Don’t pocket a tenant’s deposit

Since April 2007 if a landlord has granted an assured shorthold tenancy, and as a term of the tenancy has accepted a deposit from the tenant, the deposit must be protected through the use of an authorised tenancy deposit scheme.

Whilst the majority of assured shorthold tenancy agreements now include a clause that states that the landlord must put the deposit in an accredited scheme within 14 days of receipt, caution should be exercised by landlords who choose to either (i) ignore this obligation or (ii) fail to fully comply with the requirements to set up such a scheme.

Housing Act 2004 (‘the Act’)

In relation to tenant deposit schemes, the Act provides that a landlord must:

1. Comply with the initial requirements of the tenancy deposit scheme within 14 days of receipt of the deposit
2. Provide the tenant, or anyone who paid the deposit on behalf of the tenant, certain prescribed information.

The initial requirements that the landlord is required to comply with are those imposed by the particular scheme.

The prescribed information includes the name and details of the scheme administrator and the facilities available to resolve any dispute relating to the return of some or all of the deposit at the end of the tenancy. Such information should be provided within 14 days from the date when the landlord received the deposit.

If a landlord fails to comply with the requirements at points 1 and 2 above, or informs the tenant that the deposit has been placed in a scheme but the tenant is unable to obtain confirmation from the scheme administrator that this is the case, the tenant may apply to the court and request that sanctions are enforced against the landlord.

If the court is satisfied that the landlord is in breach of either of the requirements, the court may order the return of the deposit to the tenant, or alternatively that the deposit is paid into a tenancy deposit scheme within 14 days from the court order. Furthermore, the court must order the landlord to pay to the applicant a sum equal to three times the amount of the deposit within 14 days of the order.

If a tenant’s application is successful this may leave a landlord out of pocket and with no money to draw on at the end of the tenancy, particularly if the tenant has caused damage to the property. However, the imposition of sanctions by the court is to be construed strictly as has been highlighted in the recent case of Harvey v Bamforth 2008.

Harvey v Bamforth 2008

In this case the landlord entered into an assured shorthold tenancy agreement with the tenant in June 2007. The deposit was paid into a tenancy deposit scheme within 14 days of it being received. However, the landlord did not at this time provide the tenant with prescribed information on the scheme.

In January 2008 the landlord issued possession proceedings as the tenant was in rent arrears, and in February 2008 sent a letter to the tenant containing the prescribed information on the scheme.

In March 2008 the tenant applied to the court for an order that the landlord repay their deposit and a penalty, as the prescribed information had not been provided within 14 days of receipt of the deposit.

In the first instance it was held that the landlord should repay the deposit and a penalty, however on appeal it was found that the landlord had fully complied with his obligations as the prescribed information was provided prior to the tenant making the application to the court.

The court held that when considering the sanctions that can be imposed in accordance with the provisions of the Act, the following applied:

1. The requirement to provide prescribed information on the tenancy deposit scheme was a completely separate requirement to complying with the initial requirements of setting up a scheme within 14 days of receipt of the deposit.
2. However, whilst the prescribed information must be provided and the landlord is subject to sanctions if non-compliance is evident, sanctions cannot be imposed if the prescribed information is not provided within 14 days of the deposit being received.

The sanctions contained in the Act did not apply to the provision that the prescribed information had to be supplied within 14 days of receipt of the deposit, just that the prescribed information had to be provided.

Summary

The court based their decision in the above case on a strict interpretation of the tenancy deposit scheme provisions in the Act, but a cautious approach should be taken by landlords.

It appears that as long as the landlord pays the deposit into an accredited scheme and provides the tenant with the prescribed information before any application is made to the court by the tenant, no sanctions can be enforced on the landlord. However, this raises the question as to why the Act states that such information should be provided within 14 days. If failing to adhere to the time limit has no consequence, why has it been included as a provision in the Act?

This may be a question that is litigated in the future, however for the meantime landlords should take steps to place tenant deposits in accredited schemes and keep the tenant fully informed of the details of the scheme within the time limits set down in the Act. If nothing else this will avoid potentially becoming involved in litigation, which may ultimately cost the landlord more than the actual amount of the deposit.

If you would like further information please contact Graeme Davy at graeme.davy@gordonsllp.com