Paul Sagar scrutinises this Court of Appeal decision from December 2014, which has significant implications for any residential landlords who are holding deposits taken before held before sections 213-215 of the Housing Act 2004 came into force. As Paul explains, Charalambous spells out that a landlord is subject to the penalties in respect of serving notice under section 21 of the Housing Act 1988, even though they were never required by a tenancy deposit scheme to protect the deposit they hold.

What’s happened?

In Charalambous and Karali v Ng and Ng [2014] EWCA Civ 1604, the parties had originally entered into a fixed-term 12-month tenancy agreement which commenced in August 2002. The tenancy was subsequently renewed with further fixed-term agreements in 2003 and 2004. Upon expiry of the latter fixed-term agreement, section 5 of the Housing Act 1988 (HA 1988) operated so that a new statutory periodic tenancy came into effect in 2005.

This periodic tenancy remained in place until the landlord eventually sought possession in October 2012. A notice seeking possession was served under section 21 of the HA 1988, and possession proceedings were issued. The tenants attempted to defend proceedings at first instance by claiming the notice was invalid due to non-compliance with the appropriate tenancy deposit protection rules. At first instance the judge disagreed and the tenants appealed.

The Court of Appeal had to consider the position where a tenancy had both commenced and become periodic prior to being ‘caught’ by the tenancy deposit legislation, which came into effect on 6 April 2007. The legislation was introduced by amendments to the Housing Act 2004 (HA 2004) and was further developed through the Localism Act 2011, which tightened sanctions against non-compliant landlords and removed loopholes which had developed through case law (see Gladehurst Properties Ltd v Hashemi [2011] EWCA Civ 604 and Tiensia v Vision Enterprises Ltd [2011] EWCA Civ 1224).

Overturning the first instance decision, the court allowed the tenants’ appeal. The court paid close attention to the wording of section 215(1)(a) of the HA 2004, which states no notice may be served “at a time” when the deposit is not being held with an authorised scheme. Applying the facts to a strict reading of the legislation, the notice was deemed invalid and the possession order was set aside.

Why is it important?

The decision provides clarification on a scenario which, though rare, was previously cause for confusion. Practitioners could have been forgiven for previously assuming that the legislation presented no obstacles to a tenancy which became periodic prior to April 2007 and remained so, with no further deposit paid.

What the Court of Appeal has decided is that a landlord who wants to serve a valid section 21 notice cannot do so if they have failed to comply with the legislation or have not rectified the error. This is regardless of the date the deposit was received, and a tenancy will not escape by virtue of the fact it became periodic prior to 6 April 2007 and has not been replaced by a ‘new’ tenancy since.

How does this fit into existing law and practice?

The judgment sheds some light on the questions that could not have been foreseen when the legislation was first drafted. Existing guidance had been provided by a number of previous Court of Appeal decisions, most notably Superstrike Ltd v Rodrigues [2013] EWCA Civ 669 which addressed the need for protection when periodic tenancies arose – though specifically those which became periodic after 6 April 2007.

Before being able to serve a valid section 21 notice, landlords will need to rectify the error using the options available to them. The most efficient option will usually be to return the deposit to the tenant(s) in order to avoid the sanctions, relying on section 215(2A)(a) of the HA 2004.

Perhaps recognising that the legislation has proved to be less straightforward than intended, the Deregulation Bill is currently making its way through Parliament, which proposes to clarify tenancy deposit law and achieve the law’s original aim of being clear and easy to understand.

In what ways does this affect practitioners?

Practitioners will be required to manage landlords’ expectations carefully in situations where, invariably, both tenant and landlord commonly perceive the existing law to favour the other. Landlords will no doubt be aghast at being advised to return a deposit in full, particularly where issues of disrepair may be involved, though it is possible to return the deposit less agreed deductions (section 215(2A)(a)), however unlikely such an agreement may be.

Practitioners who commonly act for landlords and/or tenants may be required to review any existing tenancy agreements that were previously thought to be outside the protection regime.

It should be noted that the decision does not affect a landlord’s ability to seek alternative routes to possession through the grounds available to them in Schedule 2 to the HA 1988, for which a separate notice can be served should the grounds have been triggered.

What, if anything, should I be doing differently as a result?

Practitioners will be well advised in taking a cautious approach to advising landlords who wish to seek possession of properties occupied by tenants. The decision should, in practice, only affect a relatively rare number of tenancy agreements. However, when considering a potential claim for possession, the fact a deposit remains unprotected on a pre-2007 periodic tenancy should cause alarm bells to ring for legal advisers.