Tenancy deposit schemes: landlords beware!

As we have reported in previous editions, landlords who let residential property under an assured shorthold tenancy (AST) and take a deposit must protect that deposit in an authorised scheme within 14 days of receipt and provide certain prescribed information to the tenant.

If the landlord fails to do so, a tenant can make a claim for compensation equal to three times the value of the deposit, plus the return of the deposit and costs.  We have issued warnings to landlords to comply with the legal requirements or risk paying a hefty penalty.

However, recent cases have shown that the courts have been reluctant to punish landlords in this way and tenants have had little success in gaining compensation through the courts.

May 2011 saw two more court judgments relating to tenancy deposit schemes. In the case of Potts v Densley, the High Court followed an earlier ruling and determined that the sanction could not be applied against the landlord because the deposit had been protected before the hearing. The court decided that it made no difference that the tenancy had come to an end before the deposit was protected. By protecting the deposit, the tenant’s right to compensation was extinguished.

Following on from that, a Court of Appeal case - Gladehurst Properties Ltd v Farid Hashemi -  went one step further.  In this case, the court decided that because the tenancy had come to an end, the former tenant had lost his right to even bring a claim for compensation.  In other words, if a tenant wanted to claim compensation for their landlord’s failure to comply with the deposit protection requirements, he would have to make his claim before the end of his tenancy and, even then, provided the landlord acted to get the deposit lodged before any hearing, the tenant would be thwarted.

The latest case to be decided on appeal has redressed the balance in favour of the tenants, once again.  The case of Suurpere v Nice [2011] does not change the law but is an important reminder that the provision of the prescribed information is just as important as protecting the deposit.  In this case, the landlords, Mr and Mrs Nice, did not initially protect the deposit but, after a reminder from their tenant, Ms Suurpere, they quickly lodged it, as required.  Indeed, they later actually returned the deposit to the tenant.  However, they did not at any time give Ms Suurpere the prescribed information required by the Act. The High Court ordered Mr and Mrs Nice to pay the triple penalty. It is pertinent to note that Ms Suurpere was only successful because her tenancy had not come to an end. Had the tenancy ended before she made her claim then, even if the landlord had failed to provide the prescribed information, she would have failed, applying the decision made in the Gladehurst case.

Probably as a result of this flurry of litigation, the legislators have tried to clarify and improve the tenancy deposit scheme rules in the proposed Localism Bill. If it is enacted, this will make a number of changes, including preserving the tenant’s right to pursue the penalty even after the end of the tenancy (i.e. reversing the decision made in the case of Gladehurst) but also allowing the court some discretion over the value of the penalty, to between one and three times the amount of the deposit.

Points to remember:

• Landlords must protect deposits held under ASTs in a government authorised deposit scheme
• Landlords must also provide certain prescribed information to their tenants about the scheme
• If a landlord fails to do either, the tenant can apply for a triple penalty (three times the value of the deposit)
• The tenant must bring his claim before the end of the tenancy, and as long as the landlord complies before the hearing, no penalty will be payable.
• A landlord cannot use the accelerated court procedure to regain possession unless he has protected the deposit and provided the prescribed information
• It is clear that the courts have concluded that the legislation is there to ensure tenants’ rights are protected but the legislation is not intended to give the tenant a windfall or to penalise landlords financially. Landlords should take their obligations seriously, though, to avoid a heavy penalty

November 2011