Time limit for complying with initial requirements of tenancy deposit scheme
In Tiensia v Vision Enterprises Ltd (t/a Universal Estates) and Honeysuckle Properties v Fletcher and others  EWCA Civ 1224, the Court of Appeal considered whether a landlord can avoid having to pay a penalty of three times the deposit if it complies with the "initial requirements" of a tenancy deposit scheme after the 14 day time limit.
Note added: the effect of subsequent amendments to the Housing Act 2004 (made by the Localism Act 2011) is to reverse this decision. The court has power to make an order for a landlord to pay a penalty if the landlord complies after the deadline (section 214(2) and (2A), Housing Act 2004). The deadline has been extended from 14 to to 30 days, and the penalty may be between one and three times the deposit. For more information, see Practice note, Tenancy Deposit Schemes: Financial penalties and return of non-cash deposits.
In Tiensia v Vision Enterprises Ltd (t/a Universal Estates) and Honeysuckle Properties v Fletcher and others  EWCA Civ 1224, the landlord failed to protect the tenant's deposit with a Tenancy Deposit Scheme and provide the prescribed information within 14 days of receipt of the deposit as required by the Housing Act 2004 (HA 2004). The tenant applied to the court for the landlord to pay a penalty of three times the amount of deposit under section 214(4) of the HA 2004.
The Court of Appeal held that the landlord had until the court hearing date to comply with the "initial requirements" of the Tenancy Deposit Scheme and provide the prescribed information. Late compliance by the landlord would furnish a complete defence to a claim under section 214, although there may be cost implications.
Landlords and tenants have been awaiting clarification on this issue which has caused much uncertainty and conflicting case law. The decision will be welcomed by landlords. However, it means that the court's power to impose a penalty of three times the deposit will rarely be exercised in practice. Also, landlords may now be less inclined to comply with the 14 day time limit, knowing that they can avoid the imposition of a sanction should the tenant take action against them at a later date. (Tiensia v Vision Enterprises Ltd (t/a Universal Estates) and Honeysuckle Properties v Fletcher and others  EWCA Civ 1224 (11 November 2010).)Close speedread
Tenancy deposit schemes
Under the Housing Act 2004 (HA 2004), a landlord must join a Tenancy Deposit Scheme (TDS) where a deposit is paid by a tenant on the creation of a new residential assured shorthold tenancy (AST) in England or Wales.
The landlord may choose between two different types of schemes:
A custodial TDS under which the landlord pays the deposit to a scheme administrator. The scheme administrator holds the deposit until the tenancy comes to an end. The deposit (or balance due to the tenant) is then returned to the tenant.
An insurance TDS, under which the landlord retains possession of the deposit but secures it by paying a fee and insurance premiums to the scheme administrator. The scheme administrator will use the premiums to pay the tenant should the landlord misappropriate the deposit.
For more information, see Practice note, Tenancy Deposit Schemes: Types of TDS available (www.practicallaw.com/9-238-2955).
The initial requirements of the TDS must be complied with by the landlord within 14 days from the date of receipt of the deposit (section 213(3), HA 2004). The landlord must also give the tenant certain prescribed information within 14 days of receipt of the deposit (section 213(6)(b), HA 2004).
The tenant may make an application to the county court if the initial requirements have not been complied with or the landlord has not given the tenant the prescribed information (section 214(1)(a), HA 2004).
Sanctions for non-compliance
There are potentially significant sanctions for non-compliance with the requirements of a TDS. The landlord may be prevented from recovering possession of its property. For details, see Practice note, Tenancy Deposit Schemes: Sanctions against landlords (www.practicallaw.com/9-238-2955).
Furthermore, if the court is satisfied that the initial requirements have not been complied with or the prescribed information has not been given, the court must order the landlord to pay the tenant a sum of money equal to three times the amount of the deposit (section 214(4), HA 2004).
Time limit for compliance
The question arises whether a landlord has to pay such a penalty where it has protected the deposit or given the prescribed information after the 14 day limit. There have been conflicting decisions made by the courts.
In Harvey v Bamforth  PLSCS 250, the landlord had placed the deposit in a TDS but failed to give the tenant the prescribed information within 14 days. The landlord subsequently gave the prescribed information to the tenant, but the tenant issued proceedings. The county court held that the landlord was not in breach and was not liable to pay the penalty. This decision has not been universally followed and many district judges take the view that failure to pay monies into a TDS within the 14 day period cannot be rectified in this manner.
In Draycott and another v Hannells Letting Ltd  EWHC 217, the High Court held that it was not an initial requirement of the custodial Deposit Protection Scheme that the agent pay the deposit into the scheme within 14 days of receipt. So long as the agent paid it in before the tenant commenced proceedings, it was not liable to a penalty. See Legal update, Tenant deposit scheme: Effect of failure to protect rent deposit within 14 days (www.practicallaw.com/6-501-4857).
There is also a question whether a landlord would be in breach if it were to provide the prescribed information after commencement of proceedings, but before the actual court hearing. For more information, see Practice note, Tenancy Deposit Schemes: Initial requirements (www.practicallaw.com/9-238-2955).
The appeals related to two different cases which raised the same issue. The facts were broadly similar in both cases.
The tenant paid a deposit to their landlord under the terms of their AST. The landlord failed to protect the deposit with a TDS or provide the prescribed information within 14 days of receipt of the deposit.
The landlord issued proceedings against the tenant for arrears of rent. It was only after proceedings were commenced that the landlord protected the deposit with Tenancy Deposit Solutions Limited (TDSL), an insurance based deposit scheme, and provided the tenant with the prescribed information. TDSL's terms expressly required the landlord to protect the deposit with the scheme within 14 days of receipt.
The deposit had been protected and the prescribed information had been given by the date of the court hearing. The tenant claimed the landlord had failed to comply with the initial requirements of the TDS within 14 days of receipt of the deposit and counterclaimed for a payment of three times the amount of the deposit.
In Tiensia, the tenant obtained summary judgment for payment but the order was set aside on appeal. The tenant appealed to the Court of Appeal.
In Honeysuckle, the county court allowed the tenant's application and ordered the landlord to make the payment. The landlord appealed to the Court of Appeal.
The tenants argued that:
The landlords' failure to comply with the statutory requirements within 14 days of receipt of the deposit meant that the sanction under section 214(4) of the HA 2004 was automatic.
As the TDSL scheme itself required the landlord to protect the deposit within 14 days, this formed part of the scheme's "initial requirements". The landlord had to comply with this time limit as well as that imposed by section 213 of the HA 2004.
If the 14 day time limit did not apply, the cut-off point for compliance was the date of issue of the tenant's claim for the imposition of the sanction, not the date of the hearing.
The landlords argued that:
Section 214 of the HA 2004 focused exclusively on whether the landlord was still in breach at the time of the hearing for the sanction: it was not specifically linked to the 14 day time limit. The purpose of the legislation was to protect the tenant's deposit.
The cut-off date was the date of the hearing, otherwise the landlord would have no incentive to protect the deposit and comply with the purpose of the legislation.
A time limit imposed by the TDS itself was outside the definition of "initial requirements" within section 213 of the HA 2004.
The Court of Appeal dismissed the tenant's appeal in Tiensia and allowed the landlord's appeal in Honeysuckle (Sedley LJ dissenting).
The natural interpretation of the phrase "initial requirements" in sections 213(3) and (4) was that it did not include any time limit imposed by a particular TDS for protection of the deposit. Otherwise, there could be uncertainty if a TDS imposed a different time limit to the statutory time limit.
A landlord's failure to comply with the initial requirements and supply the prescribed information within 14 days was not a pre-condition to an application under section 214. The focus of section 214 was on a failure by the landlord to comply with the requirements at all. Section 214 did not refer to section 213(3) or section 213(6)(b) which contained the 14 day time limit. Also, the tense used in section 214 was "have not" rather than "were not" and this was consistent with an inquiry into whether or not there had been any compliance at all.
Late compliance by the landlord would furnish a complete defence to any claim by the tenant under section 214. A strict interpretation had to be applied to such a penal provision. It was also consistent with the purpose of the legislation which was to protect deposits paid by tenants, rather than punishing landlords who might be a day late.
The date of the hearing was the cut-off date for compliance by the landlord. There was nothing in the legislation pointing to an earlier date and this was supported by the use of the present tense " if the court is satisfied" in section 214.
When making a section 214 claim (as opposed to a counterclaim) a tenant should write a letter before action and give the landlord an opportunity to remedy its failure and avoid proceedings. The objective of the legislation was not to punish landlords but to achieve proper protection of tenants' deposits. It should be interpreted in a way to avoid litigation. If a landlord were to protect the deposit after commencement of proceedings but before the hearing, the tenant's claim would fail, but the tenant would ordinarily recover its costs.
Landlords and tenants have been awaiting clarification from a higher court on this issue which has caused much uncertainty and conflicting case law. The decision will be welcomed by landlords.
However, the decision effectively means that the court's power to impose a penalty of three times the deposit will rarely be exercised in practice. Most landlords, when faced with a section 214 claim or counterclaim, will decide to comply before the hearing date rather than risk having to pay such a penalty. The only landlords unlikely to do so will be those who have already misappropriated the deposit or are insolvent and unable to comply. Equally, tenants will be less likely to pursue such claims, knowing that the landlord has until the hearing date to comply.
Although the court held that the purpose of the legislation was to ensure that tenants' deposits are protected, this decision may have the opposite effect in practice. Landlords may be less inclined to comply with the 14 day time limit, knowing that they can avoid the imposition of a sanction at a later date. Lord Justice Sedley's dissenting opinion was:
"If the meaning of the statute is, however, that a landlord is not culpably in default if, months or maybe years after the expiry of the fortnight given by law for compliance, he or she eventually complies with the initial requirements, then the scheme is a dead letter".