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Tenancy Deposit Schemes: surprise decision on pre-2007 deposits!

Another court decision equals another headache for landlords of residential property.

Landlords have to do two things within 30 days of receiving a deposit paid in connection with an assured shorthold tenancy: first, pay the deposit into a registered scheme and second, give the tenant certain prescribed information about how the deposit is held. Unless both of these steps have been taken, a landlord cannot serve a section 21 notice under the Housing Act 1988 to obtain possession of the property once the tenancy expires.

The position is straightforward on a new letting. It is also clear that on an express renewal of the tenancy, the landlord has to make sure that the deposit is or remains protected and provide the tenant with the prescribed information afresh within 30 days of the renewal date.

Previously, we blogged about the Court of Appeal’s decision in Superstrike Ltd v Rodrigues. In that case, the Court decided that where a tenancy was granted before the tenancy deposit scheme came into force on 6 April 2007 and expired after that date but the tenant stayed in the property, there was an implied statutory periodic tenancy which has arisen after the scheme had come into force. Continuing to hold the deposit in relation to this new tenancy triggered the obligation for the landlord to protect the deposit and give the tenant the prescribed information. Unfortunate though this was for the landlord, it does make sense, as the deposit was not previously protected but the new implied tenancy fell within the tenancy deposit scheme. This is now being codified in the draft Deregulation Bill that is making its way through Parliament.

However, the recent Court of Appeal decision of Charalambous v Ng will come as a nasty surprise to landlords. In 2002, nearly five years before the tenancy deposit scheme came into force, the landlord granted a tenancy and took a deposit from the tenants. The tenancy was renewed twice, before finally expiring in 2005, some 18 months before the scheme came into force. The tenants remained in occupation and so an implied statutory periodic tenancy arose.

In 2012, the landlord served a section 21 notice to recover possession of the property. The tenants argued, and the court agreed, that the notice was invalid as the deposit was not protected.

The legislation prevents a landlord from serving a section 21 notice where a deposit “is not being held in accordance with an authorised scheme”. The Court decided that this applied whether or not the landlord had received the deposit before the scheme came into force as it was drafted in the present tense. They thought that this interpretation did not cause any real hardship to landlords as they can clear the path for service of a notice in one of two ways: put the deposit into an authorised scheme; or repay it to the tenant.

Landlords should now take another look at their portfolios and consider protecting any deposits which have not yet been protected, whether or not received before April 2007. Otherwise, they should return any deposit to the tenant in full before serving a section 21 notice to regain possession.

Case: Charalambous and another v Ng and another [2014] EWCA Civ 1604