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Update for Buy to Let Landlords

Since 6th April 2007 all landlords who have received a deposit (or bond as they are sometimes called)  under the Housing Act 2004, have had to protect them in an authorised tenancy deposit scheme. The purpose of the legislation was to give greater protection to Assured Shorthold Tenancy (AST) tenants by providing safeguards against the misappropriation of their deposits and introducing sanctions of those landlords who failed to comply with requirements. However, landlord-friendly judicial interpretation of the legislative scheme quickly weakened the effect of the sanctions created by the Act to such an extent that a senior judge concluded that the scheme was not providing the safeguards it was intended to provide.

The Government has now responded to this criticism by enacting Localism Act 2011 which came into force 6 April 2012. This provision amends sections of Housing Act 2004 and has resulted in both changes to the obligations of AST landlords and the sanctions imposed for non-compliance.

The Original Legislative Scheme

When Tenancy Deposit Schemes (TDSs) came into effect it became mandatory for a tenancy deposit to be registered within one of three approved schemes. Under the Act,  the landlord had to comply with the ‘initial requirements’ of an authorised scheme within 14 days from the date of receipt of the deposit. It required any landlord who has received such a deposit to give to the tenant prescribed information detailing the authorised scheme within 14 days of receipt of the deposit.

Failure to comply with the requirements allowed a tenant to make an application to Court and If the court were satisfied on such an application that the obligations have not been complied with, then the Court had to either order the person holding the deposit to repay it to the applicant or order that person to pay it to an authorised scheme. The Court also had the power to order the landlord to pay the tenant a sum equal to three times the deposit.

Furthermore, it provided that no Section 21 notice (see http://www.burnetts.co.uk/business/buy-to-let-residential-property/assured-shorthold-tenant-eviction-scheme/section-21-or-section-8/ for further information) could be given in relation to an AST at a time when either the deposit is not being held in accordance with an authorised scheme or the initial requirements of such a scheme have not been complied with. This had the potential of making evicting a tenant who was complying with the terms of their tenancy very difficult and costly.

The Case Law

The cases which opened up the various loopholes highlighted in Tiensia v Vision Enterprises Limited (t/a Universal Estates) and Honeysuckle Properties v Fletcher and Others [2010] EWCA Civ 1224 and Gladehurst Properties Limited v Farid Hashemi [2011] EWCA Civ 604, which collectively meant that the landlord would have a complete  defence to a claim, provided they had registered the deposit and supplied the prescribed information before the Court hearing date, and in such cases the Court could not order the landlord to pay a penalty to a former tenant.

The New Rules

The changes introduced from 6 April 2012 are an attempt to bring the practical effect of the legislation back to its original aims. They are as follows:

  • Any deposit must be protected and the Prescribed Information provided to the tenant within 30 days of receipt;
  • The requirement to protect within 30 days of receipt is absolute. A claim can be made from 31 days after the deposit payment was made, if the requirements relating to protection of the deposit have not been complied with.
  • A claim can be bought for the return of the full sum of the deposit or for it to be paid into the custodial scheme along with a penalty of between one and three times the sum of the deposit. The level of penalty to be awarded will be at the discretion of the court.
  • Even if the deposit is protected after 30 days, in retrospective compliance, this does not prevent a claim being bought for a breach of the deposit requirements.
  • A Section 21 notice cannot be relied on if there has been no compliance within the 30 days.
  • If the deposit is returned in full or with deductions as agreed; or if the tenant(s) and/or third party have taken proceedings for non-protection and these have been concluded, withdrawn or settled, a Section 21 notice can then be served.
  • A claim can be bought for a penalty award even where the tenancy has ended.

The Main Practical Considerations

The changes brought in by the Localism Act 2011 will mean that:

  • ASTs created on or after 6 April 2012 will need to comply with the new requirements;
  • ASTs already in existence on 6 April 2012 will have a 30 day window to comply with the new requirements, if they have not already done so.

The vast majority of residential tenancies created since 1988 are “assured shorthold tenancies”.

For further information contact Rob Winder on 01228 552222 or email rw@burnetts.co.uk

About the author

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Rob Winder

Senior Associate Rob leads the Debt and Property Recovery team and is head of the Penrith office.

Published: Friday 3rd August 2012
Categorised: Residential Conveyancing, Debt Recovery

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