Tenants Strike Back

10 January, 2014
by: Cripps Pemberton Greenish

SUPERSTRIKE LIMITED V RODRIGUES: A DISAPPOINTING DECISION FROM THE COURT OF APPEAL FOR RESIDENTIAL LANDLORDS

Tenants

What a difference a year makes. The last time we wrote about the statutory tenancy deposit scheme, in Spring 2012, the Localism Act 2011 was poised to restore the equilibrium between the interests of landlord and tenant, which had been upset by two earlier decisions of the Court of Appeal. For a short time at least, the law in this area appeared to have been settled.

hen taking a deposit from a tenant as security for the letting of a property under an assured shorthold tenancy agreement (“AST”), a landlord must register the deposit with one of the approved scheme providers within 30 days of receipt. He must also provide his tenant with certain key facts about the statutory scheme and the contractual conditions under which the deposit is held (referred to in the legislation as “Prescribed Information”). These requirements are set out in Section 213 of the Housing Act 2004. Failure to comply with them will leave the landlord open to a claim for statutory compensation from their tenant for a sum between one and three times the value of the deposit in question. In addition, the landlord is unable to serve a notice to terminate the tenancy agreement under Section 21 of the Housing Act 1988 without first serving his tenant with the Prescribed Information, or paying back the deposit in full.

But what effect, if any, does the statutory scheme have on tenancy agreements where the original contractual term has long since expired and the tenant has continued to live in the property by mutual consent? The commonly held view had been that the scheme did not apply to longstanding agreements. However, that view was to be turned on its head by the outcome of a dispute between Superstrike Limited (“S”) and its tenant of some 5 years, Mr Mariano Rodrigues (“R”). The parties had entered into an AST in January 2007. R paid S a deposit at that time, but S did not register it. That much is unsurprising; the requirements of the 2004 Act were not in force then. But that did not stop R from relying on the scheme rules to defend the possession proceedings that S brought against him in May 2012. R argued that S’s Section 21 Notice was invalid, because S had not dealt with his deposit in accordance with the statutory scheme. He managed to set aside the order for possession S had obtained against him in Wandsworth County Court on that basis and then appealed the decision to the Court of Appeal.

In a decision that has been met with consternation by the residential landlord community, the Court of Appeal upheld R’s appeal. Giving the judgment of the Court, Lord Justice Lloyd said that R’s deposit ought to have been registered in one of the statutory schemes by the end of January 2008. S had failed to meet that obligation and so had not been entitled to serve a Section 21 Notice.

So where does the Superstrike decision leave landlords who have tenants in occupation of their properties under long standing tenancy agreements?  It’s fair to say that opinion is divided on this point.

Tenants2

Some commentators have taken a fairly sanguine view, saying that the decision only affects tenancies which were entered into before the commencement date of Section 213, 6 April 2007. However, we can find nothing in the Court’s decision which supports that analysis. In order to try and draw some firm conclusions, it is worth thinking about the rationale behind the judgment in a little more detail.

The key point to consider is the Court’s explanation of what happens to the deposit at the end of the contractual term of an AST, when the landlord and tenant both agree that the tenant is to remain in situ. A common misconception is that if the parties do nothing in this scenario, the agreement is simply renewed by statute. What happens in reality is that the tenant continues to occupy the property under the terms of a periodic tenancy which is deemed to have arisen by virtue of Section 5 of the Housing Act 1988. Therefore, the first tenancy ends on the last day of the contractual term and is replaced by a new, periodic tenancy (albeit on identical terms). This then raises the central question of what happens to the deposit, given that the tenancy for which it was taken as security no longer exists!

In Superstrike, the Court reasoned that the landlord and tenant must be deemed to have had a hypothetical conversation. In this scenario the tenant agrees the deposit given as security for performance of their obligations under the old (contractual) tenancy, will be reallocated to security for performance of their obligations under the new periodic tenancy. The practical point here is that the landlord receives a deposit in relation to a new tenancy, and, in doing so, triggers his obligations under Section 213. Hence in the Superstrike case, S had an obligation to register R’s deposit within 14 days (the time limit for compliance with Section 213 before it was extended by the Localism Act 2011) of the day in which the statutory periodic tenancy was created.

We think that the reasoning in Superstrike is sound and the decision does no more than to clarify that the requirements of Section 213 are triggered every time a new periodic tenancy is created at the end of the contractual term. There is no doubt that in consequence landlords have been placed under a heavy administrative burden. However, that burden must be considered an unintended consequence of the way in which the legislation was drafted, rather than the Court’s interpretation of it. In the absence of an appeal to the Supreme Court, or a change in law, our advice to landlords is to apply the scheme rules to new statutory periodic tenancies in exactly the same way as you would a new, contractual tenancy. After all, forewarned is forearmed.

Adam Osieke
Solicitor
Real Estate
Dispute Resolution
a.osieke@crippspg.co.uk
+44 (0)20 7591 3313