The Court of Appeal has ruled on yet another anomaly arising from the troubled legislation concerning residential tenancy deposits in a case where Coffin Mew acted for the landlord.
In a judgment handed down on 14 June 2013 in the case Superstrike Ltd v Rodrigues  EWCA Civ 669 (see: bit.ly/1bDaaJV), the Court of Appeal examined the vexed question of the effect of section 5 of the Housing Act 1988 upon the landlord’s obligations under sections 212 to 215 of the Housing Act 2004, where the latter came into force after the creation of fixed term assured shorthold tenancy.
In 2007 the landlord (and respondent to the appeal), Superstrike Limited, granted a one year assured shorthold tenancy agreement to the tenant, Mr Rodrigues (the appellant). A deposit was paid by the tenant but at a time when the relevant provisions of the Housing Act 2004 had not yet come into force. There was accordingly no regime which compelled the landlord to protect the deposit in any way.
However, when the fixed term tenancy expired on 7 January 2008 the tenant held over and remained in occupation. This meant that a statutory periodic tenancy was created by virtue of sections 5(2) and 5(3) of the Housing Act 1988, importing the same terms as the expired fixed term. Understandably, nothing was done about the deposit at that time, which the landlord continued to hold.
In June 2011 the landlord served a notice requiring possession under section 21 of the Housing Act 1988. Upon expiry of that notice, accelerated possession proceedings were commenced in the County Court. An initial order for possession was later set aside on the basis that certain transitional provisions in the 2004 Act had not been complied with by the landlord but on appeal to the Circuit Judge the order for possession was restored, the judge ruling that there was no statutory regime was in force affecting the deposit when it was paid.
The Court of Appeal’s approach
That decision has now been overturned by the Court of Appeal. In a decision on what Lloyd LJ termed “a problem which is of some importance”, the court ruled that, notwithstanding that the Housing Act 2004 did not apply to oblige the landlord to protect the deposit when it was paid in 2007, upon the tenant holding over under section 5 Housing Act 1988 in 2008, a new statutory tenancy was created by which time the deposit protection regime had come into force.
The court found that there had been a notional fresh payment and receipt of the deposit at the time the statutory tenancy was created, notwithstanding that the landlord simply continued to hold the deposit that had been paid a year earlier. It followed that the deposit had to be protected under the Housing Act 2004 and because the landlord had not protected the deposit within the (then) required 14 days after the creation of the statutory periodic tenancy, the section 21 notice was invalid (by reason of section 215(1) Housing Act 2004). Therefore the landlord was not entitled to an order for possession and the tenant’s appeal was allowed accordingly.
It was further argued by the tenant that the requirement to comply with section 215(1) of the Housing Act 2004, which prevents a landlord relying on a notice requiring possession under section 21 of the Housing Act 1988 unless the deposit has been protected, stands independently of the requirement to comply with section 213 of the 2004 Act. However, the Court of Appeal declined to rule on that issue “interesting as the point is” (per Lloyd LJ) as it was not necessary to do so for the purposes of the appeal.
The effect of the Court of Appeal’s ruling
Landlords who created a fixed term assured shorthold tenancy before 6 April 2007, whose tenant paid a deposit and who held over after the fixed term expired, have real cause for concern. Unless those landlords took the prudent step of subsequently protecting the deposit under one of the statutory schemes, any attempt to now serve a notice requiring possession under section 21 Housing Act 1988 will prove futile. Such a notice will be invalid.
The position is compounded by the changes to the Housing Act 2004 introduced by the Localism Act 2011. The transitional provisions obliged defaulting landlords to comply with the deposit protection provisions by 5 May 2012 (regulation 16 Localism Act 2011 (Commencement No 4 and Transitional, Transitory and Saving Provisions) Order 2012). Deposits paid after the 6 April 2012 must be protected within 30 days of receipt. This removed the previous leniency of the courts as demonstrated by the case of Vision Enterprises Ltd v Tiensia  EWCA Civ 1224, which held that where the landlord had failed to comply with section 213(4) within the (then) stipulated 14 days, but had nonetheless complied before the hearing of the tenant’s claim, the sanction provided for by section 214(4) could not be imposed.
It follows that the only way landlords who are caught in this time trap can serve a valid section 21 notice under the Housing Act 1988, is to return the deposit to the tenant (section 215 (2A) (a) Housing Act 2004), unless a tenant’s application under section 214(1) Housing Act 2004 has been disposed of by the court, a position recognised in the Court of Appeal’s judgment although Lloyd LJ makes clear that it forms no part of the decision.
It is not yet clear how many tenancies will be caught by the Court of Appeal’s decision but there will undoubtedly be quite a few. In practical terms, the impact may not be quite so great. Landlords who have trusted their tenants to remain in occupation for years after a fixed term assured tenancy has expired may feel little real hardship in returning the deposit to the tenant before serving a section 21 notice, although those landlords may feel aggrieved at having to do so.
This is not the first time that the tenancy deposit legislation has caught out landlords. As Lloyd LJ put it: “Unfortunately, several points under this legislation turned out not to be as may have been expected or intended.” It is therefore essential that landlords take proper legal advice before potentially wasting a good deal of time and money in seeking a possession order which may be doomed to failure.