PP 2011/95

The Housing Act 2004 introduced tenancy deposit schemes. They were designed to protect residential tenants whose deposits are unreasonably withheld by landlords at the end of a lease or, in some cases, misappropriated. Under the legislation, landlords must protect deposits received from assured shorthold tenants with an approved scheme and provide the tenant with prescribed information within 14 days. The sanctions for non-compliance are penal.  The landlord will be unable to serve a notice to terminate the tenancy and recover possession, and will be liable to pay the tenant a sum equivalent to three times the amount of the deposit. The provisions have triggered a series of cases highlighting serious flaws in the statute, which have led to decisions depriving the legislative provisions of teeth. Hashemi v Gladehurst Properties Ltd [2011] EWCA Civ 604; [2011] PLSCS 162 concerned a landlord that kept the tenants’ deposit in its own bank account until the tenancy ended.  It deducted a relatively small sum for disrepairs and repaid the balance to the tenants. Were the tenants entitled to a penalty payment because the landlord had failed to comply with the law, even though the tenancy had come to an end? Or is the court’s power to order a penalty payment conditional on the existence of the tenancy at the relevant time?  The tenant argued that the tenancy deposit legislation was also intended to operate after a lease had expired. It pointed to the legislative use of the expression “the tenant” in connection with arrangements to resolve disputes about retentions from deposits.  Such disputes arise only after tenancies have ended. Consequently, the expression “the tenant” must include a former tenant who has paid a deposit under a lease that has expired. The landlord argued that none of the authorised tenancy deposit schemes have been structured to enable a deposit to be protected once a lease has ended. It asked how the court could order a deposit to be returned to the tenant or to be paid into the custodial scheme (as is required by the legislation) if it already has been returned and the tenancy has ended? In addition, if tenants were entitled to issue proceedings for penalty payments after leases have ended, landlords could face claims years after a tenant’s lease has terminated and its deposit has been returned. The Court of Appeal found in favour of the landlord. The strongest argument against the landlord’s interpretation of the legislation was that it would encourage unscrupulous landlords to sit on their hands because failure to protect a deposit might carry no penalty at all. Nonetheless, the court decided that tenants can always require their landlords to comply with the law by issuing proceedings while a lease is ongoing and that it is up to tenants to invoke the legislation – despite the damage that this might do to relationships with their landlords. The property industry is already hotly debating the decision. Tenants are, justifiably, claiming that Gladehurst and Vision Enterprises (t/a Universal Estates) v Tiensia [2010] EWCA Civ 1224; [2010] 49 EG 80 have robbed the tenancy deposit scheme of statutory force and are calling on the government to amend the legislation at the earliest opportunity. Allyson Colby is a property law consultant