Tenancy deposit schemes - the saga continues

Sanctions, even in this Mitchell/Denton era, generally flow from a failure to comply with an obligation. In Charalambous v Ng [2014], the Court of Appeal concluded that parliament imposed ‘sanctions for non-compliance’ even in the absence of any pre-existing obligation or failure to comply with the tenancy deposit scheme (TDS).

Any shorthold tenant’s deposit must be protected or repaid before a valid section 21 notice can be served, even if it was paid years before the TDS.

Section 215 sanctions

Charalambous addressed whether section 215(1)(a) of the Housing Act 2004 invalidated
a section 21 notice served by landlords who were not required to protect the deposit because they were outside section 213.

The TDS commenced with
the 2004 Act, becoming
effective from April 2007.
The Charalambous tenants paid a deposit in August 2002 upon
the grant of a fixed term assured shorthold tenancy (AST), which was renewed twice. A periodic statutory tenancy arose in August 2005.

Superstrike v Rodrigues [2013] decided a deposit regarding successive tenancies was notionally paid again for each new tenancy. So upon each new grant or conversion to a statutory period tenancy, the TDS requirements applied again.

In Superstrike, Lord Justice Lloyd commented that section 215(1)(a) might invalidate service of a section 21 notice, even when no obligation under section 213 arose.

In Charalambous, the court accepted this and concluded section 215(1)(a) ensures all tenants’ deposits are protected at the end of a tenancy. Landlords not caught by section 213 nevertheless need to protect or repay the deposit before serving a section 21 notice.

The Localism Act 2011 amended sections 213 to 215 in response to the decision in Vision Enterprises Ltd v Tiensa [2010].

Time for compliance

The primary obligations of sections 213(3) and (6) include the time for compliance.
Under section 214, tenants may commence proceedings where deposits are unprotected. The court may order compensation calculated as a multiple of
the deposit.

A second set of amendments to change or ameliorate Superstrike is before parliament: the Deregulation Bill, removing the repetition of section 213 obligations on tenancy renewal or conversion. This relates only
to deposits actually or notionally paid since April 2007 and does not address the Charalambous situation. In Charalambous,
the court acknowledged that
if parliament considers the amendments should extend
to earlier deposits, further amendment of the Deregulation Bill would be needed.

The Charalambous parties agreed that the landlord was never obliged to protect the deposit pursuant to section 213. The tenants relied on section 215(1)(a) to bar a section 21 notice and not on any rights under section 214.

Court of Appeal decision

The Court of Appeal’s reasoning was thus:

• If the last actual or notional payment pre-dated April 2007, landlords were never required to comply with section 213;
• It is therefore impossible for such landlords to comply with section 213(3) and (6) timeframes;
• As they were not obliged to satisfy section 213, they probably cannot be said to have failed to comply with it;
• Such landlords would probably not be subject to a section 214 claim;
• The 30-day grace period allowed by the 2012 amendments was a chance to remedy any failure to comply with sections 213(3) and (6);
• Section 215(1)(a) is separate from questions of compliance with section 213 addressed by section 215(1)(b);
• Section 215(1)(a) focuses only on the time of service;
• No one holding an AST unsecured deposit can serve a section 21 notice;
• A landlord could enable himself to serve a section 21 notice by: repaying the deposit, or possibly securing the deposit late;
• Effectively, section 215(1)(a) imposes a simple precondition to serving a section 21 notice: deposits held must be secured.

The court rejected the argument that section 215 should be read
as relating to those landlords and deposits that section 213 applied to as it represents a single scheme. It was not swayed that the proposed construction affected pre-existing deposits and tenancies retrospectively and was not parliament’s intention.
It was unconvinced that section 215(1)(a) existed to ensure landlords did not allow protected deposits to become unprotected.

Post-Charalambous, even landlords outside section 213 and its requirements are
caught by at least some of its enforcement mechanisms.

This will affect a significant number of long-term AST landlords, who believed the TDS simply did not apply to them and the deposits they hold. They must now understand that its consequences apply although the scheme itself does not.

The court suggested a landlord wishing to serve a valid section 21 notice could comply with section 215(1)(a) by placing the deposit in a TDS first. However, the court has not definitively decided this is a safe option for landlords.

Uncertainty remains as to whether such landlords have ‘not complied’ with sections 213(3) or (6) raises the spectre of s214 proceedings against those to whom s213 never applied. SJ

Brie Stevens-Hoare QC (pictured) and Morayo Fagborun Bennett are barristers practising from Hardwicke