I
have been looking at the legislation regarding the penalties for non protection of deposits, and have come across some interpretation issues where I would welcome some input from readers.
Say a landlord has failed to protect a deposit. He does not want the prospect of the tenant suing him for the penalty to be hanging over him for the next six years so he prefers to resolve it now.
He also suspects that at some stage he will want to evict the tenants so wants to keep his section 21 options open.
The law
Section 215 which is the section which deals with the prohibition on serving section 21 notices when the deposit has not been protected says, after the amendments in the Localism Act 2011 have been applied, as follows (per Lexis):
(1) [Subject to subsection (2A),] if a tenancy deposit has been paid in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy at a time when—
(a) the deposit is not being held in accordance with an authorised scheme, or
[(b) section 213(3) has not been complied with in relation to the deposit].
(2) [Subject to subsection (2A),] if section 213(6) is not complied with in relation to a deposit given in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy until such time as section 213(6)(a) is complied with.
[(2A) Subsections (1) and (2) do not apply in a case where—
(a) the deposit has been returned to the tenant in full or with such deductions as are agreed between the landlord and tenant, or
(b) an application to a county court has been made under section 214(1) and has been determined by the court, withdrawn or settled by agreement between the parties.]
…
I am having trouble with this section. First off, (1) presumably means that the failure to protect within the 30 days is an absolute bar to serving a s21, save for where 2A applies, as s213(3) says
s213(3) Where a landlord receives a tenancy deposit in connection with a shorthold tenancy, the initial requirements of an authorised scheme must be complied with by the landlord in relation to the deposit within the period of [30] days beginning with the date on which it is received.
and presumably all the schemes will provide for the deposit to be protected within 30 days. Otherwise on the face of it, s1(a) might read as if you could serve the notice once you had protected the deposit ie outside the 30 days.
There is also a direct reference to section 2A there too, which I assume means that the draftsman wants compliance with 2A to be a condition of being able to serve a s21 notice. Although it does not really read like that – not to me anyway.
But I am particularly concerned with the bit in red.
The problem
If our landlord wants to dispose of the potential penalty claim, one solution is to make an offer to settle by making a payment to the tenant now. This seems sensible to me as the problem is resolved, the tenant gets a payment and the courts are spared another claim.
However does 2A(b) ONLY apply where the situation has been resolved in connection with court proceedings?
Let us take two examples. In both cases the deposit sum is £1,000, and in both cases the landlord has protected the deposit late with the DPS:
Landlord A – he agrees to settle with his tenant, Tenant A, now with a payment of £750 in full and final settlement. Both are pleased with this outcome.
The landlord is spared the prospect of the tenant bringing a claim against him in 5 1/2 years time. The tenant gets a welcome lump sum now which he can use to pay one of his pressing debts, and does not have to go to court to get it (the prospect of which terrifies him).
Landlord B – he is sued by his tenant for the penalty (perhaps with one of the no win no fee services available now or after using my kit).
However shortly after proceedings have been issued, he offers to pay the sum of £1,000 to the tenant plus the court fee and the claim is resolved on this basis.
Subsequently both landlords decide to evict the tenant using section 21. Landlord B is fine. He does not have to return the deposit as s2A(b) applies. But what about landlord A?
Can a landlord us s2A(b) if he settles?
It seems ludicrous to me that, on the face of it, Landlord A cannot take advantage of 2A(b). However that seems to be the way the clause is worded.
It this is the case, it would mean that landlords will be discouraged from resolving the matter by negotiation, which is generally what the courts prefer, being as there is such pressure on court time.
Or can the clause be interpreted in another way?
Does the wording or settled by agreement between the parties apply JUST in the context of a court claim, or does it stand on its own – meaning the Landlord A would not have to refund the deposit money before serving his section 21 notice.
What do you think?
You are right in that there does appear to be a gap. However, the first landlord is covered by the provisions of 2A(a) provided the deposit is returned less deductions. In this case the landlord is returning £750 of the £1000 deposit, presumably by agreement, so the tenant must be agreeing to a deduction of £250.
In essence there is a power to settle out of Court using 2A(a) but it is limited in that the minimum settlement is the return of the deposit less agreed deductions.
I think 2A(b) is pretty specific that an application under s.214(1) has to have been made (by tenant or interested party), so there have to be proceedings started. It may then be settled. As David said 2A(a) is available for Landlord A – return of deposit less agreed deductions – without the need for the tenant to bring proceedings.
But the situation I am talking about is where the deposit remains with the DPS and it is the PENALTY which the landlord is offering to pay.
Does this mean then that landlords can resolve the penalty side of the equation and not have to refund the deposit (ie leave it with the DPS) if the tenant brings a COURT CLAIM for the penalty –
But not if the parties settle the penalty among themselves without the tenant going to court (ie still with the deposit remaining with the DPS)?
It seems pretty silly and unfair if so. I thought the court and govt wanted us to settle claims without going to court?
“an application to a county court has been made under section 214(1) and has been determined by the court, withdrawn or settled by agreement between the parties”
I think “or settled by agreement between the parties” must be interpreted as in the context of a court claim only, because whatever takes place does so after an application to the court has been made.
The application/claim is either determined by the court, or it is withdrawn, or it is settled between the parties.
IMO the fact that it may be ludicrous that s.215(2A)(b) does not apply to Landlord A indicates only that the draftsman perhaps didn’t think things through (rather like the draftsman of the original deposit legislation).
But the situation I am talking about is where the deposit remains with the DPS and it is the PENALTY which the landlord is offering to pay.
Quite. The tenant would hardly agree to ‘settle’ and not bring a s.214 claim (where he could be awarded 3x the value of the deposit) in exchange for the landlord generously offering to refund 75% of the deposit!
The tenant is not going to be awarded the 3x if the landlord deals with it promptly and acts responsibly. Many tenants would much prefer to get something now rather than have to struggle with bringing a court claim which many will not want to bother with.
It is normal in litigation for there to be a discount when a claim is settled. But of course tenants don’t have to settle.
And it looks as if it may be better for landlords not to settle anyway.
There have to be two issue here. Firstly the section 21 issue in section 215 and I would agree that unless it is refunded (with agreed deductions) or following court action, you cannot serve the section 21 notice.
However, the penalty issue of three times is different. This is because the rules in section 214 do not consider refunding the deposit or court action as it does in 215.Even if you decided to pay the tenant back the full £1,000, and not hold the deposit, it would not reduce your liability to the penalty on bit. Whilst I agree the courts want out of court settlements (and it makes sense) it seems to me that the draftsman has not thought of this point. I have long believed that the rules (particularly as first passed) could lead to more, not less, court actions.
I think the essence of the penalty question has to be can an agreement for a figure of less than the minimum in law get the landlord off the hook? I would suggest that a figure of the minimum might be a more effective offer as the court would be unlikely to order more than had been agreed, perhaps with a costs penalty against the tenant. This is likely to therefore proivde a practical solution and the extra £250 could be a lot cheaper than defending a later action.
Leaving aside the question of the s21 notice for the moment, are you saying David, that if you (ie a landlord) agree with your tenant that you will pay them either a slightly lesser or the full amount of the deposit now rather than wait for them to bring a court claim.
And you then send them a cheque for the agreed amount under cover of a letter saying
“This cheque is proffered in full and final settlement of all your claim under s214 of the Housing Act 2004”
and the tenant then banks that cheque –
are you saying that the tenant could then turn around and bring a claim against the landlord under s214 for the penalty for non protection and get an award?
I would have thought such a letter would essentially be trying to ask the tenant to sign away statutory rights. I would see no problem with an offer of 1 times deposit (out of court settlement that they could not be sure of bettering in court). An offer for less, to an unrepresented tenant, would seem am unwise strategy. If the tenant seeks representation and is told they may be able to get three times and guaranteed one times and clearly this landlord is a rouge trying to stop the tenant getting what they are entitled to. Might not look to a judge and they may order more compensation? Any court action (guaranteed to get more compensation, would also involve far more costs than the £250 trying to be saved.
I would see the danger being that with significant disclaimers (seek your own legal advice etc) I would have thought it would be to easy for a court to throw it out. Any approach to legal advice would most likely result in the advice to accept settlement of not less than 1 times deposit. Therefore why not just make that offer in the first place. If the tenant then tried to take the landlord to court the landlord would appear to be acting with integrity and the tenant would have to run the risk of not getting any more in settlement and incurring the costs of the claim.
Whilst it is always impossible to say what any judge would say on the day. Clearly the higher offer can be said to more effective deal with the issue and does not appear to be trying to act in any way underhandedly.
Tessa when you say ‘The tenant is not going to be awarded the 3x if the landlord deals with it promptly and acts responsibly’ what do you mean. If the landlord has failed to protect the deposit and the tenancy comes to an end and the tenant brings a claim is the court not obliged to award between 1 and 3 times the deposit as a penalty?
Sorry if I was not clear. If the landlord has not protected but has otherwise acted responsibly – eg protected the deposit as soon as he finds out etc, then the award will not be the 3x it will probably be the 1x. However an award WILL be made.
The 3x will be saved for landlords who behave badly.