Deposits protection warning to landlords

Posted: 1st July 2013

houseIn a resounding warning to owners of rental properties, the Court of Appeal (the Court) has ruled that a landlord who unwittingly failed to comply with deposit protection rules was not entitled to take possession action against a tenant. The Court’s broad interpretation of the relevant provisions of the Housing Act 2004 (the Act) means that landlords must be wary of losing any right they may have to obtain vacant possession if they fail to handle deposits correctly.

The landlord had rented out a flat for a fixed term of one year, less one day, and the tenant had paid a deposit of £606.66, that being one month’s rent. At the expiry of the fixed term, the tenancy became a statutory periodic tenancy by operation of section 5 of the Housing Act 1988. The landlord subsequently served a notice on the tenant, requiring possession, notwithstanding that the deposit remained outstanding and had not been protected in accordance with a scheme authorised under the Act.

A possession order was initially granted in the landlord’s favour but that was later set aside by a deputy district judge on grounds of non-compliance with the provisions relating to the handling of tenants’ deposits. The landlord’s appeal against that ruling was subsequently upheld by a county court judge.

In allowing the tenant’s appeal, the Court acknowledged that the issues raised were of considerable importance to both landlords and tenants of residential property. The Court concluded that, as the tenant’s deposit was not held in accordance with an authorised scheme, the landlord was not entitled to serve a possession notice under section 21 of the 1988 act.

The Court noted that the landlord and tenant were both probably unaware of the legal process by which a new statutory tenancy was created on expiry of the fixed term lease. Nevertheless, on a correct interpretation of the Act, they had to be treated as if they were so aware. The tenant was deemed to have paid the deposit in respect of the new tenancy by way of set-off against the landlord’s obligation to account to the tenant for the deposit in respect of the previous tenancy.

Although the landlord may well have been unaware of the obligations that arose on expiry of the fixed-term lease, the Court ruled that its interpretation of the deposit protection provisions contained within section 213 of the Act was entirely consistent with the policy and aim of the legislation.