Please note: if any case is on or after 6 April / 6 May 2012 this may not be reliable although some parts should remain useful.
Thanks to Painsmith blog for bringing this to everyone’s attention.
Draycott v Hannells Lettings Ltd  EWHC 217 (QB)
At the time of writing this article, this is the first binding decision on tenancy deposit schemes so is of significant importance. It would seem to agree with what we and many commentators have been suggesting for some time about the interpretation of the tenancy deposit scheme part of the Housing Act 2004.
On 28 February 2008 Michelle and Paul Draycott entered into an assured shorthold tenancy with Derby Build Ltd who were the actual landlords. The tenancy was for 12 months and there was an obligation to pay £2,700.00 to the agent (Hannells) as a deposit. Hannells was the defendant in this case.
The deposit was paid to Hannells on 4 March 2008. It was accepted by both parties that the deposit was one that required protecting.
On 19 May 2008, the deposit was protected with the Deposit Protection Service (DPS). The prescribed information was provided on 21 May 2008.
Following correspondence, on 27 November 2008, proceedings were commenced by the tenant against the agent. At the first hearing, two points were taken before the Judge. First, it was argued that by s.214(4) of the 2004 Act a claim under s.214 could only be brought against the person who was in fact the landlord (namely Derby Build Ltd in this case), and not against the letting agent. Second, it was argued that where the tenant commences a claim at a time when the deposit is in fact protected, albeit that it was not protected within 14 days after the landlord has received the deposit, no order may be made under s.214(4). The Judge rejected both arguments, and both were renewed on this appeal.
The breach of s.213 and “initial requirements of the scheme”
The Particulars of Claim identified the breach of, or failure to comply with, s213(3) as the fact that the Defendant did not transfer the deposit into the scheme within a period of 14 days beginning with the date on which it was received.
At the time of protection, the DPS terms and conditions stated:
“9. Deposit Submission
a. The Landlord or Letting Agent is responsible for ensuring that Deposits are submitted for protection within 14 calendar days of the date of receipt by the Landlord. …
d. The Landlord or Letting Agent is responsible for ensuring that the information contained on the Deposit Submission Form is full and correct.
e. The following information is a mandatory requirement on all Deposit Submission Forms: [there are 12 items of information relating to the landlord, the property and the tenant]…
f. Incomplete, illegible or unrecognisable Deposit Submission Forms will be rejected and payments returned to the sending landlord within 4 Business Days of receipt.
f. In the event that cheques are returned unpaid, The DPS will levy a fee of £25 which must be paid by the Landlord. Until this fee is paid, The DPS will not accept a Deposit from the Landlord.”
Note: at the time of writing this article, the most recent terms and conditions of the DPS specifically allow deposits to be accepted late.
The Honourable Mr Justice Tugendhat stated:
The 2004 Act s.213(3) imposes a 14 day requirement for compliance with the initial requirements of the scheme, but it does not identify the initial requirements of the Scheme. This is because the statute envisages that more than one type of scheme might be authorised: s212(1), (2). The DPS scheme is a custodial scheme, requiring deposits, but it does not follow that all authorised schemes must follow that model. An insurance based scheme would have a different requirement.
Clause 9 of the terms of the Scheme requires both that the deposit be “submitted for protection” and that that be done “within 14 calendar days of the date of receipt by the Landlord”. The words ‘initial requirements’ do not appear in clause 9. But it is plain that that is what that clause contains. What is less clear is whether the initial requirement of the scheme is just the payment into the scheme, or whether the time limit of 14 days is also part of the initial requirement of the scheme. [para 23 & 24]
I remind myself of the definition in s.213(4): “ “the initial requirements” of an authorised scheme are such requirements imposed by the scheme as fall to be complied with by a landlord on receiving such a tenancy deposit”.
In my judgment, the requirement that there be payment into the Scheme is the initial requirement of the Scheme, and not the requirement that that be done within 14 days. The time limit of 14 days is a requirement of s.213(3). That requirement is repeated in the scheme, but so are a number of other provisions of the 2004 Act. The fact that the time limit is repeated in the terms of the Scheme does not make it an initial requirement of the Scheme. [paras 28 & 29]
The penalty provisions contained in section 214 can be explained simply as follows:
Section 213 requires (a) the deposit is protected and (b) it is protected within 14 days. However, the penalty provisions only apply to (a) and not (b). Therefore as long as the deposit has been protected (prior to proceedings), the penalty of three times compensation does not apply. Therefore, this appeal was allowed because the agent had complied with (a). Crucially, in this case, the deposit had been protected prior to the court form being submitted to the court by the tenant. It remains unclear what the position would be if the deposit was protected after the court forms were submitted by the tenant.
Mr Browne (acting for the defendant agent) submitted:
Mr Browne accepted that an unscrupulous landlord could, on his interpretation, hold on to the deposit until proceedings were brought. If that is what the landlord did, but after the tenant commenced proceedings the landlord then paid the deposit into the scheme before an order was made under s.214(3), the sanction would be an order that he pay the costs of the proceedings, but no more. If he obdurately continued to hold on to the deposit after the tenant had commenced proceedings, so that an order could be made under s.214(3), then an order under s.214(4) could be made, but not otherwise. [para 43]
Similar wording applies to the prescribed information requirements and explains why Harvey v Bamforth allowed the providing of the prescribed information beyond the 14 day period because it was done before proceedings were commenced.
The meaning of “Landlord” in s.214(4)
Section 212(9) defines “landlord” as:
In this Chapter— (a) references to a landlord or landlords in relation to any shorthold tenancy or tenancies include references to a person or persons acting on his or their behalf in relation to the tenancy or tenancies,…
This has always been believed to mean that an agent can be a “landlord” for the purposes of the act. On this point, The Honourable Mr Justice Tugendhat agreed:
For the Defendant Mr McNamara submits that s.212(9) is clear and unambiguous, as the Judge held. In the present case the court is concerned with an agent who did in fact receive payment of the deposit.
In my judgment the Judge was clearly correct on this issue. The words of s.212(9) are clear and unambiguous… [paras 36 & 37]
Under section 214, there are two penalties (if it is found that a deposit has not been protected at the hearing). (A) the court must order the “person who appears to be holding the deposit” to repay it or protect it in the custodial scheme, and (B) to order the “landlord” to pay three times the deposit as compensation. These can be different people.
The Honourable Mr Justice Tugendhat stated on this point:
In my view the words in s.214(3)(a) “the person who appears to the court to be holding the deposit” are not otiose. Rather, those words limit the scope of any possible order under s.214(3)(a) to the person holding the deposit, and prevent such an order being made against any other person who would come within the statutory definition of the landlord – for example a letting agent who, at the time of the making of the court order, was not holding the deposit.
No such limitation would be appropriate in s.214(4). Unlike s. 214(3), which is an order for restitution made against the holder of the deposit, s.214(4) is penal, as Mr Browne points out. There is no reason why the penalty should be imposed on the person who, at the time the court order is made, happens to be holding the deposit. The penalty should be imposed on a person who is responsible for the failure to comply with s.213. In the present case that is the Defendant, and not the actual landlord (assuming, at this stage, that there has been a non-compliance which attracts an order under s.214(4)). [paras 38 & 39)
At the time of writing, the following can be said about protecting a deposit:
- If protecting a deposit late, a landlord is well advised to use the DPS because the other two schemes go further than the DPS rules to state that it is part of their initial requirements that a deposit must be protected within 14 days. The DPS does not specify that the deposit must be protected within 14 days.
- The person who it appears to the court is “holding the deposit” is the person who should repay or protect the deposit (if it hasn’t already been protected), not necessarily the person who “received” the deposit.
- However, the person who received the deposit and failed to protect it is the person who must pay the three times deposit compensation to the tenant. An agent who receives a deposit should never (in our view) pass the deposit to a landlord for protection for fear that they don’t protect the deposit either at all or properly. On let only cases (where this will mostly apply), both landlord and agent can register with the DPS and the money can be transferred internally from agent to landlord leaving the deposit protected at all times.
- As long as a deposit has been protected and prescribed information has been provided before the tenant hands in the court forms to the court, a landlord (or agent) will avoid penalty. (Quite rightly because in this case the tenant has suffered no loss because their deposit is protected albeit late).
- If a landlord protects a deposit (and issues prescribed information) “after” court forms have been handed in, it is unclear at this moment. As suggested in this case by Mr Browne, the landlord may avoid penalty but would have to pay the tenants costs for bringing the claim (which doesn’t sound unreasonable).
A copy of the actual judgement is available here