Articles

The Tenancy Deposit Scheme (“TDS”) has been in operation for nearly 3 years having come into effect on 6 April 2007. Whilst the majority of Landlords and letting agents now regard themselves as fully conversant with the requirements of the TDS, there is still a degree of uncertainty, particularly as to what the sanctions are that flow from non-compliance with the TDS.

When does it apply?
Where a property is let on an Assured Shorthold Tenancy on or after 6 April 2007 and the Landlord takes a deposit from the tenant, the Landlord must lodge that deposit with an appropriate Tenancy Deposit Protection Scheme, whether that be a Custodial Scheme or an Insurance based scheme. The TDS is not retrospective and therefore if a Landlord who has taken a deposit for an assured shorthold tenancy before 6 April 2007, does not need to lodge the deposit with an appropriate scheme unless a new tenancy is created after that date.

Section 212(8) Housing Act 2004 defines a tenancy deposit as:

“…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`.

Some landlords and agents have tried to avoid the TDS by claiming that money taken from a tenant is in fact not a deposit, for example that it is an advance payment of rent. The Courts have addressed this practice and have adopted the approach that even if it is not called a deposit, if it looks like a deposit, sounds like a deposit and has been treated like a deposit, it will be regarded as a deposit. Therefore, if a landlord or agent receives any money from a tenant which is not a current rent payment, unless a reasonable explanation can be provided for what the money is (for example an administration fee), the money must be registered with a Tenancy Deposit Protection Scheme.

Having lodged the money with an appropriate scheme, within 14 days of receiving a deposit from a tenant, a Landlord must provide the tenant with the following information:-

- the scheme with which the deposit has been lodged
- the contact details for that scheme
- how to apply for the release of the deposit
- what to do if there is a dispute about the deposit

Consequences of failing to comply with the TDS

If a Landlord does not comply with the requirements of the TDS:-

• A landlord cannot recover possession using Section 21 notice (a 2 month notice)

- The Court may order the Landlord to pay the Tenant three times the value of the deposit.

- A Tenant may apply to the Court to require both that the money to be protected in accordance with the schemes and also that the Landlord provide the tenant with specified information about the scheme which is being used by the Landlord.

- The Court may order that the Landlord either repay the deposit or pay the deposit to the Custodial Scheme Administrator.

The inability of a Landlord to use a section 21 notice to recover possession of a property and the risk of financial sanction when a Landlord has not complied with the TDS has helped to ensure compliance with the legislation. However, there has, perhaps, been a failure to appreciate that the failure to comply with the requirements of the TDS may derail not only a claim brought on the basis of section 21 notice but also a possession claim brought on the basis of rent arrears.

Rollits’ Property Dispute Resolution Team recently dealt with a possession claim where possession of a residential property was being sought due to rent arrears. In that case, a Landlord entered into an assured short-hold tenancy agreement with a tenant with rent of £450 per month payable. A deposit of £450 was taken by the Landlord. Whilst there were no problems with the tenant initially, rent payments were then missed. Rent arrears began to build up and after they failed to be cleared by the tenant, notice was given to the tenant that possession proceedings would shortly be instigated on the basis that as at the time of the notice at least 2 months rent was due and owing. No further payments were received from the tenant and possession proceedings were then issued.

As at the time of the possession hearing, at least 2 months rent remained due to the Landlord. Whilst the District Judge hearing the possession claim eventually made a possession order in favour of the Landlord, prior to doing so enquired as to the applicability of the TDS.

In this instance, the tenancy pre-dated the TDS and therefore did not apply. However, the District Judge made clear that had the TDS applied and there been evidence that the scheme had not been complied with by the Landlord, despite possession being sought on a rent arrears ground, he would have refused to make a possession order. Instead, he stated that the hearing would have been adjourned to allow the tenant to file a counterclaim “which was almost guaranteed to succeed”. This was on the basis that whilst there may have been at least 2 months rent due and owing to the Landlord, the Landlord’s failure to comply with the TDS would have entitled the tenant to 3x the value of the deposit, thus extinguishing the claim.

Whilst this raises questions as to whether such a counterclaim could be used to rebut a possession claim if the tenancy contained a clause providing that tenant has no right of set off, it shows that the Court is mindful of the TDS and will use the TDS to protect tenants, even if the tenants themselves are not aware of the protection that the TDS offers them. A failure to deal properly with a deposit could therefore prevent the recovery of a property even where there are substantial rent arrears.

Chris Drinkall