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The strike down of Superstrike: Where are we now with tenancy deposits?

Most landlords of residential property take a deposit as security for their tenant’s liabilities. Since 1996 the vast majority of tenancies granted by private landlords and many tenancies granted by Registered Providers of housing have been assured shorthold tenancies ("ASTs").

It is well known that since 6 April 2007 landlords who take deposits from their tenants occupying under ASTs have been subject to a stringent regime designed to protect the tenant’s deposit. Seven years on one might think that regime would be old news. It is not. It has generated some remarkable Court of Appeal decisions, several phases of legislative changes, and what landlords are required to do is still in legal flux. So much so that the 2014 Deregulation Bill provides for some major changes and clarification of the law on tenancy deposits.

One problematic area which is subject to current reform is what landlords are required to do with the deposits of their tenants who stay in occupation of the property after their fixed term. ASTs tend to be granted for a fixed term. Many tenants stay on beyond the end of the fixed term. On the expiry of the fixed term in the absence of a new fixed term AST, the tenancy automatically converts into a statutory periodic tenancy (s5 Housing Act 1988 ("HA 1988"). The application of the regime to tenants who have been in the same property since before 6 April 2007 has caused a lot of difficulty.

What is not in dispute (anymore) is that:

  1. Post 6/4/07 a landlord who “receives” a deposit from a tenant must be deal with it in accordance with an authorised scheme (s213(1) Housing Act 2004 ("HA 2004")
  2. Within 30 days (s213(3) HA 2004) of receipt the deposit must be protected and the "prescribed information" must be given to the tenant (s213(5) HA 2004);

Failure to comply has two main consequences:

  1. The landlord will be required to pay a fine of between one and three times the deposit amount to the tenant (s214(4) HA 2004); and
  2. Fundamentally for landlords trying to obtain possession of their properties, if the deposit protection provisions have not been complied with, any section 21 notice served will not be valid and, as such, the landlord will not be able to obtain possession based on section 21 (s215(1) HA 2004)

What was not spelled out clearly by the legislation was what was required in relation to a deposit taken for a tenancy which commenced before 6 April 2007. Then the case of Superstrike v Rodrigues went before the court. That concerned an AST granted before 6 April 2007 pursuant to which the landlord took a deposit. The AST became statutory periodic in January 2008 i.e. after the introduction of the statutory regime. When the tenancy commenced the deposit was not protected and at that time, there was no requirement that the landlord do so. Thereafter the landlord continued to hold the deposit and did not protect it at any time prior to the commencement of possession proceedings. Those proceedings were based on a section 21 notice served in June 2011.

The question the court in Superstrike considered was whether, upon the AST becoming a statutory periodic AST in 2008, the requirement to protect the deposit and comply with the provisions of the HA 2004 arose, so as to provide the tenant with a defence to the claim for possession pursuant to section 21.

Following possession being ordered, set aside and an appeal to a Circuit Judge, the case went before the Court of Appeal [2013] EWCA Civ 669.  In June 2013 the Court of Appeal confirmed that:

  1. Upon the expiry of a fixed term AST the statutory period tenancy which arises is a new tenancy;
  2. If a deposit is held pursuant to an expired fixed term AST it will be taken to have been “received” (again) by the landlord upon the commencement of any subsequently arising statutory periodic tenancy;
  3. Upon the commencement on or after 6 April 2007 of a new statutory periodic AST the deposit would need to be protected in accordance with HA 2004;
  4. The failure of the particular landlord to protect the tenant’s deposit and provide the prescribed information meant that the section 21 notice was not valid and the landlord was not entitled to an order for possession.

Superstrike makes it clear to landlords and their representatives that any landlord holding a deposit paid before 6 April 2007 in relation to a fixed term AST that has expired after that date, must now protect the deposit and comply with the provisions of the HA 2004 before serving a section 21 notice with a view to obtaining possession. Of course, a landlord unable to use section 21 can still seek possession based on a section 8 notice, notwithstanding a failure to comply with the requirements of the statutory regime. However, the sting in the tail is that a tenant with an unprotected deposit in those circumstances will have claim for compensation pursuant to the HA 2004.

Despite the clarity of the Court of Appeal’s judgment in the specific circumstances of  Superstrike, a number of fundamental and arguably more wide reaching questions were left unanswered.  One such question is what is required in relation to a deposit protected post 6 April 2007, but which is "received” again by a landlord upon the tenant’s fixed term AST becoming a statutory periodic AST. Would it need re-protecting? Would the prescribed information need re-serving?

In May 2014 the County Court in Birmingham attempted to answer those questions. In Gardner v McCusker [2014] [County Court] [3BM70525] the fixed term AST which commenced in 2009 became a new statutory periodic tenancy in May 2010. The court held that the deposit taken and protected in 2009 was deemed repaid (received) to the landlord in May 2010 due to the new tenancy arising and, fundamentally, the landlord was required to re-serve the prescribed information in respect of the deposit in accordance with section 213(5) HA 2004 . This was unwelcome news for landlords despite the saving grace that there was no requirement to re-protect.

As that decision is a County Court decision, it is not binding and is arguably appealable as it does not directly flow as a consequence of the Superstrike decision.  This additional burden for landlords will hopefully be a short lived one as the government has proposed major amendments to the HA 2004 through the Deregulation Bill 2014.

In summary those changes are as follows:

  • When a deposit is received and protected for a tenancy granted on or after 6 April 2007 and the prescribed information is given to the tenant in accordance with the Act, if that tenancy subsequently becomes a statutory periodic tenancy, the landlord will be deemed to have complied with protection and the prescribed information will be treated as already given (proposed section 215B).
  • When a deposit is received and protected for a tenancy granted on or after 6 April 2007 and the prescribed information is given to the tenant in accordance with the Act, if that tenancy is renewed or replaced, the prescribed information will be treated as already given (proposed section 215C). The renewal or replacement must be between the same landlord and same tenant and the terms and conditions must be the same, or substantially the same. NB the proposed amendment only applies to the prescribed information. Whether the deposit will need re-protecting will depend on the rules of the individual scheme.
  • Any deposit received before 6 April 2007 pursuant to a tenancy which became statutory periodic after that date will be required to be protected in 90 days (proposed section 215A). If a landlord wishes to avoid the penalties for failure to comply with this provision, the deposit must be returned before the 90 days expire.

The proposed transitional provisions mean that if a claim by the tenant for breach of the deposit requirements or a claim by a landlord for possession pursuant to section 21 is finally determined before the provisions come into effect then those cases will not be affected by the changes. However, if those cases have been issued prior to the amendment but not finally determined, the amendments will take effect for them. Any costs of the landlord for a victory as a result of the amendments will not be allowed to be recovered against the tenant.

Undoubtedly, when the rumours of the date these provisions come into effect start circulating, tenants and landlords will be seeking to speed up or slow down their ongoing litigation to try to take advantage of either the current situation or the changes.

These amendments are welcome clarification of law affecting tenants' deposits, even if they are some seven years late. However it is noted that the draftsmen have failed to deal with deposits in the round. The changes do not address what is required for deposits taken before 6 April 2007 pursuant to an AST which also became a statutory periodic AST before that date. Perhaps this is missing as it is generally accepted practice that these deposits do not require protecting. However in the concluding paragraphs of Superstrike the court specifically commented that it was not dealing with the position in relation to that situation. It is understood that such a case has been leapfrogged to the Court of Appeal, so watch this space for the certainty that would have been welcomed from parliament.  The few landlords in this position may wish to consider returning the deposit prior to the service of the section 21 notice as the easiest means of avoiding any potential argument on the point.

The 2014 Bill has been passed by the House of Commons. It is in the committee stage in the House of Lords in October, but at the time of writing there is no date proposed implementation. Until the changes take effect landlords should be ready to face defences to their claims for possession based on section 21 against statutory periodic tenants whose deposits have not been re-protected or the prescribed information re-served upon the expiry of a fixed term AST after 6 April 2007.