The Importance of Tenant’s Deposit Protection
by Marcus Chapman, Senior Associate Solicitor, Civil Department
Tenant’s Deposit Protection
Tenant’s deposit protection should be in place within 30 days of receipt and the landlord must provide the tenant with prescribed information concerning the appropriate deposit scheme where there is an Assured Shorthold Tenancy.
The consequences of the landlord’s failure to protect the tenant’s deposit can be severe even where the landlord is no more than a day late.
Possession under Section 21 Housing Act 1988
If the deposit was not protected in time the landlord is prevented from recovering possession of the rental property by serving a Notice under Section 21 Housing Act 1988 (seeking the right to repossess the property at the end of the Assured Shorthold Tenancy). The unprotected deposit renders the Notice invalid until the rules are complied with.
Further, landlords who fail in tenant’s deposit protection within an approved scheme will be liable to pay the tenant between 1 to 3 times the deposit as a financial penalty, together with the return of the original deposit. The tenant must take notice though and raise the issue. They have six years to do so from the date when the deposit should have been protected.
If the landlord wishes to recover possession of his property then he must first return the deposit to the tenant, but this may not prevent him receiving a financial penalty from the Court at a later date. This simply allows the landlord to proceed.
If the landlord does protect his deposit but fails to provide the “prescribed information” concerning the scheme into which the deposit has been paid within 30 days from payment he can provide the prescribed information at a later date, but again will be subject to a financial penalty.
Repayment of tenant’s deposit
Repayment of the tenant’s deposit in the above circumstances should not prove difficult. A landlord must be able to prove that the tenant has received the refund of his deposit. A landlord is likely to have a tenant’s bank details where he has been receiving rent and simple disclosure of a bank statement showing the refund would suffice.
Once the deposit has been returned to the tenant, the landlord can still proceed with a Section 21 Notice.
Possession under Section 8 Housing Act 1988
Under Section 8 Housing Act 1988 the landlord seeks possession of the property where the tenant has breached terms of the tenancy. Generally a Section 8 Notice is used in relation to the non-payment of rent.
Even in the event of failure of tenant’s deposit protection under Section 8, the landlord will still be able to recover possession of the property under the Section 8 procedure if appropriate grounds are satisfied. However, a landlord should be aware that in response to a claim for possession under Section 8 for rent arrears, for example, a tenant could counterclaim based on the landlord’s failure to protect his deposit, the Court could order that the landlord do pay the original deposit and a financial penalty of between 1 to 3 times the value of the deposit due to the landlord’s breach. Such an order may serve to substantially reduce the arrears, potentially to extinguish them in their entirety and then prevent the landlord being able to rely on Section 8, leaving the landlord with legal costs, some unpaid rent, and no possession.
What should a landlord in default do?
The landlord should repay the deposit if he wishes to seek possession under either a Section 21 or a Section 8 Notice. Whilst a Court may, if raised by the tenant, order the landlord to pay a financial penalty for his failure to protect the deposit, the penalty should not be so severe.
If the landlord is seeking possession under Section 8 and there are substantial arrears more than the deposit, then potentially it is still worthwhile for the landlord to seek possession on the basis that he has a defaulting tenant and recovering possession may enable him to let the property to a tenant who will honour their obligations. However, of course, in this scenario the landlord would recover less arrears than initially anticipated. So long as the arrears are not extinguished completely, thereby preventing Section 8 from being used, this would still be a worthwhile approach.
Marcus has been working in dispute resolution since 1989. He has extensive experience in property disputes, in landlord and tenant matters, service charge recovery, forfeiture both by peaceful re-entry and via Court action, adverse possession claims, and matters dealt with both within the Court system and via the First-Tier Tribunal (formerly the Leasehold Valuation Tribunal), together with boundary disputes.