A ‘Protection’ racket comes to an end

Posted by the Property team on 5th April 2012

Landlords have enjoyed an ‘Indian summer’ of judicial decisions on disputes arising from the Deposit Protection provisions of the Housing Act 2004, but now in 2012 that will be coming to an end. Stephen Netherwood explains. 

Protection of residential tenancy deposits in an authorised scheme became a statutory requirement in the Housing Act 2004, so that neither landlord nor tenant could unfairly exploit the fact that sometimes sizeable sums of tenants’ money has been handed over to the landlord. However, the deposit protection section of the Act is – by common agreement – atrociously drafted.

Parliament intended that a landlord who failed to comply with the statutory requirements should suffer extremely unpleasant consequences as a way of ensuring compliance. Those consequences – set out in section 214 of the Act – included a ‘penalty payment’ of three times the deposit to a tenant whose deposit had not been protected, and being unable to rely on section 21 Housing Act 1988 to recover possession of the property.

Because of the bad drafting, landlords have been able to avoid these consequences, and the whole system has become a racket. Courts agreed that the tenant’s claim could not be successful if he or she was no longer a tenant, or if the landlord had repaid the deposit or even simply protected it between receiving the tenant’s claim and the Court hearing. A solicitor would have had to advise a landlord client that the likely penalty for not protecting a deposit was – nothing.

On April 6th 2012 this all changes; the Localism Act 2011 will amend the relevant sections of the Housing Act 2004, and the penalty will now be impossible to escape..

On the other hand, things have been made a bit less problematic for the landlord.

For the tenant: if the deposit is not properly protected, and/or the landlord fails to provide the required details to you, then if you make a claim, the landlord has no defence. He will have to protect the deposit in full and pay you a penalty sum. Also, you’ll still be able to claim even after moving out of the property.

For the landlord: you now have 30 days (not 14 as previously) to protect a deposit and provide the tenant with the required details; and if you are ordered to pay a penalty sum to the tenant there will be a new lower limit of the amount of the deposit. (Previously it was no less and no more than three times the deposit amount, which is now only the maximum.)

As for using the ‘no-fault’ recovery of possession, you can only regain the ability to use s.21 by refunding the whole deposit (less any deductions to which the tenant might agree!) beforehand. (There is an exception where a previous section 214 claim has been disposed of.)

For existing tenancies, transitional provisions are in place which mean that a landlord who has not protected the deposit can protect himself against claims under s.214 provided he puts the deposit into a scheme before 4 May. This is crucial as it will be the last time he can do so.

It’s now crucially important in transactions involving tenanted properties that the purchaser enquires into the status of the deposit protection. If it wasn’t properly protected by the original landlord, it seems that you will never have a defence to a section 214 claim by the tenant unless you immediately execute a new agreement and protect the deposit. It may be advisable to get an indemnity from the vendor.

If you are affected by these changes, contact Bennett Griffin’s Commercial Division for further explanation.