Property law experts from London and Surrey-based full service law firm Mackrell Turner Garrett are warning landlords about a Court of Appeal judgement on the use of Section 21 notices.

In Superstrike Ltd v Rodrigues, the Court of Appeal ruled that the claimant (Superstrike Ltd) could not serve a Section 21 notice of possession on the defendant following the expiration of an assured shorthold tenancy (AST), as the deposit was not held in an authorised scheme under the Housing Act 2004.

“As part of the Housing Act 2004, the Government introduced tenancy deposit protection for all ASTs in England and Wales where a deposit is taken,” said Tony Kent, property lawyer at Mackrell Turner Garrett.

“From 6 April 2007, all deposits paid under an AST should have been protected within 14 calendar days of receipt by the landlord. From 6th April 2012, deposits for all ASTs must now be protected within 30 calendar days of receipt by the landlord.

“The recent case of Superstrike Ltd vs. Rodrigues has dealt with the issues surrounding the legislation regarding tenants’ deposits and raised the application of that legislation where a deposit was paid under an AST already in existence on 6 April 2007.”

In Superstrike vs. Rodrigues, the Defendant took an AST of the relevant premises from the Claimant dated 8 January 2007 for a fixed term of one year less one day, at a monthly rent of £606.66, and paid a deposit of that amount under the terms of the tenancy agreement at that time.

At the expiry of the fixed term, under section 5 of the Housing Act 1988, the Defendant became entitled to a statutory periodic tenancy on the equivalent terms, colloquially called “holding over” by many people. The Defendant was not refunded his deposit, nor did he pay a new deposit to the Claimant, nor was the deposit held in an authorised scheme in accordance with the Housing Act 2004.

On 22 June 2011, the Claimant served a notice under section 21 of the 1988 Act requiring possession. The Claimant applied to the county court for possession under the accelerated procedure, which applies where notice has been given under section 21 in relation to an AST. A possession order was made on 8 May 2012 but was subsequently set aside on 26 June 2012 on the grounds of non-compliance with the provisions relating to tenants’ deposits.

The Claimants applied for and were granted leave to appeal.

The case was subsequently heard at the Court of Appeal, with the principal issue to be determined was whether the Claimants had been entitled to serve a section 21 notice, notwithstanding that the deposit which had remained outstanding had not been protected in accordance with a scheme authorised under the Housing Act 2004.

The following decision was handed down by Lord Justice Lloyd on 14 June 2013 in the Court of Appeal, with Lord Justice Lewison and Lord Justice Gloster concurring:

In my judgment…the tenant should be treated as having paid the amount of the deposit to the landlord in respect of the new tenancy, by way of set-off against the landlord’s obligation to account to the tenant for the deposit in respect of the previous tenancy, given that the landlord did not seek payment out of the prior deposit for the consequences of any prior breach of the tenancy agreement.

It follows that, on my analysis, the tenant did pay, and the landlord did receive, the sum of £606.66 by way of a deposit in respect of the new periodic tenancy in January 2008, and so the obligations under section 213 applied to the deposit so received. As is common ground, they were not performed. Section 215(1) therefore applied so that the landlord could not validly give notice under section 21 of the 1988 Act. The notice purportedly given on 22 June 2011 was thus ineffective and the grounds for possession were not made out.”

The Court therefore decided that an AST entered into before 6 April 2007 and which became a statutory periodic tenancy after that date is considered to be a ‘new tenancy’. It is therefore a requirement that any deposit paid by the tenant under the original tenancy must have been registered within 30 days of the ‘new tenancy’ coming into effect.

Tanya Hamway, a solicitor in Mackrell’s Property Litigation team, says the ruling has major ramifications for landlords.

She says: “The ramifications of this ruling for landlords are quite clear; for so long as the requirements are not complied with, a landlord will not be able to serve a notice pursuant to section 21 of the Housing Act 1988 and landlords may be liable for sanctions if found to be in breach of the regulations.

“What is even more worrying is that at first blush, it appears as though there is no real remedy for the landlord.”

Consideration was given to this point by Lord Justice Lloyd, who stated that:

Under the original version of section 215…, it was open to the landlord to comply with the requirement to have the deposit held in accordance with an authorised scheme, even though this was not done within the 14 days then stipulated. That seems not to be the case now, given the amendment to section 215(1) (b) made in 2012.

I note that, as regards failure to provide the necessary information, under section 213(6), the sanction preventing service of a section 21 notice applies until the information is given, even if that is done late: see section 215(2) and its words: “until such time as section 213(6)(a) is complied with”. The time stipulation is in section 213(6) (b), so in that case the distinction is clearly deliberate: the landlord can retrieve the position, as regards that failure to comply, by complying late. The same does not appear to be the case in respect of failure to protect the deposit by an authorised scheme at all.

“It may be, though it has not yet been decided whether this is so, that the only way in which the landlord can now escape from the provisions of section 215(1) is by returning the deposit to the tenant before serving a section 21 notice,” added Tony.

“The Court suggested this but did not make a decision on that point.”

Only time will tell as to what effect this decision will have, or whether this will be further appealed.

For more information, please contact Tony Kent at Tony.Kent@mackrell.com or Tanya Hamway at Tanya.Hamway@mackrell.com. Alternatively, please call us on 0207 240 0521.