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Restrictions on serving a notice ending an assured shorthold tenancy (Court of Appeal)

Restrictions on serving a notice ending an assured shorthold tenancy (Court of Appeal)

In Charalambous and another v Maureen Rosairie NG and another [2014] EWCA Civ 1604, the Court of Appeal held that a landlord was not required to pay a rent deposit in respect of an assured shorthold tenancy into an authorised scheme, where there was no authorised scheme at the time the deposit was received. However, the landlord could only make use of the procedure in section 21 of the Housing Act 1988 to end the AST if the deposit was returned to the tenant, or possibly if it had been protected in an authorised scheme at the time the notice was served.

This is news forwarded by John Saulet of Saulet Ashworth Solicitors LLP in which the appeal court have clarified that tenants deposits do not need to be protected in a registered scheme if the deposit was taken before such schemes existed but that if a Section 21 is to be served, the deposit will either need to be returned or lodged with one of the registered schemes.  More details of the courts findings follow:

In Charalambous and another v Maureen Rosairie NG and another [2014] EWCA Civ 1604 (16 December 2014), the Court of Appeal considered if a notice under section 21 of the Housing Act 1988 (section 21 notice), seeking possession of a property let under an assured shorthold tenancy was valid if, at the time it was served, a security deposit paid in respect of the tenancy was not protected in accordance with the statutory scheme provided under the Housing Act 2004.

The Court of Appeal held that, because the deposit was received by the landlord before the tenancy deposit scheme came into force, the landlord was not subject to any of the penalties the legislation specifies for failing to register the deposit or for not giving the tenant the information it is due.

While the landlord was not directly obliged to register this deposit, because of when it had been received, the landlord could only serve a section 21 notice if the tenancy deposit was protected at the time of service or the deposit had been returned to the tenant. The landlord had served its section 21 notice without protecting the deposit under one of the authorised schemes, or returning the deposit to the tenant, so the notice was invalid. However, the landlord would not be liable for the financial penalties imposed by section 214 of the Housing Act 1988. 

Background

Since 6 April 2007, a landlord must join a tenancy deposit scheme (TDS) on the creation of a new residential assured shorthold tenancy (AST), where a deposit is paid by the tenant to the landlord on commencement of the tenancy.
This requirement is imposed by section 213(1) of the Housing Act 2004 (HA 2004) which provides that:

"Any tenancy deposit paid to a person in connection with a shorthold tenancy must, as from the time when it is received, be dealt with in accordance with an authorised scheme."

Section 213 also requires a landlord taking a tenancy deposit to comply with the protection scheme's initial requirements within 30 days (section 213(3), HA 2004 ). The landlord must also give the tenant certain information within the same 30 day period from the date of receipt (section 213(6), HA 2004). Before 6 April 2012, when those provisions of the HA 2004 were amended by the Localism Act 2011 (LA 2011), those periods were only 14 days.

Ending an AST under section 21 where there is a tenancy deposit

By virtue of section 21 of the Housing Act 1988 (HA 1988), the landlord of an AST has the right to apply for possession of the premises once any fixed term has expired without giving any reason, subject only to giving not less than two months' notice.
However, if the landlord has received a deposit in respect of the tenancy, the landlord cannot serve notice under section 21 of the HA 1988 (section 21 notice) if either of the following applies:

  • The deposit is not being held in accordance with an authorised TDS.
  • Section 213 of the HA 2004 has not been complied with in relation to the deposit.

(Section 215(1), HA 2004 .)

Penalties for landlords where the tenancy deposit requirements were not met

Where a tenancy deposit has been paid in connection with an assured shorthold tenancy, the tenant and any relevant person may make an application to the county court on the grounds that the landlord has not complied with its obligations in relation to the initial requirements of an authorised scheme or the prescribed information requirements (section 214(1)(a), HA 2004 ).

If the court finds in favour of the tenant on this application, it must order the landlord to pay a penalty equal to one to three times the amount of the deposit to the tenant (section 214(4), HA 2004). There are other consequences to this finding too, which vary depending upon whether the tenancy has ended.

For more information on TDS, including the consequences of not complying with the tenancy deposit regime, see Practice note, Tenancy Deposit Schemes (www.practicallaw.com/9-238-2955).

Amendments to the HA 2004 following Tiensia

Originally, the tenancy deposit provisions of the HA 2004 potentially allowed a landlord to avoid the penalty payable under section 214 of the HA 2004, simply by complying with the Act's requirements before the date of the court hearing. This view was confirmed by the majority decision of the Court of Appeal in Tiensia v Vision Enterprises Ltd (t/a Universal Estates) and Honeysuckle Properties v Fletcher and others [2010] EWCA Civ 1224 . This interpretation of the TDS legislation substantially undermined the idea behind the TDS scheme, which was to ensure that tenants' deposits were protected during their tenancies, as landlords could easily avoid the sanctions for failing to protect the deposit. For more information, see Legal update, Time limit for complying with initial requirements of tenancy deposit scheme (www.practicallaw.com/9-503-8989).

The LA 2011 made some changes to the HA 2004 and one of the purposes behind these amendments was to tackle the problem highlighted by the Tiensia case. The LA 2011 amended the HA 2004 with effect from 6 April 2012, attempting to make it clear that the statutory requirements for deposit protection could not be safely put off, or ignored, by a landlord until it chose to comply for its own purposes.

Section 184 of the LA 2011 was brought into force by article 8 of the Localism Act 2011 (Commencement No. 4 and Transitional, Transitory and Saving Provisions) Order 2012 (LACO 2012). Article 8 operated subject to article 16, which provides:

"(1) Subject to paragraph (2), the amendments made by section 184 of the Act apply in respect of any tenancy deposit received by a landlord in connection with a shorthold tenancy where the tenancy was in effect on or after 6th April 2012.

(2) Those amendments do not apply in respect of a tenancy deposit received by a landlord in connection with a shorthold tenancy where-

(a) the tenancy was in effect on or after 6th April 2012, and

(b) the landlord has, before the end of the period of 30 days beginning with that date-

(i) complied with the initial requirements of an authorised scheme in relation to the deposit, and

(ii) given to the tenant and any relevant person the information prescribed for the purposes of section 213 (5) of the Housing Act 2004."

Facts

The tenants under an AST appealed against a decision that a section 21 notice served by the landlord was valid.

The tenants had taken a one year tenancy of a residential property in 2002 and paid a deposit. They renewed the tenancy twice and each time the same deposit was carried over to the new tenancy. When the contractual term of the third tenancy ended on 17 August 2005, a periodic tenancy arose under the HA 1988 and the tenants remained in occupation under that periodic tenancy.

The landlords served a section 21 notice on 17 October 2012, seeking to end the AST. At the initial trial, the judge held that the section 21 notice was valid despite the deposit not having been paid into a tenancy deposit scheme at the time the notice was served.

Decision

The Court of Appeal unanimously allowed the appeal, and held that the section 21 notice was invalid.
The Court of Appeal looked at three issues in particular:

Is there a requirement to register a deposit received before 6 April 2007?

The Court of Appeal accepted that there had been no obligation on the landlords to register the deposit.

In accordance with the decision in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669 , the deposit was "received" again in August 2005, when the statutory periodic tenancy came into being, even though the landlords had held the same sum of money since August 2002. The court agreed with the landlords that, in August 2005, there were no authorised schemes with which they could have protected the deposit and indeed the relevant provisions of the HA 2004 were not even in force at that point and so the landlords did not have to register the deposit.

For more information on Superstrike, see Legal update, What should happen to a deposit when a statutory tenancy arises? (Court of Appeal) (www.practicallaw.com/2-532-2612).

What is the effect of not protecting a deposit on a section 21 notice?

The landlords argued that, as there was no obligation on them to protect the deposit with a TDS, there was no reason why they should be prevented from serving a section 21 notice because of that lack of protection. The Court of Appeal had no problem in rejecting this contention.

The wording of section 215(1)(a) of the HA 2004 was clear. No section 21 notice may be given in relation to a tenancy at a time when the deposit is not being held in accordance with an authorised scheme. The Court of Appeal could see no reason not to apply this provision exactly as it reads and agreed with Sedley LJ's comment in Tiensia that legislation like this "is or ought to be written for lay people", in other words, reasonably clear on its face.

This interpretation meant that it was theoretically possible for a landlord to be able to serve a section 21 notice at one point and subsequently not be able to do so. The key is to look at the circumstances at the time when the notice is served.

The Court of Appeal was also clear that the two requirements in section 215 of the HA 2004 were separate and that the landlord must be able to pass both tests in order to serve a section 21 notice.

The court rejected the argument that the amended version of section 215(1)(a) was retrospective in operation; when the LA 2011 amended the tenancy deposit provisions of the HA 2004 on 6 April 2012 (see What is the effect of not complying with the tenancy deposit scheme's requirements on a section 21 notice?), there was no effect on section 21 notices served before that date. The Court of Appeal also pointed out that article 16 of LACO 2012 seemed clear that the amendments to the tenancy deposit regime made by section 184 of the LA 2011 applied to a tenancy in force on or after 6 April 2012 and so applied to tenancies already in existence at that date.

It was still possible for the landlords to serve a section 21 notice in this case. They could have protected the deposit before serving the section 21 notice, and so complied with section 215(1)(a) of the HA 2004, although there would still be a question regarding compliance with section 215(1)(b) of the HA 2004, see What is the effect of not complying with the tenancy deposit scheme's requirements on a section 21 notice?. Alternatively, if the landlords decided against that course of action, they could have returned the deposit to the tenants, in which case section 215(2A) would have disapplied the requirements in section 215(1).

What is the effect of not complying with the tenancy deposit scheme's requirements on a section 21 notice?

The Court of Appeal found the application of section 215(1)(b) much trickier than section 215(1)(a). In particular, the meaning of the words "at a time when" in section 215(1) of the HA 2004 were hard to apply to section 215(1)(b).

The court consider two possible interpretations:

The "period of grace"

One possible interpretation of section 215(1) of the HA 2004, as amended, was that it was at least partially retrospective.

When section 184 of the LA 2011 amended the HA 2004, those changes were made subject to the transitional provisions contained in article 16 of LACO 2012 (see Amendments to the HA 2004 following Tiensia ). It was possible to argue that article 16 created a 30 day "period of grace" from 6 April 2012, in which a landlord could comply with the amended deposit regime, if necessary. This period could apply even where the landlord was not directly required to protect a tenancy deposit in view of when it was received (as the Court of Appeal found was the case here, see Is there a requirement to register a deposit received before 6 April 2007?).

There was an argument that, if a landlord had failed to protect the deposit and deal with the authorised scheme's requirements within the "period of grace", it had missed its chance and would then not be able to avoid the restriction on section 21 notices contained in section 215(1)(b) of the HA 2004. Such a landlord could only serve a section 21 notice by returning the deposit, and relying on section 215(2A). The Court of Appeal acknowledged that this could be problematic for landlords, but that landlords could simply have protected deposits within the period of grace.

The compliance interpretation

The other possible view of the amended section 215 of the HA 2004 was that section 215(1)(b) only applies where a landlord has failed to comply with section 213 of the HA 2004. Compliance in this situation presupposes an obligation to comply. Here, the landlords had no obligation to protect the deposit, because of when it was received, see Is there a requirement to register a deposit received before 6 April 2007? .

This interpretation would not rob article 16 of LACO 2012 of its effect, as the period of grace would still apply to landlords who were obliged to comply with section 213 of the HA 2004 when they received their deposits, but who had not done so. Before the LA 2011 amended the HA 2004, landlords could easily avoid the adverse consequences of failing to protect deposits, simply by protecting them late (see Amendments to the HA 2004 following Tiensia).

The Court of Appeal indicated that it was inclined towards favouring this interpretation of section 215 of the HA 2004. However, in view of its decision on the application of section 215(1)(a) (see What is the effect of not protecting a deposit on a section 21 notice?), the Court of Appeal did not decide the point. The court had not heard full argument on the issue and stated that a decision would have to wait for a case that actually turned on the application of section 215(1)(b).

Comment

This case considered three important questions for tenancies in respect of which deposits were paid before the tenancy deposit protection scheme was brought into effect on 6 April 2007. While there are probably not too many such deposits, there are still some affected tenancies.

The Deregulation Bill 2013-14 to 2014-15 contains some further amendments to the deposit protection regime (see Practice note, Tenancy Deposit Schemes (www.practicallaw.com/9-238-2955) ). However, the changes that would be made by that Bill are aimed at the problems arising from the deemed receipt of a deposit when the statutory periodic tenancy arises on or after 6 April 2007, where the original deposit did not have to be registered (as illustrated in Superstrike Ltd v Rodrigues [2013] EWCA Civ 669, see Registration requirements). The Bill would require amendment to deal with tenancy deposits received, or deemed received, before 6 April 2007, as in Charalambous.

A hidden catch: section 21 notices served at the start of the term

The Court of Appeal was quite clear that, when considering section 215 of the HA 2004, you must look at the position when the notice is served.

It is quite common for landlords to serve section 21 notices at the very start of an AST, specifying that the tenancy will finish at the end of the fixed term, and so preventing the statutory periodic tenancy from arising. Any landlord, or person acting for a landlord, doing this must ensure that section 215 is satisfied at the point at which the section 21 notice is served. While the landlord has 30 days in which to protect the deposit, it seems that protection must actually take place before the section 21 notice can be served.

Registration requirements

Any landlords still holding tenancy deposits received before 6 April 2007 will be relieved that the Court of Appeal had no hesitation in finding that there is no direct obligation to register those deposits.

Practitioners should, however, bear in mind the decision in Superstrike . That case held that, where a landlord held a tenancy deposit, which was not protected (because it was originally taken before the tenancy deposit requirements came into force), the creation of the statutory periodic tenancy at the end of the contractual term of an AST leads to a deemed new receipt of that deposit, which may trigger the protection requirements. For more information, see Legal update, What should happen to a deposit when a statutory tenancy arises? (Court of Appeal) (www.practicallaw.com/2-532-2612). While the Deregulation Bill 2013-14 to 2014-15 contains provisions that will amend the Housing Act 2004 to deal with the effect of Superstrike, those provisions are not yet in force.

In Charalambous, the statutory periodic tenancy itself arose before the tenancy protection regime was in force, so Superstrike did not make any difference. As the Court of Appeal pointed out in Charalambous, when the landlord received the deposit (in this case there was a deemed receipt when the statutory periodic tenancy arose in August 2005), there were no authorised tenancy deposit protection schemes in existence for the landlord to use and the relevant sections of the HA 2004 were not even in force. While most practitioners will find this a sensible approach, the tenancy deposit legislation has occasionally led to some unexpected results, and landlords (and their lawyers and agents) will be relieved to have a Court of Appeal judgment confirming the position.

While the Court of Appeal did not expressly deal with the point, if the landlords were never obliged to protect the deposit, then logically there was no question of them being liable to financial penalties under section 214 of the HA 2004 (see Penalties for landlords where the tenancy deposit requirements were not met).

Serving a section 21 notice: the deposit must be protected

The element of the Court of Appeal's decision that dealt with the requirements of section 215(1)(a) of the HA 2004 is also largely uncontroversial.

It is perhaps a little surprising that even if a deposit does not have to be protected, the landlord might still be barred from serving a section 21 notice. However, the wording of section 215(1)(a) of the HA 2004 seems clear on its face, and the Court of Appeal pointed out that, if the landlord is taking steps to remove a tenant from its home, there is merit in ensuring that the deposit is properly safeguarded at that time.
The decision in this case underlines how important it is for practitioners, and anyone else serving notices under a statutory regime, to check that they are valid in accordance with that regime.

Serving a section 21 notice: the tenancy deposit scheme's requirements must have been complied with promptly

The Court of Appeal was quite clear that the two requirements of section 215(1) of the HA 2004 have to be considered separately. Even if a landlord can satisfy section 215(1)(a) by protecting the deposit (assuming it has not already done so), it might still fall foul of the requirement in section 215(1)(b).

It is a pity that the landlord's clear failure to meet the requirements of section 215(1)(a) of the HA 2004 meant that the Court of Appeal did not hear argument, or have to reach a decision, on the exact meaning of section 215(1)(b). The court said that the interpretation of the latter provision would have to wait for an appropriate case.

Bearing in mind that there cannot be many tenancies still in existence where the deposit was received before 6 April 2007 (in other words the initial contractual term is still running, or the tenant remain in occupation under a statutory periodic tenancy created before that date), it may be the case that the exact effect of section 215(b) and section 213(3) of the HA 2004 for such tenancies is never resolved by the courts.

If, however, a practitioner is asked to serve a section 21 notice in respect of such a tenancy, the uncertainty of section 213(3)'s effect should be borne in mind when advising the client. The landlord will have to weigh up the potential risks of foregoing the deposit (by returning it to the tenant) against the possibility that a court will hold that the landlord was required to protect the deposit in 2012 and, having not done that, cannot now comply with section 213. While the Court of Appeal in Charalambous seemed favourably inclined towards interpreting 215(1)(b) of the HA 2004 in a way that would favour such a landlord, the point was not fully argued.

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