Another reason to keep your tenants’ deposit secure and up to date

Since 2007, landlords have been obliged to protect deposits taken from assured shorthold tenants (AST), and since 2011 they have needed to protect their tenants’ deposits and also serve the prescribed information within 30 days of receipt. If they don’t do this they won’t be able to rely upon Section 21 of the Housing Act 1988 to evict tenants and to gain possession of a property when the need to terminate the tenancy arises.

In addition, late protection does not protect this right, the only way of doing so would be by handing it back and this is not always that simple.

If the fixed term of the tenancy comes to an end and a ‘statutory periodic tenancy’ starts, a new tenancy has come into existence and therefore, any deposit taken previously must be taken again (although not physically) and as a result, the landlord has to go through the procedures of securing it again. Failing to do so prevents the right to rely on Section 21.

In December 2014, the Court of Appeal went one step further in Charalambous and Karali v Ng and Ng [2014] EWCA Civ 1604.

Here, the landlord had granted a tenancy and taken a deposit in 2002. The tenancy was then renewed twice with the last fixed term ending in 2005. Since that date, the tenants remained in occupation under a statutory periodic tenancy. The deposit was never secured. A Section 21 notice was then served but the tenant argued that it was invalid as the deposit had not been protected since 2005.

As the rules regarding securing deposits did not come into effect until 2007, and the statutory periodic tenancy came into existence before that, you would think that the notice was valid as the deposit did not need to be secured at the time.

However, the court did not agree and ruled that any deposit taken had to be secured or paid back before a Section 21 could be relied upon even if it did not need to be secured at the time it was taken. The fact that one was taken and had never been secured meant that Section 21 could not be relied upon.

It remains to be seen whether this is challenged and/or whether protecting the deposits now (which would be late i.e. not within 30 days of receipt) will protect the landlord’s right to rely upon Section 21.

What should you do as a landlord with statutory periodic tenancies?

For now landlords are advised to review all deposits taken regardless of when they were taken and consider either protecting them now or more reliably handing them back. Failing to do either can prevent you from using Section 21 to obtain possession back from your tenants and leave you in a position where unless you have any Section 8 grounds to rely upon, for example non-payment of rent or any other breaches of the tenants' obligations, you have no grounds upon which to terminate the tenancy.

If you are buying or selling a property that is tenanted, care needs to be taken to make sure that the deposit protection requirements have been complied with and your Section 21 rights are protected and penalties are not inherited.