Landlords must check they have protected the deposits of tenants who have 'rolled over', expert warns

Allyson Colby of Pinsent Masons, the law firm behind Out-Law.com, was commenting as a Court of Appeal judge ruled that the deposit of a tenant in that position had to be protected under a statutory deposit scheme, even though that deposit was taken in relation to a pre-April 2007 assured shorthold tenancy.

Tenancy deposit schemes were introduced in April 2007, when the relevant provisions of the 2004 Housing Act came into force. Deposits paid by assured shorthold tenants now have to be lodged with an authorised statutory scheme within 30 days of receipt, while tenants must be provided with information as to how their deposits have been protected. Among the legal consequences for landlords that fail to hold a deposit in accordance with an authorised scheme is that a landlord may not issue a notice requiring possession in the absence of a statutory reason for doing so, simply because it wants to bring the tenancy to an end.

"The decision confirms the existence of a 'heffalump trap' for landlords," Colby said. "Many will have been caught unawares by the requirement to protect deposits taken before the legislative requirements came into force, if the landlord has then hung on to the deposit when the fixed term tenancy rolled over."

"The requirements do not stop there. The obligations imposed by the legislation are twofold, because tenants are also entitled to be told how their deposits have been protected. However, landlords and letting agents often fail to send the prescribed information to tenants, simply because they do not realise that the legislation requires them to do this," she said.

"Nonetheless, the Court of Appeal has decided that ignorance of the law is no excuse. Consequently, landlords would be well-advised to check whether deposits have been protected before issuing proceedings for possession against assured shorthold tenants - and should also beware of the financial penalties for non-compliance with the legislation," she said.

The tenant in this case, Mr Rodrigues, took out a 12-month assured shorthold tenancy with the landlord, Superstrike, in January 2007. At the time, a deposit equal to one month's rent was paid. The tenancy automatically became a statutory periodic tenancy, running from month to month, in January 2008.

In its judgement, the Court of Appeal said that the statutory periodic tenancy amounted to a new tenancy, and that the deposit protection requirements which came into force between the two tenancies applied. The landlord argued that the deposit had not been "received" under the legislation at the time that the new tenancy began as this had already been paid. However Lord Justice Lloyd said that "payment" should be construed more broadly. Of particular interest was the fact that the landlord had not returned the deposit or deducted anything from it at the end of the previous tenancy, he said.

"It is clear from [the 1988 Housing Act] that what happens at the end of the fixed period tenancy is the creation of a new and distinct statutory tenancy, rather than, for example, the continuation of the tenant's previous status. I do not see that there can be any doubt as to that," the judge said.

"The tenant should be treated as having paid the amount of the deposit to the landlord in respect of the new tenancy, by way of set-off against the landlord's obligation to account to the tenant for the deposit in respect of the previous tenancy, given that the landlord did not seek payment out of the prior deposit for the consequences of any prior breach of the tenancy agreement," he said.

As the statutory obligation to pay the deposit into an authorised deposit scheme had not taken place, the landlord was not entitled to possession of the property, he said.

"I am willing to accept that the need to comply may not have been foreseen," Lord Justice Lloyd said. "Unfortunately, several points under this legislation turned out not to be as may have been expected or intended. The imposition of this requirement in these circumstances does not seem to me in any way anomalous, futile or pointless. To the contrary, it is entirely consistent with the policy and aim of the relevant provisions."