Please note: for cases after 6 April / 6 May 2012 this can no longer be relied upon

 

Gladehurst Properties Ltd v Hashemi & Anor [2011] EWCA Civ 604 (19 May 2011)

We now have a further court of appeal ruling on deposit protection, in particular can an ex-tenant make an application for 3 times deposit once a tenancy has ended. Although at first glance, the outcome of this case may seem good news for landlords, I wonder if this is very bad news for landlords indeed?

Background

Gladehurst Properties Limited (“Gladehurst”) is the landlord of flat 8, 238 City Road, London EC1V 2PQ which was let to Mr Farid Hashemi and Mr Matthew Johnson under an assured shorthold tenancy agreement dated 8th August 2007. The tenancy was granted for a fixed term of one year commencing on 6th September 2007 subject to a break clause under which either the landlord or the tenants could terminate the lease after 6 months by giving two months’ notice in writing.

The rent payable under the tenancy was £2,080 per calendar month. It was payable in advance on the 6th day of each month. The tenants paid a deposit of £6,240 which was held by the landlord as stakeholders.

The deposit which the tenants paid was never registered or paid into a tenancy deposit scheme. Instead it was retained by Gladehurst in its own bank account until October 2008 when the tenants vacated the flat. There were various breaches of the cleaning and repairing covenants outstanding at the end of the lease and Gladehurst arranged for an independent inventory clerk to inspect the flat and to assess the cost of cleaning and making good the disrepair. He recommended the deduction of £1,123.99 from the deposit. This was therefore retained by Gladehurst and the balance of £5,116.01 was repaid to the tenants via a bank transfer to their nominated account.

In November 2008 Mr Hashemi contacted Gladehurst and requested receipts and a breakdown of the amount deducted from the deposit. At the same time he put the landlord on notice that he would issue a claim for three times the deposit as provided for under s.214 of the 2004 Act.

Hearings leading to Court of Appeal

The claim was considered on paper by District Judge Manners on 2nd April 2009. She struck out the claim on the ground that it had been made after the tenancy had come to an end and that the provisions of s.214 no longer therefore applied. The tenants applied to set that order aside and their application was heard by District Judge Stary on 9th July 2009 when Mr Hashemi appeared in person. The District Judge dismissed the application insofar as it related to the claim for three times the deposit but allowed the claim to stand in respect of the sum of £618 out of the £1,123.99 retained by Gladehurst from the deposit.

The £618 represents the cost to the landlord of repainting the flat and of various other items of repair. These were disputed by the tenants. But they accept that the landlord was entitled to deduct unpaid water rates; unpaid inventory charges and the cost of cleaning the premises, all of which totalled £505.99. The District Judge ordered that the dispute about the £618 should continue as a small claim and gave directions for a new defence to be filed in relation to that.

The tenants appealed against the striking out of their claim for three times the amount of the deposit. This was heard by HH Judge Cryan who allowed the appeal; restored the claim under s.214(4) of the Act; and gave judgment for the tenants in respect of the deposit and for a further sum of £18,720 representing the s.214(4) claim. He also ordered that the balance of the claim in respect of the sum of £618 should be stayed for a period of 28 days and struck out if no application to restore it was made by the tenants within that period.

Gladehurst now appeal against the judge’s order with the permission of Arden LJ. The principal ground of appeal relates to the order for payment of the £18,720.

Authority to sue

One of a couple of additional grounds of appeal arose in relation to the authority to sue which is quickly worthy of note.

In this case, only one of joint tenants had commenced proceedings.

The issue about [the other tenant’s] involvement in the proceedings and the appeal was important because … any remedy which the tenants are entitled to either under the lease or under s.214 is enjoyed by them as joint tenants and can only be enforced by both of them. In these circumstances, CPR 19.3(1) requires both of them to be parties to the action unless the court orders otherwise. [para 16]

As it turned out, in this case, Mr Hashemi had obtained a witness statement from the other tenant (Mr Johnson) and although perhaps all procedures including statement of truths were not followed precisely correctly, this witness statement gave Mr Hashemi authority to pursue the claim on his behalf and no real prejudice by the landlord was suffered so it was allowed to continue in both names.

The section 214 claim

Lord Justice Patten:

… I have come to the conclusion that the power of the Court to make an order under s.214(3) and (4) is no longer exercisable once the tenancy has come to an end. Although s.213 makes it unlawful for a landlord to require the payment of a deposit which is not to be dealt with in accordance with an authorised scheme and requires the landlord within 14 days of receipt of a deposit to comply with the initial requirements of such a scheme, it is important to note that no criminal penalty is imposed for non-compliance with these provisions. Instead, they are made enforceable at the option of the tenant under s.214. It is entirely a matter for him as to whether he chooses to take advantage of the provisions in s.213 which were created for his benefit.

 

The answer therefore to the argument that the construction of s.214 contended for by Gladehurst will encourage landlords not to comply with their legal obligations under s.213 is the same as applies to any breach by a landlord of its covenants or other obligations under the lease. The tenant always has it within his hands to secure their enforcement by the taking of proceedings. That is the remedy prescribed by s.214 of the Act and it is up to the tenant to make use of it.

 

Looked at in this way it is entirely understandable if some temporal limits apply to the exercise of the right of enforcement under s.214. The initial requirements of an authorised scheme are, as Mr Gannon submitted, matters to be dealt with at the inception of the lease and not later than the expiry of the term. Section 214(1), as interpreted in Tiensia, speaks in terms of these requirements not yet having been complied with and therefore carries the strong implication that the default can still be remedied. This impression is confirmed by s.214(3) which requires the Court either to order the repayment of the deposit to the applicant or to order the landlord to pay it into an authorised scheme. For the Court to have a genuine discretion to exercise both alternatives must be available. On the facts of this case, neither was. Although Judge Cryan treated the £618 as part of the deposit retained by Gladehurst, it was artificial to do so. The tenants had agreed to Gladehurst retaining the £618 pending the prosecution of their claim for its return which it was for them to pursue and make out. The retention was therefore consensual.

 

The issue raised by the landlord has also to be resolved in a case where the landlord has returned the entirety of the deposit on the termination of the lease. Mr Gannon accepted that if this were the case then no s.214 claim could be made. Section 214 envisages that it must still be open to the Court to make both a s.214(3) and a s.214(4) order. Where this is not the case neither applies.

 

But that argument would mean that a defaulting landlord who nevertheless was scrupulous in dealing with the deposit at the end of the lease would be in a worse position with a defaulting tenant than he would be with a tenant who observed his own covenants to the letter. If the landlord was able to refund the deposit in its entirety he would escape the consequences of s.214(4) but not if he had legitimate grounds for retaining part of it to pay for repairs.

 

Anomalies of this kind are avoided by reading s.214(1)(a) as meaning that the initial requirements of an authorised scheme have not been but are still capable of being complied with. This is consistent with the decision in Tiensia and is the only meaning which ties in with the two alternatives in s.214(3) continuing to be available. In practice, this means that the grounds for a s.214 application will cease to exist once the lease expires and no order under either s.214(3) or (4) can therefore be made after that date. From that moment on the application will cease to be “such an application” as is described in s.214(2). [paras 37 – 42]

Comment

I agree with the comments about the fact that the legislation has been worded in such a way make it the tenant’s responsibility to make an application. If a tenant fails to pay a landlord rent, it is for the landlord to serve a notice and make an appropriate application to the court for judgment and remedy (i.e. possession). In the case of tenancy deposit schemes, it is the same principle in that the tenant must commence proceedings to obtain the remedy.

As we have repeated on many occasions, the legislator in our view worded the penalty provisions specifically so as to make the 14 day limit as a period of immunity for the landlord to have time to protect the deposit. From day 15 onwards, the tenant who truly has issues with a deposit that has not been protected still has the full weight of the court behind him despite this and other decisions.

The main basis for the court deciding that only “tenants” (and not “ex-tenants”) can make an application is firstly because:

… once the lease has terminated the landlord cannot comply with the initial requirements of a scheme. None of the authorised schemes which have been set up intend a deposit to be protected under the scheme once the contractual term has come to an end. Moreover, if the respondents are right and it remains open to a former tenant to take proceedings under s.214 after the termination of the lease, their landlords could be faced with proceedings for three times the amount of the deposit even years after the lease has come to an end and the initial deposit has been returned. [para 32]

With the very greatest respect, I’m not entirely sure this is technically correct. For example, the Deposit Protection Service has no restriction within their rules (or initial requirements) as to when a deposit may or may not be protected. The DPS will accept deposits after a tenancy has ended. Although it should be noted, it seems Lord Justice Patten chose the words carefully and doesn’t actually say the schemes won’t accept a deposit. It is simply stated that the schemes didn’t “intend a deposit to be protected once the … term has come to an end.”

Secondly, in order for the court to get round the problems they faced, they have basically reworded section 214.

The wording contained in the Housing Act 2004 is as follows with the bold part added by the court:

214 Proceedings relating to tenancy deposits

(1)Where a tenancy deposit has been paid in connection with a shorthold tenancy, the tenant or any relevant person (as defined by section 213(10)) may make an application to a county court on the grounds—

 

(a) that the initial requirements of an authorised scheme (see section 213(4)) have not , or section 213(6)(a) has not, been but are still capable of being complied with in relation to the deposit; or

 

(b) that he has been notified by the landlord that a particular authorised scheme applies to the deposit but has been unable to obtain confirmation from the scheme administrator that the deposit is being held in accordance with the scheme.

This basically follows on from above in that if the landlord cannot comply with the initial requirements of the scheme because the tenancy has ended, then an application by a tenant does not fall into that particular ground of application.

The final reason was that if a tenant has a ground of application, the court must order either repayment of the deposit or, protection with the custodial scheme. Section 214(3) & (4):

(3)The court must, as it thinks fit, either—

(a) order the person who appears to the court to be holding the deposit to repay it to the applicant, or

(b) order that person to pay the deposit into the designated account held by the scheme administrator under an authorised custodial scheme,

within the period of 14 days beginning with the date of the making of the order.

(4)The court must also order the landlord to pay to the applicant a sum of money equal to three times the amount of the deposit within the period of 14 days beginning with the date of the making of the order.

At paragraph 39 of this judgment:

… s.214(3) which requires the Court either to order the repayment of the deposit to the applicant or to order the landlord to pay it into an authorised scheme. For the Court to have a genuine discretion to exercise both alternatives must be available…

In summary therefore in this case, it was held that because the deposit had been repaid (albeit with a small portion held by the landlord with the tenants consent) and because it was not possible to protect the deposit with the DPS, neither option was available and as a result, no order could be made for three times deposit because in order for that to apply, the court must first have available and order either of those two options.

Again, with the very greatest respect, I can’t see how that is correct because section 214 is not only dealing with protection but also prescribed information.

Take the following example:

Landlord protects deposit perfectly within 14 days using the DPS and fails totally to provide the prescribed information.

Now, no person is holding the deposit so an order to repay cannot be made under 214(3)(a). As the deposit is already being held in the DPS, then no order can be made under 214(3)(b).

Therefore, neither alternatives are available, so, according to this decision, despite the legislation specifically making the penalties for three times deposit available for both protection or prescribed information (or both), it now seems it will not be possible for the court to order 3 times deposit in relation to prescribed information only in particular if the DPS has been used? Clearly this point wasn’t argued so this type of case could no doubt be distinguished on the facts but this would seem to be difficult for a tenant.

Why is this bad news?

As we suggested in the first paragraph, this decision really could be bad news for landlords. Allow me to explain …

Had the court decided as we had thought that the tenant could make an application after the tenancy has ended but the landlord could remedy the situation at any time up to the hearing so as avoiding the penalty, I think that would be almost an end to the situation and things would stay as they are. After all, as the nearlylegal blog points out, the Limitation Act limits the time for a tenant to make a claim up to six years.

However, now that a tenant must make an application during the term of the tenancy and any application after will fail, the Government is probably not going to like that. It is therefore highly likely now that major changes will be introduced maybe into the Localism Bill which could be far worse than what landlords had.

There is a question still unanswered which is what if the tenant applies during the tenancy but the hearing is after the tenancy has ended?

Despite this judgment, our advice is, as always, to protect the deposit within 14 days and issue the prescribed information!

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