The recent high-profile Superstrike case has wide implications for landlords and tenancy deposit schemes. Steven Wood, whose firm acted for the claimant, outlines the case and the current legislation covering tenancy deposits

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The Housing Act 2004 (HA 2004) introduced, with effect from 6 April 2007, a requirement for landlords who take a deposit to protect it in a tenancy deposit scheme. Before then, surveys conducted by the Office of the Deputy Prime Minister (Housing in England 1999, 2000 and 2001) found that at least 20% of tenants had had all or part of their deposit unreasonably withheld. For many of these individuals, the loss of this money was a significant concern and stopped them from taking rented accommodation elsewhere. Fighting a case (usually through the county court small claims track) was expensive for 
both tenants and landlords, most of whom were private individuals or 
small businesses.

Since the introduction of deposit protection, the proportion of tenancies resulting in a deposit dispute has been 1.28% (Tenancy Deposit Protection: An evaluation of the legislation, five years on, The Dispute Service Ltd, 2012), suggesting that the legislation has been a success. However, in May this year, Shelter found that a third of tenants do not know of their right to have their deposit protected, so there is still work to be done to raise awareness.

The legislation is also silent as to the obligation to protect a deposit where a tenancy pre-dating the 2004 Act is extended or renewed. In Superstrike Ltd v Rodrigues [2013] EWCA Civ 669, the Court of Appeal examined this question in relation to a statutory periodic tenancy arising after the expiry of a fixed-term assured shorthold tenancy.

In May this year, Shelter found that a third of tenants do not know their right to have their deposit protected, so there is still work to be done to raise awareness

The law

The relevant law is contained in sections 212 to 215 of, and schedule 10 to, the HA 2004, and was brought into force on 6 April 2007.

A ‘tenancy deposit scheme’ is defined by section 212(2) as “…a scheme which (a) is made for the purpose of safeguarding tenancy deposits paid in connection with shorthold tenancies and facilitating the resolution of disputes arising in connection with such deposits, and (b) complies with the requirements of Schedule 10.”

Section 213(1) provides that: “Any tenancy deposit paid to a person in connection with a shorthold tenancy must, as from the time when it is received, be dealt with in accordance with an authorised scheme.”

Schedule 10 makes very detailed provision for the requirements of schemes with, essentially, two forms:

  • Custodial, where the deposit is held by the scheme administrator in a separate account; or
  • Insurance, where the landlord retains the deposit, and pays a fee and insurance premium to the scheme administrator so the administrator can repay the tenant should the landlord misappropriate the deposit.

With both schemes, the landlord must comply with the ‘initial requirements’ of the scheme and give the tenant (and anyone paying the deposit on the tenant’s behalf) information on the scheme (and other prescribed information) within 30 days from receipt of the deposit (for deposits received by the landlord before 6 April 2012, the period for compliance was 14 days).

Where the landlord does not comply with section 213, sections 214 and 215 of the 2004 act provide for certain sanctions: first, the landlord may be ordered, through proceedings in the county court, to repay to the tenant the deposit plus an amount three times the amount of the deposit as well as costs; second, the landlord cannot commence a claim for possession of the property using section 21 of the Housing Act 1988 (HA 1988).

Assured shorthold tenancies

Under the HA 1988, an assured tenancy which is for a fixed term may come to an end by an order of the court or by surrender by the tenant, or it may be replaced by a fresh contractual term. Otherwise, when it expires, by virtue of section 5(2) the tenant “shall be entitled to remain in possession of the dwelling-house let under that tenancy and … his right to possession shall depend upon a periodic tenancy arising by virtue of this section.”

Section 5(3) of the 1988 act provides that the periodic tenancy takes effect in possession at the end of the fixed-term tenancy, by the same landlord, for the same premises, for the same rental periods, and under all the same ‘other terms’ as those for the fixed-term tenancy.

In the case of an assured shorthold tenancy, the landlord has the right to apply for possession of the premises, once any fixed term has expired, subject only to giving not less than two months’ notice under section 21 of the HA 1988. The court has to be satisfied that the notice has been duly given and that any fixed-term tenancy has come to an end, but otherwise there is no discretion for the court to refuse to make an order for possession.

That is in contrast to section 8 of the 1988 act, under which the landlord can also give notice of proceedings for possession, but where the court has to be satisfied that one of a number of grounds for making a possession order exists, that ground having been specified in the notice of seeking possession. Depending on which ground is relied on, the court may also have to be satisfied that it is reasonable to make the order.

A landlord of an assured shorthold tenant will therefore generally rely on a notice under section 21 rather than on proceeding under section 8, unless there is some very good reason to do so. That is why one of the sanctions to ensure compliance with the law as regards protecting tenants’ deposits is a fetter on the use of section 21.

The Tienisia judgment

Following the introduction of the legislation, a number of cases revealed problems with the drafting of the HA 2004. For example, in Tiensia v Vision Enterprises Ltd [2010] EWCA Civ 1224, the Court of Appeal provided guidance on the interpretation of the act, holding that, where the landlord had failed to comply with section 213(4) within the stipulated 14 days, but had complied before the hearing of the claim, the sanction provided for by section 214(4) could not be imposed. According to Lord Justice Rimer, the statutory purpose of the provisions was achieving the proper protection of tenants’ deposits; the objective was not the punishment of landlords. As noted by Lord Justice Sedley in his dissenting judgment, legislation such as this is, or ought to be, written for lay people.

Landlords who created a fixed-term assured shorthold tenancy before 6 April 2007, whose tenant paid a deposit and who held over after the fixed term expires, have cause for concern

As a result, amendments were made to the HA 2004, by section 184 of the Localism Act 2011, to redress the balance in favour of tenants; crucially, a tightening of the previous leniency available to the courts. These changes came into force on 6 April 2013.

The facts of Superstrike

On 8 January 2007, the landlord, Superstrike Ltd, granted an assured shorthold tenancy agreement to Marino Rodrigues for a fixed term of one year less one day, at a monthly rent of £606.66. Mr Rodrigues also paid a deposit of £606.66. This was at a time when the relevant provisions of the HA 2004 had not yet come into force. Accordingly, there was no regime which compelled Superstrike to protect Mr Rodrigues’ deposit in any way.

When the fixed term of his tenancy expired on 7 January 2008, Mr Rodrigues held over and remained in occupation of the premises. A statutory periodic tenancy was therefore created, but nothing was done about his deposit, which Superstrike continued to hold.

On 22 June 2011, Superstrike served Mr Rodrigues with a notice requiring possession pursuant to section 21 of the HA 1988. Upon expiry of that notice, Superstrike applied to the county court for possession using the accelerated procedure.

An order for possession was made, but set aside on the grounds of non-compliance with the provisions relating to tenants’ deposits. On appeal to the circuit judge, the order for possession was restored, the judge ruling that the deposit had been paid and received before the legislation came into force, and there was nothing in the legislation which indicated that it was to apply to a deposit which had already been paid before the commencement date.

The appeal

Mr Rodrigues appealed to the Court of Appeal, making two primary submissions: first, that section 213 applied so as to oblige Superstrike to deal with his deposit in accordance with an authorised scheme within 14 days of 8 January 2008 when he became tenant under a new statutory periodic assured shorthold tenancy, the deposit being treated as paid and received in respect of that periodic tenancy when it came into being; and second, that section 215(1) applied in any event in 2011 when Superstrike served its section 21 notice, so as to preclude it from doing so.

Before the Court of Appeal, counsel for Superstrike contended that the deposit was paid and received in January 2007, before the relevant provisions came into force, so nothing in section 213 could ‘bite’ on the deposit, since it refers consistently to the time, or the date, when it is received.

Counsel for Mr Rodrigues argued that, when the new statutory periodic tenancy came into being in January 2008, the deposit had to be regarded as then being paid and received in respect of that new tenancy. Their Lordships agreed, stating: “It is clear from the 1988 act that what happens at the end of the fixed period tenancy is the creation of a new and distinct statutory tenancy, rather than, for example, the continuation of the tenant’s previous status.”

According to Lord Justice Lloyd, the HA 2004 must be construed in light of the provisions of the HA 1988 as regards assured shorthold tenancies, including section 5. Once a new statutory periodic tenancy came into being after 6 April 2007, a tenant’s deposit already being held, it was necessary to consider whether, and if so how, the 2004 Act applied.

Lord Justice Lloyd discussed what happened in January 2008 which led to the deposit being held in relation to the new tenancy. He said that it was either an actual (physical) payment or something which amounted to payment; for example, an agreement between the parties that the deposit should be held by the landlord and treated as the deposit under the new tenancy. His Lordship accepted that the parties were probably blissfully unaware of the situation at the time and did no such thing, but said that Mr Rodrigues should be treated as having paid the amount of the deposit to Superstrike in respect of the new tenancy, given that it had not sought any payment out of the deposit for any prior breach by him. As a result, it followed that the deposit had to be protected under the Housing Act 2004; and because Superstrike had not protected the deposit within the required time after the creation of the statutory periodic tenancy, its section 21 notice was invalid. Superstrike was therefore not entitled to an order for possession and Mr Rodrigues’ appeal was allowed.

It was further argued by Mr Rodrigues 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, the terms of section 215(1) still applied. This was so as to prevent a section 21 notice requiring possession from being served whenever a deposit is held which is not held in accordance with an authorised scheme. Lord Justice Lloyd said that he could see the basis for this argument, but declined to rule on it, “interesting as the point is”, as it was not necessary to do so for the purposes of the appeal.

The implications of the case

Landlords who created a fixed-term assured shorthold tenancy before 6 April 2007, whose tenant paid a deposit and who held over after the fixed term expired, have real cause for concern. Unless they took the prudent step of subsequently protecting the deposit under one of the statutory schemes, any attempt to now serve a notice requiring possession under section 21 of the HA 1988 will prove futile, as such notice will be invalid.

The position is compounded by the changes to the HA 2004 introduced by the Localism Act 2011. Under the original version of section 215, as construed in Tiensia, it was open to the landlord to comply with the requirement to have the deposit held in accordance with an authorised scheme, even though this was not done within the 14-day period then stipulated. As regards failure to provide the necessary information, under section 213(6), the sanction preventing service of a section 21 notice applies until the information is given, even if that is done late. The same is not the case in respect of a failure to protect the deposit by an authorised scheme at all.

It follows that the only way a landlord who is caught in this trap can serve a valid section 21 notice under the HA 1988 is to return the deposit to the tenant (under section 215(2A)(a)), unless a tenant’s application under section 214(1) of the HA 2004 has been disposed of by the court; this position was recognised in the Court of Appeal’s judgment, although Lord Justice Lloyd made clear that it forms no part of the decision.

It is not yet clear how many tenancies will be caught by the Court of Appeal’s decision. The amount of coverage it has received, as well as anecdotal evidence of ‘claims-farmers’ gearing up to bring legal action against unwitting landlords, suggests the impact could be significant. In practical terms though, it may not be quite so great. The decision is limited and is only authority where:

  • the tenancy commenced before 6 April 2007;
  • that tenancy then continued after 6 April 2007 on a periodic basis; and
  • the deposit given at the start of the tenancy was not protected.

Landlords who have trusted their tenants to remain in occupation for years after a fixed-term assured tenancy has expired may feel aggrieved, but otherwise suffer little real hardship in returning the deposit to their tenant before serving a section 21 notice.

This is not the first time that the tenancy deposit legislation has caught out landlords, and it is unlikely to be the last. As Lord Justice Lloyd put it, “unfortunately, several points under this legislation turned out not to be as may have been expected or intended.” It is therefore essential that landlords take proper legal advice before potentially wasting a good deal of time and money in seeking a possession order which may be doomed to failure.

In May this year, Shelter found that a third of tenants do not know their right to have their deposit protected, so there is still work to be done to raise awareness.

If you want to…

…read further details on Superstrike, as provided by LexisNexis, see the July edition of our Property Section e-newsletter, which also contains expert commentary on property case law by Peter Reekie