Tenancy deposits and the changes made by the Localism Act 2011

Since 6 April 2007, a landlord who receives a deposit in relation to an Assured Shorthold Tenancy (AST) must ‘protect’ that deposit in one of three government authorised schemes. The regime, contained in the Housing Act 2004, is clearly aimed at the domestic private rental market. However, it appears to apply not only when a deposit is initially taken on the grant of an AST, but also where an investment property is sold subject to an AST, and the deposit transferred from the seller to the buyer. If the landlord does not comply with the scheme, a fine may be imposed. The landlord may also find itself unable to recover possession of the property.

The legislation governing tenancy deposit schemes was amended by the Localism Act 2011, the relevant provisions of which came into force on 6 April 2012. The most high-profile changes undoubtedly make the scheme more landlord-friendly. However, the government also took the opportunity to tighten up the rules to eliminate a number of ‘loopholes’ which had been highlighted through various court decisions. This article outlines the main changes and considers how the new rules may affect landlords.

Period in which a deposit must be protected

The most important change was to extend the period within which the landlord must protect a deposit in an authorised scheme from 14 days to 30 days. Once the deposit has been protected, the landlord also has to provide certain ‘prescribed information’ to the tenant about the protection of the deposit and the mechanics for its repayment at the end of the tenancy. The deadline for the provision of this information has also been extended from 14 to 30 days. All deadlines begin to run from the date the deposit is ‘received’ by the landlord.

This extension of time is welcome news for landlords and will hopefully increase the rate of compliance with the legislation. However, a number of landlords remain blissfully unaware of the regime, or simply have no intention of complying. For these landlords, the changes to the sanctions for non-compliance will be crucial.

The first sanction: a financial penalty

Previously, a landlord who failed to comply with the rules had to pay a penalty to the tenant of three times the amount of the deposit. The court now has more discretion over the level of the penalty – from 6 April it can be anywhere between one and three times the amount of the deposit.

The second sanction: restriction on ability to recover possession

Of greater concern to many landlords is that they may be unable to recover possession of the premises if the rules have not been followed. Under s21 of the Housing Act 1988, a landlord under an AST can ordinarily recover possession of the property on service of two months’ notice on the tenant, provided any fixed term of the tenancy has expired. The tenancy deposit legislation restricts a landlord’s right to serve a section 21 notice in certain circumstances.

Where the default in question is not a failure to protect the deposit, but rather to give the tenant the prescribed information within the relevant time period, the legislation has always been clear that the right to serve a section 21 notice is simply suspended, so that once the prescribed information is given, the right will revive. However, as originally drafted, it was unclear whether a failure by the landlord to protect the deposit within the required time frame was remediable. In other words, was the landlord forever prevented from serving a section 21 notice, or would the right to serve such a notice revive once the deposit had been protected, albeit late?

The legislation has now been clarified so that the landlord will not be able to serve a section 21 notice where a deposit was not protected within 30 days of receipt. The restriction on serving a notice remains in place, even if the deposit is protected late.

Although this would seem rather a draconian sanction, it is tempered by the introduction of an important ‘get-out’; if the deposit is simply repaid to the tenant, then the restriction on the right to serve a notice to recover possession will not apply. In many cases, the potential cost to a landlord of repayment of the deposit will be outweighed by the benefit of being able to recover possession.

A combination of unclear drafting in the original legislation, and the way it has been interpreted by the courts, had the effect of weakening the sanctions on landlords for non-compliance. Some of the ‘loopholes’ created or brought to light by the case law have now been closed. Nonetheless, the closing of the ‘loopholes’ means that in some respects landlords are worse off. Landlords need to be scrupulous about meeting the 30 day deadline, as if they comply late and the tenant takes the point to court, they will have to pay a fine. Although the court now has some discretion over the level of the fine to be levied in each case.

The Landlord Group have advised hundreds of landlords on this very issue and with our help we can guide you through the legislation and assist you even where you have fallen foul of the deposit scheme rules.

For more information on how to protect tenancy deposits or the eviction process generally please call The Landlord Group on tel: 01924 376 222 or email: This email address is being protected from spambots. You need JavaScript enabled to view it..