Tenancy Deposit Schemes – lost in translation
In response to the common issue of tenants’ deposits being unjustly withheld by landlords at the end of tenancies, the Legislature in its wisdom, enacted regulations, namely Part 6 Chapter 4 of the Housing Act 2004 (“the Regulations”) which came into force on 6 April 2007 and apply to all Assured Shorthold Tenancies created since that date.
These Regulations essentially provide compulsory measures whereby landlords/letting agents have 14 days from receipt of deposit monies, to place the monies in a secure scheme (“the Scheme”) and to provide details of the scheme to tenants. If there is no dispute at the end of the tenancy, the deposit monies are returned to the tenant. Any disputes are referred to Alternative Dispute Resolution (“ADR”) which is provided free under the Scheme and the parties are bound by ADR determination.
There are two types of Scheme, namely an insurance backed one or a “custodial” Scheme. In the first type, the landlord pays a premium to the Scheme for cover but retains the deposit. In the second, the deposit is transferred to the Scheme within 14 days and held in escrow.
A breach of the Regulations carries severe penalties; a financial penalty of three times the deposit (s.214(4)) and exclusion from the accelerated possession procedure so that the tenancy cannot be terminated.
At first glance, these Regulations would appear to offer significant protection to tenants whilst severely penalising landlords, if breached. A number of Appeal decisions have however, highlighted the extent to which lamentably unclear legislation can lose its “bite” in the course of judicial translation.
A case now largely viewed as the authority on the interpretation of the Regulations, is Tiensia –v- Vision Enterprises Limited  EWCA Civ 1224,  1ALL ER 1059. In this case, the tenants made an application under s.214(1) for the repayment of the deposit and further, under s.214(4) for a penalty payment in respect of failure to comply with the initial requirements and to provide the prescribed information within the 14 day timeframe specified by s.213. Both requirements had been complied with by the date of the hearing.
The Court found that the obligations and the 14 day time limit imposed by the Act, were deemed free-standing. Further, it was ruled that the penalties only attached to the obligations and not to the 14 day time limit. Consequently, a landlord may avoid the penalties entirely, by simply complying immediately prior to the hearing of the tenant’s application to the Court. There is little incentive for timely compliance and given the significant costs to a tenant of making an application, this somewhat tarnishes the efficacy of the Regulations.
What if the tenancy has ended by the date of the hearing?
This issue was dealt with in the later case of Potts –v- Densley  EWHC 1144 (QB,  ALL ER (D)54(May). In this case, the Landlord first let the property for a term of one year commencing 12 May 2007. A deposit of £1,500 was taken and correctly registered with the Tenancy Deposit Scheme. In 2009, the parties agreed to enter into a new tenancy, upon which basis the deposit was to be withdrawn from the Scheme and held by the Landlord, subject to insurance cover. Immediately prior to the return of the deposit to the Landlord, the Tenants exercised a break clause, thereby terminating the tenancy on 15 August 2009. On 10 August 2009, the Landlord offered to pay the deposit back to the tenants but the Tenants refused and insisted the Landlord register the deposit with a Scheme, pursuant to s.213. The Landlord failed to do so and the Tenants issued proceedings on 12 August 2009. The Landlord registered the deposit with a custodial Scheme on 19 August 2009, hence two days after the tenancy had been effectively terminated. The question for the Court was whether a landlord could be capable of complying with s.213 obligations, after a tenancy has ended, so as to avoid s.214 penalties.
The Court found (at least in the circumstances of this case) that it could ; it was held that a party’s position as “the Landlord” or “the Tenant … crystallises when a deposit is paid”. Thereafter, “whether the tenancy has been determined or not”, the Landlord remains under a continuing obligation to comply with the initial requirements and to provide the prescribed information. Consequently, the Landlord was considered by the Court to have complied with s.213 by the date of the hearing and hence (following Tiensia principles), was not obliged to pay a penalty to the Tenants.
The position is made all the more confusing by the case of Gladehurst –v- Hashemi  EWCA Civ 604, 19 May 2011 which apparently contradicts the Appeal Courts’ later findings in Potts.
In Gladehurst –v- Hashemi, the Landlord had failed to pay the deposit monies into a Tenancy Deposit Scheme and upon expiry of the tenancy only repaid part of the monies, withholding a proportion commensurate with alleged disrepair to the property. The Tenant issued a claim for penalty compensation under s.214(4) and this was struck out at first instance, as the Application was made after termination of the tenancy. This decision was reversed on appeal and thereafter further appealed by the Landlord. Patten LJ held that “the point is not an easy one but I have come to the conclusion that the power of the Court to make an Order under s.214(3) and (4) is no longer exercisable once the tenancy has come to an end’.
The Appeal Court had further occasion to consider this contradictory position, in Suurpere –v- Nice which was determined shortly after Potts and Gladehurst.
In Suurpere the Tenants had been harassed into vacating the property by the Landlords. It could therefore be said that the tenancy had not been validly terminated.
Yet again, the Appeal Court sought as in Potts, to interpret the legislation with a view to achieving justice; it was held that the Landlords’ repayment of the deposit monies did not absolve its continuing s.213 obligations. However, Gladehurst was distinguished in so far as in that case the tenancy had clearly terminated whilst in this case, termination was in dispute. On this basis, the Landlords were ordered to pay the Tenant the s.214(4) penalty, for failure to provide prescribed information. On the facts, justice therefore prevailed.
One further point worth mentioning is that the language of s.214(1)(a) which refers to “have not” and “has not”, is consistent with the tenancy needing to be continuing at the date of hearing, to enable the Courts to enforce s.213 obligations and impose s.214 penalties.
On balance however, these appealed decisions collectively appear to favour the landlord over the tenant; a landlord’s opportunity to evade penalties is extended, whilst a tenant’s ability to enforce penalties, is restricted. In so doing, the Courts may on occasion, defeat the original objective of this legislation.
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.