Tenancy Deposit Schemes – 14 Days… and Who’s Counting?

20 March, 2012
by: Cripps Pemberton Greenish

Until relatively recently the residential letting market was a rather unregulated affair, particularly in the context of tenants’ deposits.  Landlords were free to keep the deposit wherever they chose, whether with a letting agent or in the landlord’s private bank account. This led to widely reported claims of exploitation and injustice to tenants, and stories of landlords making arbitrary deductions at will.

The Housing Act 2004 sought to address this and introduced a sea change in the law for residential landlords. All deposits received under the terms of an assured shorthold tenancy agreement must now be registered with one of several Government approved schemes and within 14 days of the tenancy’s start date. If the landlord fails to do so, the tenant can seek a court order fining the landlord up to three times the value of the original deposit. For more valuable properties, and even those less so, the results for a defaulting landlord can be catastrophic.

However, the professed intentions of the Act, to protect tenants, appeared to fall by the wayside following two leading decisions on the topic.  In Tiensa v Vision Enterprises Ltd/ Honeysuckle v Fletcher, a conjoined case which came before the Court of Appeal, the tenants bought counterclaims against their landlords for failing to register their deposits in time, despite being in arrears of rent. In a surprising judgment the court found that by a quirk of drafting, the Housing Act 2004 fails to link the landlord’s obligation to register the deposit with the penalty for non-compliance. The court held that so long as a landlord registers the deposit and notifies his tenant that he has done so before the date of the court hearing, he would not be liable for any penalty.

More good news awaited landlords. In Gladehust Properties Ltd v Hashemi, the Court of Appeal decided that a tenant was not allowed to bring a claim against his landlord for failure to register a deposit as the tenancy in question had ended before the date of the hearing.

These decisions suggested landlords had the option of simply biding their time and doing nothing until shortly before the hearing date or better still, sitting tight and hoping that the tenancy came to an end before the matter reached court.  Clearly not the intention of the legislation.

So in view of all this, if you are a residential landlord is there any reason for you to worry about making sure your tenant’s deposit is properly registered? The short answer is yes. Unless the tenancy deposit has been properly registered in line with the 2004 Act, a notice to end an assured shorthold tenancy (under section 21 of the Housing Act 1988) will be invalid.

More importantly, the landlord’s ‘discretion’ as to when to register a tenancy deposit will soon become a thing of the past.  When it comes into force, Section 184 of the Localism Act 2011 will amend the 2004 Act and reverse the effect of both Tiensa and Gladehurst.  Landlords will have to register their tenant’s deposit within the statutory time limit or else be liable for between one and three times the amount in damages (the court will have discretion to decide the appropriate penalty in each case). Tenants will also be free to make claims in respect of tenancies which have ceased to exist by the date of the hearing.

However, the 2011 Act does attempt to strike a balance between the interests of both parties. Landlords will have a period of 30 days (as opposed to 14) from the date of the tenancy in which to register the deposit. Section 21 Notices will not be rendered invalid provided the deposit has been returned to the tenant in full (or with agreed deductions), or if the tenant has issued proceedings against the landlord for late registration of the deposit which have been concluded, withdrawn or settled.

So what now?  If you are considering letting a property, it is essential to familiarise yourself with the different tenancy deposit schemes available.  Once the tenancy begins, ensure the deposit is properly registered and your tenant has been given notice of the registration. Even if using a letting agent, check they have done this for you by asking for a copy of the registration certificate and their letter/email of confirmation to your tenants. Remember that any claim for non-compliance will be made against you as landlord, not the agent.

As ever forewarned is forearmed.  To date the law has leant in favour of landlords but this is set to change. Taking simple steps and adopting good habits from the outset will ensure income from a residential letting is preserved.