Left Out in the Cold

The government-approved tenancy deposit schemes should provide a successful dispute resolution mechanism, but solicitors should be involved in the on-going consultation over its actual effectiveness, says Debra Wilson.

Since 6 April 2007, s.213 of the Housing Act 2004 introduced statutory protection for deposits paid by as

sured shorthold tenants. The Department of Communities and Local Government (DCLG) has set up a users’ group inviting interested parties to consult on the workings of the approved tenancy deposit schemes (TDS). Sara Chandler, chairwoman of the Law Society Housing Law Committee wrote to the DCLG offering to contribute to the users’ group. It is, perhaps, a reflection of the DCLG’s view that solicitors have no role to play in a users’ group that the invitation has yet to receive a reply. The Housing Law Committee continues in its efforts to promote the inclusion of solicitors, who have a valuable contribution to make to such a group.

If the deposit scheme and its contribution to dispute resolution are to be fully considered from the perspective of all concerned, involvement from solicitors should be seen as essential in such a group. Solicitors are still very much involved with such issues, even though it is recognised that the TDS is a successful alternative dispute forum in directing such matters from the court.

“Perceived Success”

In an appraisal of the operation of the TDS since it came into operation, the general consensus is that the scheme is a success. There are now appropriate measures to stop what used to be a widespread problem arising from landlord and tenant disputes at the end of a tenancy, leading to landlords refusing or failing to repay a depost on the basis that deductions should be made from the sum they held.

The government-approved tenancy deposit schemes are now protecting vast sums of deposits. The free adjudications services offered by the three approved schemes are proving to be a good way of diverting such issues from the court.

A survey reported by Inside Housing on 15 August 2007 stated however that while 125,000 landlords had joined an insurance scheme as soon as it became compulsory, almost one-fifth of those who took part in the survey were unaware it was mandatory to sign up to one of the authorised schemes. Even now after the scheme has been put in place, there are still many landlords and tenants who are unaware of the legislation and its implication, despite the publicity prior to the legislation coming into force.

The level of understanding and participation in such schemes by landlords can be improved. Landlords who are members of bodies such as The Association of Residential Letting Agencies are better placed to appreciate why compliance is important, but there are still a number of landlords who are not so familiar, or who are ignorant of the law. The surprise awakening arises often when a landlord faces one of the sanctions which can be imposed (see below).

Solicitors’ involvement reduced

The Housing Act 1996 (as amended by s.19 of the Housing Act 1988) introduced new rules to simplify the process of creating assured shorthold tenancies, particularly to address the problem where assured tenancies were being inadvertently created. As a consequence, most tenancies created after 28 February 1997 will automatically be assured shortholds. This change assisted landlords to avoid the pitfalls of not being able to regain possession with the relative ease expected of an assured shorthold.

The relatively straightforward means of creating assured shortholds has meant that solicitors have become less involved in the early stages of drafting and advising on the creation of such agreements. This has become more so, with the advent of precedent agreement and/or the availability of law stationers’ forms online. The majority of assured shorthold agreements are now prepared by estate agents, or landlords themselves. This is where access to sources of relevant information and the ability to keep abreast with changes in the law becomes crucial.

The statutory protection afforded to deposits is a welcome diversion of such cases from solicitors, since such cases usually concern sums that would be considered small claims. It is in the interest of the public that they now have redress through one of the three approved deposit schemes, as opposed to expending disproportionate sums on legal costs on what are often very contentious issues over essentially a small claim.

There are, however, still a number of instances where it may be unavoidable that solicitors will become involved in disputes over deposits. For instance, a bare licensee or agricultural tenant’s deposit is not covered under the scheme, although they are often the most vulnerable. Nor are those cases where a tenant’s rent is over £25,000 per annum; such tenants being excluded from statutory protection, because such tenancies would not be an assured shorthold.

Sanctions

A tenant is entitled to prescribed information about the deposit scheme within 14 days of the landlord receiving the deposit. If a landlord fails to give this information, a tenant may apply to the court where the initial requirements of the scheme have not bee complied with, or where the tenant, having been notified that the landlord has joined a particular scheme, has been unable to obtain confirmation from the scheme administrator (s.214(1)).

If the initial requirements have not been met, an application can be made to the court, whereupon the court must, “as it thinks fit”, make an order under s.214(3) that either:

(a) the person who is holding the deposit (usually the landlord) must repay it to the applicant;

or;

(b) that the deposit is paid into a designated account in the custodial scheme within a period of 14 days beginning with the date of making that order; and

(c) furthermore, that the court must also order the landlord to pay to the applicant three times the amount of the deposit within the period of 14 days (s.214(4)).

A landlord is therefore faced with the prospect of not only having to repay the deposit, but effectively being fined an additional sum equivalent to three times the size of the deposit. There is however, some doubt over whethe a landlord would still face such a sanction if, say, there was no compliance within the initial 14 days of receipt of the deposit, but a landlord nevertheless later complies with the deposit scheme. The general view is that in some cases, a landlord would probably escape an order under s.214(4), despite the mandatory way in which s.214(4) is drafted. The legislation states that the court “must” make an order effectively imposing a fine of three times the sum of the deposit, where satisfied the scheme had not been complied in accordance with s.214(1).

There are conflicting views from the judiciary in two county court cases. One view arises from a tenant’s application; (Stankova v Glassonbury, Gloucester County Court, 10 March 2008, Legal Action Journal, June 2008 page 31) where an award of three times the deposit was awarded, with no set-off against rent arrears. District Judge Singleton is reported to have expressed concern that “it goes against the grain” to make the order sought, but held that the legislation gave the court no discretion. In contrast, in another county court case (Harvey v Bamforth, Sheffield County Court, Solicitors Journal 152/34, p5) on an appeal by the landlord to His Honour Judge Bullimore, the mandatory damages of three times the value of the deposit was not awarded. The district judge’s decision was reversed even though a breach of the TDS provision was found, as the landlord had failed to provide the prescribed information to the tenant about how the deposit was protected. On appeal, the circuit judge’s view was that provision of the prescribed information at any stage before the hearing for possession was sufficient to comply with the requirements of the deposit scheme. As these cases are county court decisions, they are not binding, but they do illustrate that the prevailing view is probably correct, which is that the sanction will probably not apply to a landlord if correct action is taken, whatever stage of proceedings.

In most cases, a tenant’s application for mandatory damages will invariably follow from a tenant having to vacate premises, as one would probably not want to advise a tenant to make a claim, when it may damage relations with their landlord and place their security of tenure in some jeopardy. Especially, bearing in mind that once the deposit has been safeguarded, a landlord is then likely to want to start s.21 HA 1988 proceedings, if they feel threatened by a tenant they perceive to be difficult.

However, a landlord can not rely upon service of a notice pursuant to s.21 of the Housing Act 1988 to obtain a mandatory possession order, during any time when the deposit has not been held in accordance with the authorised scheme, or where the initial requirements of such a scheme had not been complied with (s.215 2004 Act). This sanction makes it compelling for a landlord and tenant’s representative to check if the deposit had been protected, as it can otherwise scupper a possession claim.

With both sanctions in place, there should be effective disincentive against a landlord ignoring the scheme, and/or promotion of better relations between both parties, respecting the reality of the workings of the private rented sector.

A little recognition

The DCLG’s users’ group may prove an important means of considering feedback on how the deposit schemes are working, and how to improve on decision taking within the adjudication scheme. It should be a useful source for gathering information on how problems arise so as to prevent disputes happening. For instance, to increase appreciation by landlords of the importance of preparing detailed inventories before the grant of a tenancy, and how to improve on such matters so as to avoid issues arising. Solicitors continue to see disputes about deposits arising, and are an important source of such information gathering on how such problems arise. The Law Society Housing Committee is hoping that the DCLG will recognise that deposit schemes have not extinguished solicitor’s participation.

This article was first published in Solicitors Journal –  7 October 2008

Debra Wilson is a partner at Anthony Gold Solicitors and a member of the Law Society Housing Committee. The committee was involved in campaigning to introduce equal access and competitive rates for solicitors joining deposit schemes. For further information email Debra or call 020 7940 4060.

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