Since Superstrike we look at most deposit cases that have not been answered yet and assume what is the very worst outcome possible and what was the least intention of Parliament. Once you start to think like that, you generally arrive at the correct answer to the question.
Here again we have the same thing happened in Charalambous & Anor v Maureen Rosairie NG & Anor  EWCA Civ 1604 although this time I think it was fairly well predicted.
Superstrike dealt with the situation where a deposit was received before the tenancy deposit legislation commenced (6 April 2007) but went statutory periodic after commencement. In that case it was held that when the tenancy went statutory periodic the deposit was effectively received by the landlord again and so should have been protected.
At the end of Superstrike, a very important question was left unanswered and at paras 43 – 45 it was said:
… Towards the end of a further skeleton argument lodged thereafter by Mr Westgate and Mr Chataway another point was taken, namely that even if the provisions of section 213 had not applied to the deposit as a result of the creation of the statutory periodic tenancy in 2008, nevertheless the terms of section 215(1) were such that it applies so as to prevent a section 21 notice from being served whenever a deposit is held which is not held in accordance with an authorised scheme.
I can see the basis for this argument on the literal words of the section. If it is right, it would have had extensive consequences when the legislation first came into force, since it would have required any deposit to be put into an authorised scheme before the landlord could serve a section 21 notice after the commencement date, even if there would have been no other obligation to do so under section 213. It is not clear how significant would be the effect of this point now, six years after the provisions first came into force.
Interesting as the point is, it is not necessary to decide it for the purposes of determining this appeal. For that reason, I prefer not to deal with it but to leave it to be decided in a case in which it matters, if one such were to arise.
Well, now, the situation has arisen and has been answered.
On the help-line we call Superstrike deposits (taken pre April 2007 but statutory periodic after) “pre deposits” and deposits taken before April 2007 AND went periodic before April 2007 “pre – pre deposits”. This new Court of Appeal case deals with those “pre – pre deposits”.
The facts are simple, Mr Charalambous and Ms Karali took a tenancy from 20 August 2002. They paid a deposit of £1,560.00. There were a couple of further renewals for which the deposit was credited to each new tenancy and then it went statutory periodic from 18 August 2005 after which no more renewals were done. On 17 October 2012, Mrs Ng served a section 21 notice requiring possession after 17 December 2012.
Prohibition of serving a section 21 notice
Section 215 Housing Act 2004 contains the sanctions for non compliance which in it’s current form (after Localism Act 2011 amendments) says:
(1) Subject to subsection (2A), if a tenancy deposit has been paid in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy at a time when–
(a) the deposit is not being held in accordance with an authorised scheme, or
(b) section 213 (3) has not been complied with in relation to the deposit.
(2) Subject to subsection (2A), if section 213 (6) is not complied with in relation to a deposit given in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy until such time as section 213 (6) (a) is complied with.
(2A) Subsections (1) and (2) do not apply in a case where—
(a) the deposit has been returned to the tenant in full or with such deductions as are agreed between the landlord and tenant, or
(b) an application to the county court has been made under section 214 (1) and has been determined by the court, withdrawn or settled by agreement between the parties.”
You will note that there is no reference to when the deposit was received. Section 215(1) simply says – if a … deposit has been paid … no section 21 notice may be given at a time when (a) the deposit is not being held in … a scheme, or (b) the initial requirements have not been complied with within 30 days.
Section 215(2A) provides that this does not apply if the deposit has been returned thus allowing a section 21 to be served after the return of the deposit in full (or agreed deductions). Under the previous wording before the Localism Act 2011 it was possible for a landlord to protect the deposit late and then serve a section 21 notice. There has therefore always been some mechanism to serve a section 21 notice despite a failure to have complied with the initial requirements of a scheme.
Therefore, when reading section 215 literally, in this new case, a deposit had been received (albeit before April 2007), it was not being held in a scheme, the initial requirements had not been complied with within 30 days nor had the deposit been returned in full. As a result the Court of Appeal held the section 21 notice to be invalid and possession refused.
Penalty for not protecting within 30 days?
In this new case, the court made clear however that there was no requirement to comply with the initial requirements of a scheme because of the deposit being received before April 2007 (and went periodic before 2007 too).
It was distinguished between having to protect the deposit on receipt when the legislation did not even exist at that time and the service of a section 21 notice after the legislation took effect at a time when the deposit had not been returned, not being held in a scheme nor was protected within 30 days of 6 April 2012 (localism Act amendments).
As a result, no penalty is payable in respect of pre – pre deposits where the deposit has not been protected (but no section 21 can be served unless deposit returned first).
Section 21 at beginning of tenancy
This case must surely put into question the decision of Tummond, R (on the application of) v ReadingCounty Court & Anor  EWHC 1039 where it was held a section 21 was valid despite being served “at a time” when the deposit was not protected. In Tummond, the section 21 had been served at the beginning of the tenancy but the deposit had not at that time been protected. However, the deposit (and prescribed information) was done perfectly within the 30 days time-scale. The High Court considered the title of section 215 “sanctions for non-compliance” and considered as there had not been any “non-compliance” at the time of service of the notice (because the deposit didn’t need protecting until up to 30 days), there should not be any sanctions.
It could still be argued that up to 30 days, even without protection, the deposit could be said to be held in accordance with a scheme but we wouldn’t like to rely on that now.
Our advice remains unchanged and in fact has only been confirmed by this case. Because the 30 days grace period has now long passed since the amendments were made by the Localism Act 2011. The only way for a landlord with a pre pre deposit to serve a section 21 notice (where the deposit was not protected before 6 May 2012), is to return the deposit in full or agree deductions prior to service of the notice. In our view there is no point in protecting at this late stage because section 215(1)(b) can never be complied with now.
… Thus Mrs Ng may well be precluded from serving a section 21 notice unless she repays the deposit to the tenants. … [para 27]
At first glance, it might be thought this is a terrible decision. It probably is but as I said at the beigining if you think of all deposit legislation as been horrific for landlords then anything that comes after no longer has the same impact. Frankly, we are getting quite used to these types of decisions.
Also, this decision won’t affect that many properties. We personally have a number of pre pre deposits and we’re not that bothered in all honesty. The simple fact is that by the very nature, the tenant must have been in occupation at least 7 – 8 years, often much longer and as a result they have proven to be a good tenant so why would we want to evict after all this time?
The message we keep trying to get across is that landlords aren’t in the business of evicting tenants, we’re in the business of letting property. The less times we have to let a property the better.
Also, if we assume after 10 years a tenant has a 100% fair wear and tear allowance (i.e. we could never deduct for decorating or new carpet etc. after 10 years) how many deposits would a landlord want to keep after this time anyway? Most of the properties we have where the tenant has been in for this length of time are pretty much destroyed and ready for a total renovation top to bottom. Frankly, the deposit we might be holding will not make much difference whether we hold one or not and as discussed, it only becomes an issue if we wish to serve a section 21 which is unlikely in the real world.
There are proposals in the Deregulation Bill to have yet another go at amending deposit legislation which as proposed would confirm Superstrike “pre deposits” (as we call them). However, “pre pre deposits” as dealt with in this new case are not considered in the Bill.
We have lobbied for the Bill to contain provisions dealing with this exact type of case and David d’Orton-Gibson has done far more lobbying on this exact point than us. As yet his points don’t seem to have been taken on board but maybe this case will be the push that was needed. Lord Justice Lewison said at paragraph 32:
We were told that clause 31 of the Deregulation Bill now progressing through Parliament will make changes to the law about tenancy deposits. The current proposals do not cover the factual situation with which we are concerned. If Parliament considers that there is a need to make additional changes to the law, the opportunity is there.
As the Nearlylegal article about this case points out, this case raises an interesting point relating to insurance based schemes. These schemes allow a landlord to retain the deposit in their own bank account in consideration for the payment of a fee. In most cases, a new fee is required upon a renewal but sometimes this might not have been paid by the landlord or agent. The penalty provisions of up to 3 x deposit are only payable if the landlord or agent has failed to “comply with the initial requirements of a scheme” within 30 days of receipt of the deposit. Is the failure to pay a further fee upon a renewal a simple breach of the scheme rules or a failure to comply with the initial requirements? This is at yet untested (so going back to the beginning think of the very worst outcome and that will be the answer).
However, what is arguably more clear is that where a landlord or agent has failed to pay any renewal fees, the deposit might no longer be held in accordance with a scheme. No section 21 notice can be served at a time when the deposit is not being held in accordance with an authorised scheme. For that matter, presumably this could extend to any breaches of the scheme rules? The more we look at this, the more satisfied we are that we don’t take deposits anymore since April 2007!
Landlords and agents are urged to make sure they pay all renewal fees, are compliant with all scheme rules and maybe consider not doing renewals at all to reduce risks.
Alternatively, it might be worth considering using the Deposit Protection Service custodial scheme as that is much easier to continue to comply with than any of the insurance based schemes in our view. And, it’s free of charge to use! Of course the rules must continue to be complied with in order to serve a section 21.
Finally, landlords and agents could consider deposit replacement insurance and don’t bother taking a deposit at all!