Deadline looming for landlords to protect tenancy deposits
One of the final acts of the previous Parliament was to pass the Deregulation Act 2015, a wide-ranging enactment of particular interest to residential landlords. Specifically, landlords holding tenancy deposits need to be aware of Sections 30 – 32 of the Act, the effect of which is to bring the practice of holding tenancy deposits in line with recent case law. The Act introduces a grace period for landlords not previously complying with the legislation governing tenancy deposits, meaning that landlords not correctly protecting the deposits they are holding within this period face penalties and other potential adverse consequences. It is therefore worthwhile for landlords to make themselves aware of their new obligations before the deadline for protecting their tenancy deposits expires.
BACKGROUND TO TENANCY DEPOSITS
Tenancy deposits will often be demanded by landlords letting residential properties under Assured Shorthold Tenancies. Their purpose is to provide the landlord with some security against the tenant’s default or breach of covenant during the term of the tenancy; if the tenant falls into arrears with rent or allows the property to fall into disrepair, then the landlord can use the deposit to cover his losses. However for good tenants who pay their rent and observe their covenants under the tenancy, there can be a problem of recovering deposits once the tenancy is over; if the landlord is dishonest or incompetent then they could make recovery of the deposit difficult, while deposits held by landlords who become insolvent could, if not properly protected, fall into the hands of the landlord’s creditors.
The Housing Act 2004 was designed to address the problem of good residential tenants struggling to recover their deposits, by requiring landlords taking such deposits to register them with an official scheme. This essentially ensured that good tenants could recover their deposits by virtue of their membership of the scheme, without having to rely on the landlord. Landlords obliged to register their deposits were also required by the legislation to serve on tenants prescribed information regarding how the deposit was being held, so that the tenant had the information necessary to recover the deposit at the end of the tenancy.
In the wake of the Housing Act 2004, it became clear from subsequent litigation that there were two main issues which the legislation had left unclear. The first concerned the status of deposits taken before the legislation came into force; what were the landlord’s obligations in respect of these? The second concerned the common situation whereby the landlord takes a deposit from the tenant when first granting a tenancy which is later renewed, or where the tenant simply remains in the property indefinitely, with the landlord’s permission, once the tenancy expires; is the landlord required to perform the same obligations again, particular serving the prescribed information, in respect of the new tenancy which emerges in succession to the initial one? The Deregulation Act 2015 has sought to address these issues, with important consequences for landlords.
THE DEREGULATION ACT 2015
Since 6th April 2007 it has been compulsory for landlords taking deposits from assured shorthold tenants to protect the deposit by registration with an official scheme, and to serve prescribed information about the scheme on the tenant. Failure to do this entails two serious consequences for the landlord: firstly, the landlord will be unable to go to court recover possession of the property at the end of the term of the Assured Shorthold Tenancy (unless he can prove a breach of covenant by the tenant entitling the landlord to evict him) until he has returned the deposit (or served the prescribed the information, if this is the landlord’s only breach). And secondly, the landlord is liable to pay the tenant a fine of between one and three times the value of the deposit. This applies even if the tenant has suffered no loss from the landlord’s failure to protect the deposit.
The Deregulation Act 2015 extends the landlord’s obligations in respect of tenancy deposits so as to apply to deposits taken before 6th April 2007, at which time there would have been no obligation to protect. Additionally, where the landlord took the deposit after 6th April 2007 in respect of a tenancy which has now expired, but where the tenant remains in the property and the deposit remains protected (clearly the landlord has already breached his obligations if the deposit has not been protected), the landlord must now serve the prescribed information in respect of the tenancy succeeding to the original fixed-term tenancy, notwithstanding that he will already have served such information when he first took the deposit. The landlord has until 23rd June 2015 to comply with these requirements or face being unable to recover possession of the property, as well as financial penalties.
For landlords already well-versed in the law surrounding the protection of tenancy deposits, the Deregulation Act 2015 should not present too much concern. In all likelihood, such landlords will already have all of their deposits protected, and be on top of their obligation to serve the prescribed information. Those most at risk of breaching the legislation, and failing to do what is required of them by the 23rd June deadline, are likely to be those with large buy-to-let portfolios who take lots of tenancy deposits and find it difficult to keep track of them all (particularly if they do not employ an agent to manage their tenancies), and those who have been residential landlords for a number of years and may therefore still have deposits taken before the Housing Act came into force. However, even under these circumstances there are exceptions and derogations to the legislation (for example, the requirement to protect deposits does not apply in the case of some student lettings, such as university halls). Accordingly, if landlords are at all uncertain about their obligations, then a consultation with their solicitor in advance of the 23rd June deadline is certainly to be recommended.