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Deposit dilemmas

publication date: Apr 22, 2010
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Since April 2007 residential landlords have been obliged to protect deposits received from tenants who have taken on an assured shorthold tenancy agreement. The aim of the legislation is to protect tenants from unfair deductions, to ensure deposits were returned – and promptly – to the tenant.

However, as tenants become ever more aware of their rights (which is not, of course, a bad thing) court action regarding the management of these deposits is becoming more widespread. Some of the decisions made in these cases indicate that there may be issues with the legislation and how the courts can deal with such cases.

An unhappy tenant may take not only his landlord to court, he may take action against the letting agent – without a good Professional Indemnity policy would you be able to defend yourself?

Legal experts Laura West and Marianne Rivett report here on a few of the cases recently brought to court.

Can insurance cover you?The requirements of the compulsory tenancy deposit scheme are set out in Pt VI, Chapter 4 of the Housing Act 2004 [HA 2004]. Within 14 days of receiving a deposit a landlord must, pursuant to s 213(3), comply with the initial requirements of one of the authorised schemes (two being custodial, one insurance backed). Neither “landlord” nor “tenant” is defined for the purposes of the scheme. Additionally, pursuant to s 213(5), a landlord who has received a deposit must give to the tenant and any other “relevant person” (defined in s 213(10) as any person who has paid the deposit on behalf of the tenant) certain prescribed information as set out in s 213(5) HA 2004 and the Housing (Tenancy Deposits) Prescribed Information) Order 2007 (SI 2007/797).

Where a deposit has been paid any tenant or relevant person may apply to the county court either because the landlord has (i) failed to take any or sufficient steps to register the deposit, or (ii) provided some prescribed information to the tenant but the scheme administrator has not been able to obtain confirm that the deposit is protected.

Where the court is satisfied that the landlord has failed to either protect the deposit within 14 days or at all, or, the prescribed information has not been given to the tenant s214(3) and (4), will come into effect as follows: (3) The court must, as it thinks fit, either– (a) order the person who appears to the court to be holding the deposit to repay it to the applicant, or (b) order that person to pay the deposit into the designated account held by the scheme administrator under an authorised custodial scheme, within the period of 14 days beginning with the date of the making of the order. (4) The court must also order the landlord to pay to the applicant a sum of money equal to three times the amount of the deposit within the period of 14 days beginning with the date of the making of the order.

A number of straightforward cases show that the scheme has been put to good effect by tenants, including Beal v McCartney (Plymouth County Court, March 2008), Ferguson v Jones (Birmingham County Court, November 2008) and Universal Estates v Tiensia (Croydon County Court, February 2009). In all of these cases the landlord failed to protect the deposit within the 14-day period and the tenant was awarded a sum equal to three times the deposit.

Possibly the most widely cited of the county court decisions, Harvey v Bamforth (Sheffield County Court, August 2008, cited in the White Book at para 3A–1627.2) gave some comfort to landlords. The first instance decision awarding the penalty stipulated in s 214(4) to the tenant was overturned on appeal by HHJ Bullimore, who found that the landlord was not liable for the penalty where he had correctly protected the deposit but had simply failed to provide the information to the tenant – as required under s 213(6)(a) – within 14 days, as required by s 213(6)(b).

QuoteHarvey was distinguished in Seghier v Rollings, (Bow County Court, March 2009), where the landlord was found to have failed to provide the prescribed information, although an unsigned copy of the registration certificate had been passed to the tenant following the commencement of the court proceedings. The landlord was ordered to pay the s214(4) penalty.

Another decision in favour of landlords is Anderson v Diamond Properties Leeds Ltd (Leeds County Court, January 2009), where the defendant letting agent successfully opposed the claim on the ground that the deposit had been protected and the prescribed information supplied to the tenant before the application was heard by the court.

However, defects in the scheme with the potential to lead to inequitable results have come to light. One aspect of the legislation which has proven problematic is the absence of a formal definition of the term “landlord(s)”, albeit that s212(9)(a) states that the term shall include references to a person or persons acting on his or their behalf in relation to a tenancy.

A case heard in May 2009 in the Central London County Court, Jacklin v Fraser Property Management Ltd, T/a Martin and Co (Bedford), serves as a cautionary tale for agents and tenants. (The claimant, Jacklin was the tenant).

The defendant, Fraser, entered into an agreement with a landlord to find a tenant for a vacant property. The agreement clearly stated that the landlord was responsible for the registration of the deposit. However as a result of an administrative error the tenancy agreement incorrectly stated that the defendant letting agent would be responsible for the registration of the deposit. On discovering that the landlord had failed to register the deposit within the 14-day period the defendant immediately registered it. The landlord duly went bankrupt. In time, the two joint tenants abandoned the property within the fixed term of the Assured Shorthold Tenancy Agreement and stopped paying rent.

DJ Lightman held that he would be bound to find that the defendant was a landlord for the purposes of the scheme because of the error in the tenancy agreement. However, the judge found that the proceedings were improperly brought by only one of the two joint tenants and therefore no penalty was ordered. (The claimant had also failed to constitute the proceedings properly in citing the name of the defendant incorrectly).

The judge went on to highlight the issues with the legislation as he saw them, which would have put him in an impossible position, had the claim been properly constituted:

• He found he would have been compelled to order that the defendant pay the penalty despite the clear arrangement between the defendant and landlord – an unjust result. The inequity of such a decision would have been compounded by the fact that the landlord had since gone bankrupt and, had it not been for the actions of the defendant, the monies would have been as good as lost to the claimant.

• Had he been compelled to order the payment of the penalty by either the defendant, or indeed the landlord, the claimant may well have benefted from an enrichment which would have been unjust since he had abandoned the tenancy during the fxed term— where the landlord did not accept the abandonment—and ceased to pay rent without any legal basis for doing so.

• s213(3) would require the court to either order the person who appears to the court to be holding the deposit to repay it to the applicant (s213(3)(a)) or order that the person pay the deposit into the designated account held by the scheme administrator under an authorised custodial scheme (s 213(3)(b)) within 14 days. Any such order would be completely pointless in the circumstances since the deposit was already protected in the insurance backed scheme. Furthermore, were the deposit protected in a custodial scheme the court would be compelled to order the return of the deposit to the tenant (even where the landlord was entitled to a set off ). However, where the landlord had chosen the insurance scheme (as in Jacklin) the court could manipulate the system and merely order the transfer of the deposit funds from an insurance backed scheme to a custodial scheme pursuant to s.213(3)(b) in order to avoid returning the monies to the tenant.

Deposit assistanceWhile the judge in Jacklin was of the view that where any set off was possible the court should so order, this differs from the earlier case of Stankova v Glassonbury (Gloucester County Court, March 2008) where it appeared that the judge refused a set off sought by the landlord to cover dilapidations, on the basis that had the landlord registered the deposit he would have been able to raise those issues through the arbitration scheme. In the absence of any provision in the legislation, DJ Singleton felt he was unable to order any set off against the deposit monies and penalty – albeit that the state of affairs “went against the grain”.

However, more recently in the case of Davies v Smith (Tunbridge Wells County Court, June 2009) the landlord was permitted to set off a sum for breach of the tenancy agreement against the s214(4) penalty (the deposit having been returned).

Finally, in Jacklin the defendant sought to argue that he had not “received” the monies within the meaning of s213(3) until he discovered that the landlord had failed to register the deposit as per their agreement, and that until that moment the monies were held on trust for the landlord. The judge declined to rule on this point. However, it is clear that where a landlord and tenant enter into two successive tenancy agreements and the landlord retains deposit monies from one tenancy to the next the landlord will be deemed to have “received” those funds for the purposes of the scheme and will be liable should he fail to protect them within 14 days, even where he seeks to argue that the monies were retained as rent in advance (see Piggott v Slaven, Grimsby County Court and Saad v Hogan, Brentford County Court, both February 2009).

There is also the outstanding question of whether a claimant is entitled to receive the benefit of the legislation after the tenancy in question has come to an end. As noted above the legislation fails to define the term “tenant” and it is arguable that the intention of the Act is to protect only current tenants. The conduct of the deposit schemes also lends weight to this argument, as they will refuse to accept a deposit after a tenancy has ended.

As a result of the draftsman’s haste to get this scheme on the statute books, it would seem that this supposedly “no fuss” mechanism for tenants has run into problems. County court judges seem increasingly perplexed that they are compelled to make orders within a rigid system, with the potential for inequitable and unjust results. This is in clear conflict with the original aims of the legislation.

In giving his judgement in Jacklin DJ Lightman commented that “the sooner Parliament looks at this the better”.

Laura West, is a barrister at Arden Chambers.
Marianne Rivett is a solicitor at Kennedys.
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