RESIDENTIAL LETTINGS : Care needed over Tenancy Deposit Schemes

In 2007 the provisions of the Housing Act 2004 concerning tenants’ deposits came into force. If a landlord accepts a deposit from a tenant under a shorthold tenancy, the deposit must be held in one of the two schemes set up by the Government.  There is a Deposit Scheme where the deposit is paid over to the special deposit taking institution or an Insurance Scheme where the landlord or the landlord’s agent belongs to the scheme and is insured to return the deposit.

The penalties for failure to comply with the provisions are draconian. Firstly, a Court - upon the application of the tenant - must either order that the deposit is paid into a scheme or alternatively order that the deposit is returned to the tenant. However the second part is the real scorpion’s tail as the Court must at the same time order the landlord to pay to the tenant a penalty of three times the amount of the deposit.

A medium-sized house in London might attract a rent of say £4000 per month. There might be three month’s rent deposit and the order then would amount to a whopping £36,000 that the landlord has to pay the tenant.  Even one month’s rent deposit would yield a penalty of £12,000.

What if the landlord is ignorant of the law and unwittingly keeps the deposit?

The case of Gladehurst Properties Ltd v Hashemi [2011] is of help.  The Court of Appeal has decided that the penalty only applies in the case of the Court making the order for the return of the deposit or payment into a Scheme.  If by the time that the Court Hearing comes about the deposit has been paid into a scheme or the tenancy has come to an end, the Court will not make an order.  If it does not make an order then it will not be able to make a penalty order.

The moral; make sure you pay your tenants’ deposits into one of the Government Schemes. If you do not and you are faced with a Court application, sort yourself out quickly before the Court Hearing!

For further information about this or any other property-related matters - commercial or private - please contact Neil Spurrier: n.spurrier@grm.co.uk