Saturday, 10 April 2010

Tenancy Deposit Schemes Know Your Rights

The introduction of the Tenancy Deposit Scheme ("TDS") was intended to address complaints concerning the way some landlords of residential properties would fail to return tenants' deposits.

TDSs were created under the Housing Act 2004 ("the Act") and became mandatory for all residential assured shorthold tenancies created on or after 6 April 2007. An assured shorthold tenancy is designed for use with residential lettings and tenancies made on or after 1 April 1990 under the Housing Act 1988. There are a number of criteria that must be fulfilled for the tenancy to be considered an assured shorthold tenancy, for example the rent must not be more than £125,000 per year.


The Act provides for two types of authorised scheme: "custodial" and "insurance". 


Custodial


A custodial TDS requires a landlord to pay its tenant's deposit to a scheme administrator within 14 days of receipt from the tenant. The scheme administrator holds the deposit until the tenancy comes to an end. The deposit (or balance due to the tenant) is then returned to the tenant. 


Insurance


Under an insurance TDS the landlord retains possession of the deposit and pays an insurance premium to the scheme administrator. The scheme administrator will then repay the tenant should the landlord misappropriate the deposit.


It is for the landlord to choose which scheme to use, not the tenant. The landlord must then inform the tenant of the TDS being used within 14 days of receiving the deposit and provide the tenant with certain "prescribed information" (section 213 of the Act).

The sanctions for non-compliance are severe. Where the requirements have not been met the tenant can apply to court. If the court is satisfied that the landlord's obligations have been breached, it must either order the repayment of the deposit or (where a custodial scheme is being used) order that the deposit be handed over to the administrator of the scheme. In addition, it must order the landlord to pay to the tenant a sum equal to three times the amount of the deposit.



Furthermore, section 215 of the Act provides that no section 21 notice to terminate the assured shorthold tenancy can be served until the landlord has complied with the initial requirements of the scheme and has given the tenant the prescribed information.


Case Law

The first reported case on the operation of the TDS was reported in late 2008 (Harvey v Bamforth [2008] 46 EG 119). 



The Facts


In this case the defendant had paid a deposit of £520. The landlord had complied with the initial requirements of an insurance TDS. However the landlord did not supply the "prescribed information". The tenant fell into arrears and the landlord issued proceedings for possession. It became clear the landlord had not complied with the act and the claim for possession was withdrawn.


The tenant, realising the landlord's error, applied for the return of the deposit and the payment of the penalty (being three times the amount of the deposit). The judge ruled that by failing to give the prescribed information within 14 days the landlord was in sufficient breach to trigger the sanctions. He therefore ordered repayment of the deposit and the penalty was set off against the arrears of rent.


Point at Issue


The landlord appealed as to whether the 14 day limit for providing the information was integral to trigger the sanctions. 


Decision


The judge on appeal made it clear that only a failure to comply with providing the information triggered the mandatory penalties. In the circumstances, the tenant had applied to court after the landlord (albeit belatedly) provided the prescribed information. The landlord was therefore not in breach and was not liable to repay the deposit or pay the penalty.


However, despite the landlord's request, the judge refused to clarify what would happen if the tenant had applied before the information was provided. There must therefore be a real possibility that, in such circumstances, a landlord will be liable.


Conclusion


Landlords must therefore ensure they comply with their obligations under the TDS as tenants may be able to enforce severe sanctions for non-compliance.



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