Landlords Beware

Thursday 12 January 2012

The Localism Act, to come into force in April this year, is set to amend the courts’ powers in relation to a landlord’s responsibility to protect a tenant’s deposit by paying into a relevant scheme, and to provide set information about the scheme to the tenant.

The Housing Act 2004 set out various penalties for landlords who fail to protect their tenants’ deposits, chiefly that landlords cannot serve notice to repossess the property at the end of the fixed term until the deposit is protected, and that a landlord failing to protect the deposit would be liable for a fine of three times the deposit. The period to protect the deposit under the 2004 act was 14 days.

However recent legal rulings have pulled the teeth of the 2004 Act in two ways:

• The courts ruled that even if the deposit was not protected within the 14 day period, so long as it was protected at a later date, no penalty would be payable. Similarly a landlord wishing to repossess could protect the deposit immediately before serving notice, and suffer no penalty.
• Secondly, once the tenancy had ended, the tenant would no longer be covered by the Act and so would lose any ability to bring proceedings against a landlord in breach.

Landlords have therefore been able to take a relaxed attitude to protecting deposits, and the 14 day period given in the 2004 Act has virtually ceased to be relevant.

The Localism Act (amongst a wide range of other provisions) will make the following key amendments to the 2004 Act:

• The 14 day period to protect the tenancy (and provide the relevant information to the tenant) is extended to 30 days from receipt of deposit.
• Landlords failing to protect the deposit and provide the relevant information within the new 30 day period may be ordered to repay the deposit and will also have to pay a penalty of 1-3 times the deposit’s value. This will apply whether the deposit is protected late or not at all (although the courts will presumably take into account how soon and under what circumstances the deposit was protected, when deciding what penalty to order). A fine of at least the value of the deposit would seem to be the minimum, and so even the most well-meaning of landlords will face a penalty if the deposit is not protected on time.
• Tenants will be able to bring proceedings for breach of the Act after the end of their tenancies.
• Regarding a landlord’s ability to serve notice to repossess at the end of the tenancy term, under the amendments to be brought in by the Localism Act, a landlord who has failed to protect a deposit by the 30 day deadline will only be able to serve such a notice after refunding the deposit to the tenant, or after the resolution of a tenant’s claim for compensation for the landlord’s failure to protect.
• A landlord’s ability to repossess against squatters, or for non-payment of rent or other breach, is not affected, although it is possible that any penalty for non-protection of deposit may be set off against rent arrears in the same way as awards for dilapidation of property are.

Once these provisions become law, landlords will be forced to take the tenancy deposit deadline far more seriously, both to avoid the penalties and to keep their options open regarding regaining possession of their property. Alternatively, many landlords may simply not take deposits from their tenants at all, thereby sidestepping the legislation minefield entirely. Landlords should be aware, though, that money received from a tenant under any other name that fulfills a deposit-like function (such as an extra month’s rent in advance) may still be viewed as a deposit by the courts.