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Tenancy deposits - clarity or further confusion for landlords?

Since 6 April 2007, it has been mandatory for a landlord to ensure that a deposit paid on creation of a new residential Assured Shorthold Tenancy Agreement (AST) in England or Wales is paid into a Tenancy Deposit Scheme (TDS). These changes were brought in under amendments made to the Housing Act 2004 and they were not intended to be retrospective. 

In the recent case of Superstrike Ltd v Rodrigues (2013) the Court of Appeal held that in some cases a deposit paid before 6 April 2007 should also be placed into a TDS; when the fixed term of an AST has come to an end and a statutory periodic tenancy has arisen.

The facts

The tenant (Rodrigues), who appealed the decision, took an AST from the landlord (Superstrike Ltd) dated 8 January 2007, for a fixed term of one year less one day, at a monthly rent of £606.66, and paid a deposit of that same amount under the terms of the AST. At the expiry of the fixed term, by the effect of Section 5 of the Housing Act 1988, the tenant became entitled to a statutory periodic tenancy on equivalent terms. On 22 June 2011 the landlord served a notice under Section 21 of the Housing Act 1988 requiring possession. The issue before the Court was whether it was entitled to do so, as the deposit had not been protected within a TDS authorised by the Housing Act 2004.

Decision

The Court of Appeal held that a statutory periodic tenancy is a new tenancy. On the facts, the statutory periodic tenancy was created after 6 April 2007 and therefore the tenant's deposit was required to be held in accordance within a TDS. Since the deposit was not held in accordance with a TDS, the landlord was not entitled to possession under Section 21.

The Court of Appeal did not favour the landlord's argument that the Housing Act 2004 requires the deposit to be protected on receipt and the deposit monies were not physically received after 6 April 2007. It favoured the tenant's argument of receipt by way of transfer from one tenancy to another. This occurred by setting-off the original deposit against a demand for payment for a new deposit as the statutory tenancy is granted on equivalent terms. The Court held that the landlord did not seek payment out of the original deposit for the consequences of any prior breach of the original tenancy agreement. Therefore it follows that the tenant paid, and the landlord received the sum of £606.66 by way of a deposit in respect of the new periodic tenancy in January 2008, and so the obligations under the Housing Act 2004 applied to the deposit so received.

Comment

The Tenancy Deposit Scheme, MyDeposits and The Deposit Protections Service have published a joint statement in relation to this decision on their websites stating that they have read the judgment with interest and they will be consulting with the DCLG before issuing a further joint statement. We can expect their previous advice to change.

This case means that Landlords must ensure deposits paid prior to 6 April 2007 are protected where a statutory periodic tenancy has arisen after 6 April 2007. Due to changes brought in by the Localism Act 2011, however, they may have to do more.

Amendments introduced under the Localism Act 2011 provide if a relevant deposit was not protected before 6 May 2012 (being the end of the 30 day moratorium introduced after the changes brought in by the Localism Act 2011) it must be returned to the tenant in full or with agreed deductions before a Section 21 notice can be served.

A point not considered in this case is where a deposit was paid prior to 6 April 2007 and the statutory periodic tenancy also commenced before 6 April 2007. The Localism Act commencement order stated that the amended protection regime applies to all deposits held for ASTs in place on or after 6 April 2012. Thus there is an argument that any deposits paid in respect of an AST should also be protected within a TDS, including those paid before 6 April 2007. The safer course of action may be for landlords to return any deposit in respect of an AST not protected by a TDS in full to avoid being prevented from obtaining possession under Section 21.

Section 21 remains a much loved route to possession for landlords, because it is a non fault right (as opposed to possession under Section 8 of the Housing Act 1988). Whilst it is a good thing that the Court of Appeal clears up these points, the increasing number of trips to the senior courts, and the Government's amendments to the deposit legislation, make obtaining possession under this route increasingly tricky.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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