Protecting residential deposits: penalties and invalid notices

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

When residential tenancy deposits are taken from assured shorthold tenants, landlords must exercise care to protect them under an authorised scheme, not only when the landlord takes the deposit, but also when the fixed term expires.

As the law now stands following the Court of Appeal’s decision in Superstrike v Rodrigues (Superstrike v Rodrigues [2013] EWCA Civ 669) a landlord is required to protect the deposit within 30 days of the date of receipt by the landlord. This case turned on its own facts but has wider ramifications for all concerned with residential shorthold occupiers:

• deposits must be protected at the start of the fixed term and again at the end of the fixed term if the tenancy becomes periodic;
• the prescribed information must be sent to the tenant within 30 days of the initial receipt of the deposit; and

• this information must be sent again to the tenant the moment the fixed term expires and a statutory periodic tenancy is created (under section 5 of the Housing Act 1988).

Deposit protection

Legislation was introduced on 6 April 2007 that required landlords to protect residential deposits paid in respect of shorthold tenancies in authorised schemes. If a landlord fails to protect the deposit, then a tenant may seek an order from the court to require the landlord to repay the deposit together with a penalty of up to three times the deposit paid.

This in itself is fairly bad news for the hapless landlord but more crucially, the failure to protect the deposit and then serve statutory information about the scheme where the deposit is held means that the landlord is unable to terminate the shorthold tenancy with a two-month notice to quit (known as a section 21 notice).

Ability to terminate

The benefit of a shorthold tenancy as opposed to a simple assured tenancy is that the landlord can terminate the shorthold without there being any fault on the part of the tenant. This gives the landlord certainty and allows possession to be obtained.

In Superstrike the landlord took a deposit from the tenant a few months before the tenancy deposit legislation was introduced. The fixed term came to an end and the tenant remained in occupation on the basis of a statutory periodic tenancy. This is a new tenancy on the same terms as the previous fixed term tenancy, except that it is periodic, based on the last rent payment period paid before the fixed term ended.

Four years later, the landlord needed to obtain possession of the premises and served the two months’ notice to end the tenancy. This was challenged on the basis that the landlord had failed to serve the statutory information in relation to the deposit. As the legislation had not been in place when the deposit was first paid the landlord argued that it was not required to serve any information relating to the deposit.

The case ended up before the Court of Appeal, which held that:

• the statutory periodic tenancy is a new tenancy when it comes into force and as a result this new tenancy was created after the legislation;
• whilst no new deposit was paid, the keeping of the previous deposit during the periodic tenancy would be treated as though the deposit had been repaid to the landlord; and
• as a result the landlord was required to comply with the terms of the tenancy deposit legislation and it had failed to do so. The landlord’s two months’ notice was therefore invalid.

What this case means for landlords

The outcome of this case means that when a deposit has been paid, the landlord should re-protect it and re-serve the statutory information on the tenant immediately that the fixed term ends and the periodic tenancy takes effect.

Failing to do so, as the law stands, could mean that the landlord will not be able end the tenancy on a no-fault basis under the section 21 procedure.

If you find yourself in the position that you discover that you hold a deposit that has not been protected then the simplest way to remedy this is to get the tenant to sign a new fixed-term tenancy (surrendering the old one) and then deal with the deposit, protecting it and serve the statutory information within 30 days.

Terminating a fixed-term assured shorthold tenancy

The Court of Appeal has just confirmed what happens when a fixed-term assured shorthold tenancy expires and the tenant remains in occupation on a statutory periodic tenancy (Spencer v Taylor [2013] EWCA Civ 1600). In that situation, it seems that the landlord can serve a notice under section 21(1)(b) of the Housing Act 1988 at any time, provided the tenancy has, at some stage, been a fixed term tenancy. It is no longer necessary to comply with the additional requirements of section 21(4) if the fixed term tenancy has expired and the tenant is in occupation on a statutory periodic tenancy.