The Localism Act 2011 - Deposit Protection

24 Jul 2012

These decisions meant that where a deposit had not been protected it was relatively easy for landlords and agents to avoid any of the penalties as included in section 214 of the Housing Act 2004. The changes were meant to correct the errors in the original drafting and give the Housing Act 2004 more weight.

The changes mean that if a deposit is now not protected (and more below as to what this means) properly then the landlord and/or agent will be subject to a penalty amount if the tenant makes an application to the Court. The other serious consequence is that a landlord will not be able to serve a valid Notice under section 21 of the Housing Act 1988 (Section 215 Housing Act 2004). This Notice allows a tenancy to be ended without the landlord having to prove any fault on the part of the tenant and is a sure way for a landlord of obtaining possession.

To properly protect a deposit there must be strict compliance with the rules of one of the authorised schemes (section 213 Housing Act 2004). This now means that the deposit must be protected within 30 days of receipt (not necessarily the same as the start date of the tenancy), together with the giving of any and all prescribed information and any other requirements of the particular scheme (some require an advice leaflet to be given). If the deposit has not been fully registered within this scheme the general view currently is whilst you can register the deposit out of time this will not afford you protection.

So if the deposit is not properly registered what can happen? Firstly you will not be able to use a section 21 Notice to seek possession. The court forms for accelerated possession have been changed to ensure that details of the deposit and its registration are included. In our experience Courts are looking at this information and considering if deposits have been properly registered. The tenant may also make an application under section 214 of the Housing Act 2004 to seek a return of the deposit and also a penalty amount.

The Court has the power to order the return of the deposit in full to the tenant or that it is paid into an authorised scheme. Whilst prior to the changes the Court had to award a penalty amount of three times the deposit this has been amended so the Court can award an amount between one and three times the deposit amount. It is here that the Court retains some discretion as to the amount. It will be for the landlord or the agent to adduce evidence to try and mitigate this amount perhaps by showing that there was a technical breach, financial hardship etc. Clearly an award requiring the return of a deposit and also a penalty of three times the deposit (which of itself could be more than 4 months rent) will be crippling to many landlords and if such a claim is made as a counterclaim in rent arrears proceedings may wipe out any and all arrears meaning that possession is not granted.

With regards to section 21 notices if the authorised scheme has not been strictly complied with the landlord cannot serve a valid Notice. At this stage there are no particular cases relating to the changes and how in practice the Court will look at this situation. It is however believed that simply complying with the requirements out of time will not of itself allow you to then serve a valid section 21 Notice. Section 215 does provide that you can return the deposit in full to the tenant. It is believed that tenants will be advised not to accept the return of the deposit so in this way preventing a landlord from being able to serve a section 21 Notice. If the tenant brings a claim under section 214 Housing Act 2004 and this has been determined, withdrawn or settled this will allow the landlord to then be able to serve a section 21 Notice. If a section 21 Notice cannot be served this would then mean that a landlord could not rely upon this mandatory no fault ground to bring possession proceedings. A tenant would then find themselves in the position of almost being akin to an assured tenant only able to be made the subject of a possession order if one of the grounds to Schedule 2 of the Housing Act 1988 had been made out.

We are yet to see how the Courts interpret the amended Act and whether they give landlords “get outs” as they did previously. Most people will not want to be the no doubt expensive guinea pig to test this situation. The will of Parliament was to give the legislation teeth as part of the regulation of the private rented sector. It is vital that you do comply and if you become aware of a deposit which has slipped through the net take advice.

Victoria Mellor
Training Manager (Lettings & Property Management) - Head Office, Investments & Accounts
01865 760055 / victoria@scottfraser.co.uk  

Source: Painsmith Solicitors