way for a landlord to seek repossession under section 21 would be if:

  • the deposit (in full or with agreed deductions) has been returned to the tenant (section 215(2A)(a)); or
  • an application made under section 214(1) has been determined by the court, withdrawn or settled between the parties (section 215(2A)(b)).

Transitional provisions

The above amendments are subject to the following transitional provisions:

  • The amendments apply in respect of tenancy deposits received by a landlord in connection with a shorthold tenancy where the tenancy has commenced on or after 6 April 2012;
  • The amendments do not apply where the tenancy was in effect on or after 6 April 2012 but the landlord had fulfilled their obligations before 6 May 2012.
  • The amendments to the legislation are not intended to be retrospective but it is arguable that a deposit received before 6 April 2012 in respect of a tenancy that is still in effect after that date may fall under the new rather than the old rules.

Conclusions

Following the amendments introduced to the Housing Act 2004 by section 184 of the Localism Act 2011, landlords and tenants should be aware of the following key points:

  • Landlords must protect the deposit under a tenancy deposit scheme and provide the tenant with information about the scheme and their compliance within 30 days of receiving the deposit. This is an absolute time limit and compliance by the time of the hearing will no longer be a defence;
  • Even if the deposit has been protected at some point after the expiry of the 30-day time limit, penalties under section 214 can be imposed;
  • Applications for penalty awards can be made and sanctions may be imposed even after the end of the tenancy;
  • The level of penalty is now subject to the court's discretion and may be anything between one and three times the amount of the deposit;
  • An order for repayment of part of the deposit may be made when the tenancy has ended; and
  • If a landlord has not fulfilled their obligations under the legislation within the 30-day time limit, they can still seek a repossession order under section 21 of the Housing Act 1988 if they have repaid the deposit to the tenant (in full or with agreed deductions) or if the tenant's application under section 214 has been settled.