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Tenancy Deposit Trap for Landlords

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15/10/2013

A residential landlord usually requires a deposit to be paid by the tenant at the grant of an assured shorthold tenancy as security for the payment of rent and for the tenant looking after the property. If the tenant’s occupation of the property is then extended, either by entering into a new agreement or by the tenant simply remaining in the property beyond the original fixed term (as a statutory periodic tenant), the original deposit will commonly be ‘rolled over’ or continuously held by the landlord.

The Housing Act 2004 (as amended) (HA) requires a landlord of an assured shorthold tenant to protect a tenant’s deposit in a government authorised tenancy deposit scheme within 30 days of the date of receipt and to provide the tenant with prescribed information in respect of that scheme. Should a landlord fail to meet the above requirements, the HA provides that the landlord cannot serve a valid notice to terminate the tenancy under section 21 of the Housing Act 1988 until the terms of the HA have been satisfied.

Questions have arisen as to whether the landlord’s retention of a deposit received prior to 6 April 2007 (the date the HA came into force) is subject to section 213 of the HA, which requires a landlord to place a deposit into an authorised scheme [1], and what happens in the case of an extended, or continuation, tenancy.

In Superstrike Ltd v Rodrigues [2] the Court of Appeal provided clarity.

The tenant’s fixed term agreement had expired but he continued to live in the property as a statutory periodic tenant. No new terms were agreed between the landlord and tenant when the fixed term ended, and no deposit monies changed hands. The landlord, Superstrike, simply continued to hold the deposit that had been given to it at the outset of the original fixed term tenancy. When Superstrike later sought to remove the tenant by issuing a section 21 termination notice pursuant to the Housing Act 1988, the tenant argued that the commencement of the statutory periodic tenancy created a new tenancy agreement and, as this took place after 6 April 2007, Superstrike was required to place the deposit in an authorised scheme. Consequently, failure to do so prevented Superstrike from serving a valid section 21 notice.

The Court of Appeal agreed with the tenant’s argument. It stated that, where a statutory periodic tenancy comes into being after 6 April 2007, landlords are required to protect deposits in an authorised scheme. Superstrike’s failure to do so, and also its failure to provide the prescribed information regarding its protection to the tenant, invalidated the section 21 notice which could not be relied upon to terminate the tenancy.

Walker Morris Comment

This is the latest in a succession of controversial cases regarding the tenancy deposit legislation. The legislation was amended by the Government last year in an attempt to provide better clarity and fairness for both landlords and tenants. The Court of Appeal’s decision in Superstrike has the potential to have a significant adverse impact on landlords who may find out to their cost that a section 21 notice is invalid some months after it has been served. Since the case was reported, Housing Minister, Mark Prisk, has commented that the Government did not intend the legislation to operate in this manner. The legislation is now being reviewed and corrective legislation may be enacted. As yet, no information is available on potential changes.

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[1] There are currently four authorised schemes in which a landlord can protect a deposit. These are:

Deposit Protection Service (Custodial and Insured)
MyDeposits
Tenancy Deposit Scheme
Capita Tenancy Deposit Protection.
[2] [2013] EWCA Civ 669

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