Where a deposit hasn’t been protected within the prescribed time, landlords must return it to the tenant or risk being prevented from recovering possession of the property.
The Problem
At present, landlords must protect a deposit with an authorised scheme within 30 days of receiving it.
If a deposit was received between 6 April 2007 and 5 April 2012, landlords were required to protect it within 14 days of receipt. From 6 April 2012, the period was extended to 30 days, as it is currently.
It’s also now the case that if the landlord received a deposit before 6 April 2007, the landlord must have protected the deposit by 24 June 2015. The consequences of failing to do so are severe, and the court requires strict compliance.
We have created a visual aid to guide you through the process, which you can access here.
What Is the Penalty for Not Protecting a Tenant’s Deposit?
Landlords who fail to protect a tenant’s deposit within 30 days could face penalties. Courts can order repayment of the deposit and impose a penalty ranging from 1 to 3 times the deposit amount.
Larger penalty fines are likely if the deposit wasn’t protected rather than being protected a few days late. It doesn’t matter if the landlord is even a day late; the same sanctions apply. That said, the sanctions can vary depending on the severity of the landlord’s behaviour, as explained below.
If the deposit wasn’t protected in time, a landlord cannot recover possession by serving a section 21 notice until they have complied with the rules. The unprotected deposit will invalidate the notice, and proceedings based on it will fail.
The landlord may still be able to recover possession through section 8 notice proceedings if the relevant grounds are made out. However, there is a risk that the tenant will bring their own claim against the landlord for failure to protect the deposit in time or at all. The court may order that the landlord repay the deposit and that the landlord pay the tenant a sum of up to three times the value of the deposit.
Modest breaches tend to attract a penalty of one times the deposit and more flagrant breaches up to three times the deposit. If the section 8 notice relies on the tenant’s rent arrears, then the deposit claim could offset the rent arrears, resulting in the landlord being unable to rely upon the mandatory ground 8.
The court might make an order on discretionary grounds, but conversely, it might not, leaving the landlord with legal costs, unpaid rent, and no possession. Clearly, if the tenant’s deposit claim completely extinguishes the rent arrears, the possession claim will likely fail.
The Solution
So what is a landlord to do? The deposit must be repaid. If the deposit is repaid, then the first sanction does not apply; the landlord will be able to serve a valid Section 21 notice (provided the other requirements are made out; see our blog on serving a valid Section 21 notice).
The second sanction may also become less severe—if the landlord returns the deposit to the tenant, the court is more likely to order a lower penalty figure to be paid to the tenant.
Scenario 1: Immediate Steps to Resolve an Unprotected Tenant Deposit
Protect it and serve the prescribed information immediately or repay the deposit; either of these should minimise the impact of any adverse consequences. A Court can order repayment and compensation up to three times the tenant’s original deposit, payable within fourteen days.
A potentially worse pitfall is that the tenants may not have to leave the property when the tenancy ends. If a landlord hasn’t followed the Deposit Protection legislation, they cannot serve a Section 21 Notice for vacant possession.
Unable to serve a Section 21 Notice means relying on Section 8, which requires the landlord to prove grounds for eviction. However, you don’t need to comply with deposit legislation for Section 8. Most tenancy advice websites quickly raise the deposit question for tenants looking for guidance after receiving a Section 21 Notice.
The deposit must be protected, and the landlord must have sent the legally required information.
How to Repay
It’s important to note that the landlord must prove that the deposit has been returned to the tenant. This is not difficult if the landlord has not protected the deposit and has the tenant’s bank details; the money can be simply transferred into the tenant’s account, and the bank statement will serve as evidence of payment.
If the deposit is protected within a scheme late, the landlord must make a request to the specific deposit protection scheme for the deposit to be returned. The scheme’s procedure must be used: the landlord cannot use their own funds to repay an amount equivalent to the deposit.
The difficulty in this scenario is that the tenant can evade the return of the deposit via the scheme, and until the scheme confirms that the deposit has been repaid to the tenant, the landlord will not be able to serve a valid section 21 notice.
This may mean that it is impossible to recover possession using the section 21 procedure. The landlord will either have to take the risk of relying on Section 8 proceedings or wait for the tenant to leave voluntarily.
Prescribed Information
The landlord’s deposit scheme also prescribes that the tenant be served with the necessary information within the timescales set out above.
Failure to serve the prescribed information will also result in the landlord being unable to serve a Section 21 Notice. However, unlike with protecting the deposit, the landlord is able to simply resolve this problem by serving the prescribed information before the Section 21 notice is served.
The monetary penalties for failing to protect a deposit properly also apply to failing to serve the prescribed information. However, as this failure is a more modest breach, any penalty will likely be at the lower end of the scale.
Recommendation
- Landlords should protect deposits and serve prescribed information within 30 days.
- If the deposit has not been protected in time, the landlord should return the deposit to the tenant. If the deposit is not returned, the landlord cannot obtain possession using the section 21 procedure.
- If the prescribed information has not been served in time or there is no evidence that it has been served in time, the landlord should serve it before serving a section 21 notice.
Scenario 2: How to Manage Tenant Claims for Damages Arising from Unprotected Deposits
A tenant may be unaware of their right to claim damages. Sometimes, a tenant may be happy to waive this right because the tenancy has been an overall positive experience. However, some tenants will waste no time in raising a claim.
If a tenant is leaving and hasn’t raised the issue of an unprotected deposit, it may be worth taking a more lenient view of routine deductions at the end of the tenancy and letting certain things go. It could be the cheaper option ultimately.
If a tenant goes to court, the judge may consider a landlord’s overall behaviour before deciding on the amount to award. Unreasonable or unresponsive landlords could well face a higher penalty, a point to consider.
Landlords using a letting agent must be aware of an agent’s failure to protect a deposit. The law concerning this was altered in Section 214 of the Housing Act 2004.
Scenario 3: How to Proceed Following a Failed Eviction Due to Unprotected Deposits
There are two options. If you have grounds, try a Section 8 eviction, which doesn’t require the deposit to be protected. If not, protect the deposit, issue the prescribed Information, and try again with a Section 21 Notice, ensuring there are no other flaws.
Section 8 Notices aren’t the preferred eviction route because they require a breach of the tenancy agreement and can take time.
Most sensible sources on tenant rights advise tenants to sue their landlord for compensation after the tenancy has ended. Consequently, it may only be apparent once the tenants have left the property whether they intend to make a claim.
Learn how to evict a tenant if their deposit isn’t protected, comply with the law, and issue a Section 21 Notice. However, a Section 21 Notice cannot be used less than four months from the start of the tenancy or if the fixed term has yet to end.
Understanding Tenancy Deposits
For properties on an assured shorthold tenancy commencing after April 6, 2007, a landlord must place a tenant’s deposit in a government-approved tenancy deposit scheme (TDP). There’s no legal requirement to request a deposit, but if you do, it must be placed in one of the three government-approved schemes.
What Is a Tenancy Deposit?
A tenancy deposit is a sum paid by a tenant and held by a landlord for the duration of a tenancy. The money acts as a security deposit in case a tenant does not meet their obligations as set out in their tenancy agreement, i.e., to cover the cost of any damages to the property during the tenancy.
Once the landlord receives a tenant’s deposit, they must pay the money into a tenancy deposit scheme within 30 days, which holds the money safely until the end of the tenancy, and the full or partial sum is paid back to the tenant.
Which Deposits Need to Be Protected?
As of 6 April 2007, the law states that all tenancy deposits must be protected by an authorised tenancy deposit scheme.
What Is the Tenancy Deposit Scheme?
The TDS is a UK government-authorised deposit protection scheme that holds tenancy deposits on behalf of landlords. At the end of a tenancy, the entire deposit is either paid back to the tenant or held until any disputes are settled, such as the landlord claiming part or all of the deposit to cover the cost of damages caused to the property during the tenancy.
What Happens to the Interest on the Deposit?
This depends on the type of scheme that holds the deposit. There are two types: custodial and insured.
A custodial tenancy deposit scheme is free to use because the interest funds the scheme. The scheme provider keeps any interest earned by the deposit.
An insured tenancy deposit scheme is where a landlord (or agent acting on behalf of a landlord) pays a small fixed sum to protect a deposit in a suitable account. The landlord usually keeps any interest accrued. To avoid any confusion or conflict around who is entitled to the interest, the tenancy agreement should state who keeps it once the tenancy is up.
Need Advice? Contact Helix Law
It’s easy to overlook registering a tenant’s deposit, particularly if you have multiple properties. Failing to register a deposit can have serious consequences, so if you’ve forgotten to protect a tenant’s deposit, you’ll need to act quickly and seek the right professional advice to avoid penalties.
Helix Law specialises in landlord and tenant legislation and provides fast advice to landlords. Our experienced team helps protect your position and your property, suggesting the right course of action with commercially expedient and practical guidance. Speak to Helix Law, the experts in property rentals. Our friendly team is waiting to take your call.