Important Changes for Tenancy Deposit Schemes

Following the Court of Appeal’s decision in Superstrike Limited v Rodrigues there has been a further important case concerning Tenancy Deposit Schemes that affects what landlords must do when an Assured Shorthold Tenancy becomes periodic.

The Decision in ‘Superstrike’

• In Superstrike an AST had been granted for a term of 12 months in January 2007 i.e. before the introduction of Tenancy Deposit Schemes.  Upon the expiry of the fixed term the tenancy continued on a periodic basis from January 2008.

• The deposit for the tenancy had not been registered by the landlord, as the deposit had been received before the relevant rules came into force.  The landlord subsequently served a section 21 notice in June 2011 seeking to terminate the tenancy.

• The Court of Appeal held that as the periodic tenancy was a new and distinct tenancy, the deposit previously held by the landlord was deemed to have been “received” - in relation to the periodic tenancy - at the commencement of the periodic tenancy.

• Accordingly, as the deposit had been “received” in January 2008 it ought to have been registered by the landlord.  As it had not, the landlord did not have the right to serve a section 21 notice.  The notice already served was therefore invalid.

The consequences of this decision were initially somewhat limited, in that the decision only seemed to apply to ASTs that commenced before April 2007 and which became periodic tenancies after that date.

Important Changes – Gardner v McCusker

However, that has all changed following the decision in Gardner v McCusker where the court applied the Superstrike decision so as to give it broader effect.

In Gardner the court found that when a fixed term AST expires, the periodic tenancy that follows is a separate tenancy.  The effect of this, as in Superstrike, was that the landlord had effectively “received” a deposit upon the commencement of that periodic tenancy.

The court held that the rules on Tenancy Deposit Schemes were such that the landlord was under a new obligation to ensure he had complied with those rules in respect of the periodic tenancy.

In Gardner the landlord was not able to demonstrate he had complied with the rules and the section 21 notice he was seeking to rely on was therefore deemed invalid.  He was also ordered to pay the tenant compensation of two times the deposit sum.

The Effects of Superstrike and Gardner

As a result of these two cases all landlords will need to ensure they comply with the relevant rules concerning tenancy deposits at the outset of a fixed term tenancy and also where that tenancy ends and a new periodic tenancy commences.

This means that on both these occasions a landlord must ensure that within 30 days of “receiving” the deposit they;

1.         Register the deposit with an authorised provider; and

2.         Provide the tenants with ‘prescribed information’ confirming the registration details for the deposit.

A failure to comply with either of these rules will result in a landlord being unable to serve a valid section 21 notice – prejudicing their ability to recover possession of the property – and leave them vulnerable to a claim from their tenant for compensation of up to three times the amount of the deposit.

In practical terms this is likely to mean that, provided the deposit is already registered, a landlord will simply have to provide their tenants with the ‘prescribed information’ within 30 days of the commencement of the periodic tenancy. However, it is strongly recommended that all landlords check with their chosen Tenancy Deposit Scheme provider to see whether they will also need to notify their provider of the commencement of a periodic tenancy.

The Future

Proposals to reform the rules concerning tenancy deposits have been set out in a draft parliamentary bill which would effectively overturn the Gardner decision.  However, there are no guarantees this bill will be passed.

For the time being therefore all landlords will need to pay careful attention to the landmark decision in Gardner and ensure that, for the purposes of dealing with a deposit, they treat each periodic tenancy as if it were a new fixed term tenancy and ensure they comply with the relevant rules accordingly.

More information

If you would like more information on the latest changes to Tenancy Deposit Schemes and how they could affect you or your business, please contact:

Daniel Edwards, specialist Landlord and Tenant solicitor.