Tenancy Agreements and Deposits

Since 6th April 2007 landlords have been required to place the deposit paid by tenants, in respect of most residential tenancy agreements, into an authorised tenancy deposit scheme. This requirement applies to the type of tenancy agreement most commonly entered into by private tenants: the assured shorthold tenancy.

The rules governing tenancy deposits are contained in the Housing Act 2004 (HA 2004). Failure by a landlord to place a tenant's deposit in an authorised scheme could make it impossible for the landlord to obtain a repossession order against the tenant - and even make them liable to pay compensation. (According to section 213 of HA 2004 a deposit in respect of a shorthold tenancy should only be in the form of money.)

Authorised Tenancy Deposit Schemes

There are two types of tenancy deposit schemes: custodial schemes, in which the deposit is paid into a special account; and insurance schemes, in which the landlord retains the deposit. The requirements for an authorised tenancy deposit scheme are contained in Schedule 10 of HA 2004. Regardless of the type of scheme chosen, the scheme performs a dual purpose: it protects the deposit and provides a system for resolving any disputes between the landlord and the tenant about what should happen to the deposit at the end of the tenancy.

Landlords’ Obligations in Relation to Deposits

A landlord may not demand a deposit unless it is to be paid into an authorised scheme. Under section 213 of HA 2004 a landlord must comply with the "initial requirements" of an authorised scheme within 14 days of receipt of the deposit. The "initial requirements" may depend on the scheme chosen by the landlord. Also within 14 days of receipt of the deposit the landlord must provide the tenant with information about the tenancy deposit scheme and confirmation of the landlord's compliance with its initial requirements.

Tenants’ Remedies for Breach of the Deposit Rules

Section 214 of the HA 2004 gives tenants the right to apply to the local county court if:

• they believe that their landlord has failed to safeguard the deposit in an authorised scheme; – or,
• the landlord has failed to comply with the "initial requirements" of an authorised scheme – for example, by providing the tenant with information about the scheme.

If someone else paid the deposit on the tenant's behalf that person may make the application to the court.

Where a judge is satisfied that a landlord has not fulfilled his obligations under the tenancy deposit rules he or she must take one of the following steps:

• order whoever is holding the deposit to pay it back to the tenant – or to the person who paid it on their behalf; OR,
• order the person holding the deposit to pay it, within 14 days, into an authorised, custodial scheme.

The judge must also:

• order the landlord, within 14 days, to pay the tenant (or the person who paid the deposit) an amount equal to three times the deposit.

The HA 2004 gives judges hearing such applications virtually no discretion. If the judge is satisfied that the landlord has failed in his requirements, the orders described above should be made. However, in practice some judges may be reluctant to order the financial penalty if the breach was a failure to provide the required information within 14 days but the information had already been provided by the time the application was made.

Deposits and Repossession of Rented Properties

Section 215 of the HA 2004 imposes limitations on a landlord's ability to repossess a property if he is in breach of the tenancy deposit requirements. Section 215 states that a landlord may not serve a section 21 notice on a tenant if:

• the deposit is not being held in an authorised scheme; or,
• the initial requirements of the relevant authorised scheme have not been complied with; or,
• the required information regarding the deposit scheme has not been provided to the tenant.

The landlord is also prevented from issuing a valid section 21 notice if the deposit was taken in a form which is not permitted under the HA 2004 - i.e. it was not in monetary form.

Failure to comply with the deposit rules can provide a tenant with an absolute defence to a repossession claim based on a section 21 notice. Such a claim is fatally flawed and should be struck out because a landlord cannot serve a valid section 21 notice unless the deposit requirements have been complied with.

The HA 2004 does not mention section 8 notices, therefore, failure to comply with the deposit rules may not invalidate a repossession claim based on a section 8 notice. However, the judge may take it into account when deciding whether to grant a possession order if the claim is based on discretionary grounds.