Following up on her previous update on the subject, Tessa Shepperson uncovers a latent pitfall for landlords who fail to comply with the new tenancy deposit rules
After my last article on the new tenancy deposit laws, I rather hoped that I would not have to revisit this topic for some time. However a worrying issue has arisen. It concerns a problem which was always there but which under the new rules has a much greater significance. Let us remind ourselves first what the new rules, which came into effect on 6 April, are.
A landlord who takes a deposit must:
protect it within a government approved tenancy deposit scheme; and
serve a notice on the tenant giving ‘prescribed information’.
If this is not done within 30 days of payment of the deposit to the landlord or his agent, then:
The tenant can bring a county court claim for an order that the landlord pay a penalty for non-compliance, of between one and three times the deposit sum (the precise amount to be in the discretion of the judge); and
The landlord is unable to serve a valid section 21 notice (to recover possession) unless either:
The full deposit sum has been paid back to the tenant (or, if the tenant agrees, which in most cases is unlikely, the deposit less any payment due to the landlord), or
The tenant has brought a claim for the penalty which has been resolved in some way (either by court order
The legislation makes it clear that the penalty payment can be ordered at any time after the 30 day period has ended, including after the tenancy has ended. So if the landlord fails to protect within the 30 day period, he will potentially be liable for the penalty until the limitation period ends, in six years time.
Under the old regime landlords could protect out of time. However under the new rules, this option is no longer available. It is therefore essential that landlords, or their agents, protect the deposit within this timeframe. However there is a potential problem. You might expect the definition of a deposit to be obvious. ‘It is of course’, you will say, ‘money paid to the landlord to provide a fund to use at the end of the tenancy in case of damage to the property’. Sadly, it is not as straight forward as this.
Under s212(8) of the Housing Act 2004 the statutory definition of a ‘tenancy deposit’, in relation to a shorthold tenancy, is any money intended to be held (by the landlord or otherwise) as security for:
(a) the performance of any obligations of the tenant; or
(b) the discharge of any liability of his arising under, or in connection with, the tenancy.
Most people think this just means obligations under the tenancy for damage. However, the payment of rent is also an obligation. So if a landlord takes a payment as security for rent, this will also need to be protected. So we then need to consider when a payment is rent and when it is a deposit. We have a couple of cases here to guide us, although unfortunately they are both county court decisions and so are not binding on anyone.
Piggott v Slaven
The first is Piggott v Slaven, a decision made in the Grimsby County Court in 2009 and reported on the Nearly Legal blog on 23 February that year.1 Mrs Slaven paid a £600 deposit to Mr Piggott in April 2006. She then moved to a different property in June 2008, after the tenancy deposit regulations came into force. The deposit was not protected at that time. Subsequently Mr Piggott served a section 21 notice and brought proceedings for possession. The proceedings were defended on the basis that the tenancy deposit regulations had not been complied with. Mr Piggott claimed that the money had been taken as advance rent and therefore did not need protecting.
At the hearing the judge said that it could not have been intended for a landlord to be able to avoid the scheme simply by saying that he did not intend to hold the money as security. Mr Piggott had not offset the money against the first six weeks rent at the new property and therefore the money was clearly held by way of security. His claim for possession failed and he was ordered to pay the penalty.
Johnson v Old
The second case is the more recent January 2012 decision in Brighton County Court of Johnson v Old.2 We don’t know much about this case but it seems that there was a succession of six month fixed-term tenancy agreements. The landlord required the tenant to pay rent in advance, as the tenant had failed referencing. There was also a deposit paid which was properly protected. After the end of the third fixed-term the landlord served a section 21 notice and applied for possession. The judge however refused this on the basis that all three advance rent payments had been deposits which required protecting.
Both these cases indicate that a payment which the landlord considers to be rent can be classed as a deposit, even if (according to the second case) it is credited to the rent account immediately.
When I reported this case on my Landlord Law blog on 26 June it excited quite a bit of discussion. Several people said that so far as they were concerned, any payment of rent in advance, other than that provided for in the tenancy agreement, will need protecting. The way to do this, they said, is to give a seven month fixed term, provide in the tenancy agreement for the first six months rent to be paid in advance in one payment, and then for the final month’s rent to be paid in advance before the start of the seventh month. The reason for the final payment, is to prevent any subsequent periodic tenancy from becoming a six monthly one under s5 of the Housing Act 1988. As, if it did, under s21(4), any section 21 notice would require a six months’
However if any rent paid in advance is to be a deposit, this throws up some strange scenarios. What if the rent is paid one month or two weeks in advance? Or one day in advance? Is it still a deposit requiring protection? If it is a deposit when it is paid six months in advance but not a deposit if it is paid two days in advance, where do you draw the line?
Then there is the question of what happens when the rent falls due for payment. If six month’s rent is paid in advance on 1 January with subsequent rent due monthly in advance on the first day of every month, is the landlord expected to protect the five month’s rent, and then remove it from protection on a month-by-month basis? Surely Parliament cannot have intended that? Then there is the situation raised by another commentator, who said her tenant often pays rent directly into her bank account in advance without being asked. What would be the case (she asked) if she did not find out about this until after the 30 days had passed – would her tenant then be able to apply to the court for the return of the ‘deposit’ and the penalty? ‘That’ she pointed out ‘would be a very nice earner for tenants!’
She also wondered whether the landlord in the Johnson v Old case would have to pay back 18 months worth of rent to the tenant before he could serve a section 21 notice.
An interesting question.
A note of sanity was struck by another commentator who referred to the Court of Appeal decision of UK Housing Alliance (North West) Ltd v. Francis saying that this case is authority for a deposit being money which has been paid in contemplation of being returned. Which is clearly not the case where money is paid as rent in advance.
However the UK Housing Alliance case was not a normal AST case. It concerned the sale and leaseback of a property. The vendor/tenant (who had an AST) claimed that the ‘final payment’ under this arrangement was a deposit. The court held that it wasn’t. This case will be a useful authority for landlord’s faced with a tenant claiming that rent paid in advance was really a deposit but I don’t think it will be
a conclusive one.
When the initial legislation was passed and came into force in April 2007 we all thought we knew what it meant. After
the cases of Tiensia v Vision Enterprises Ltd (t/a Universal Estates) in 2010 and Gladehurst Properties Ltd v Hashemi in 2011, we discovered that we didn’t. Are we
now going to experience further problems and uncertainty?
I understand that when the amendments to the localism bill were being drafted, it was pointed out to government that a clearer definition of a deposit would be advisable. It is perhaps unfortunate that this advice was not acted on.
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