The Tenancy Deposit Protection Scheme – when landlords can face penalties


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The Tenancy Deposit Protection Scheme was introduced on 6 April 2007. The scheme affords protection to those deposits paid as security for the tenant’s obligations under the terms of an assured shorthold tenancy (AST).

The Tenancy Deposit Protection Scheme was set up to safeguard tenancy deposits, provide for the imposition of sanctions for failure to comply with the requirements of the scheme and facilitate the resolution of disputes between the parties in connection with the deposits.

There are three approved tenancy deposit protection schemes to protect tenants’ deposits. These are the Deposit Protection Service (DPS), the Tenancy Deposit Scheme and My Deposits.

The DPS operates a custodial scheme where it holds the deposit throughout the tenancy until it is paid, either in whole or in part, to the landlord or tenant. (Note: if you are a landlord overseas, you must use the custodial scheme unless you employ a UK registered letting agent to manage your property.)

The Tenancy Deposit Scheme and My Deposits are both insurance based schemes where the landlord retains the deposit but must take out insurance to protect against the risk that the landlord refuses, or is unable, to repay the deposit at the end of the term.

Initially most of the responsibility to comply with the scheme rests with the landlord. In brief, when taking a deposit, landlords must protect it (by registering it with one of three approved schemes) within 14 days of receipt from the tenant and give, within the same 14 day period, prescribed information to the tenant relating to the scheme that the landlord has decided to use.

If you are a landlord, failure to comply with the provisions of the scheme could mean:

  • you lose the ability to obtain vacant possession through service of a "no fault" notice (also called a section 21 notice). It is called "no fault" because it does not require the tenant to be in breach of any terms of the tenancy before a landlord can issue the notice. By losing the ability to serve a "no fault" notice a landlord is also barred from adopting the accelerated possession procedure. (Note: if the ability to serve a "no fault" notice is taken away, a landlord would have to prove a tenant breach in order to obtain possession and, in the case of defended proceedings, it can take many months to obtain a possession order); and
  • your tenant applies to the county court and obtains an order that, within 14 days, you either repay your tenant the deposit or pay the deposit into the designated account held by the scheme administrator under an authorised custodial scheme. The court must also order you, within 14 days, to pay the tenant three times the deposit amount.

The consequences of failing to comply with the provisions of the scheme are severe and, until not so long ago, the message was clear: adopt the scheme or run the risk of paying a hefty fine and struggling to get rid of a tenant because a tenant breach cannot be established.

However, landlords can breathe a sigh of relief as a result of a Court of Appeal decision in November 2010. In Christelle Tiensia v Vision Enterprises Limited (t/a Universal Estates), the Court of Appeal discussed the issue concerning tenants’ deposits and, most importantly, when the court should order the penalty for non compliance to be made.

In this case, the court indicated that, provided a landlord "puts his house in order" following correspondence between the parties, litigation will be avoided. The court looked at the deadline to register the deposit with one of the schemes, i.e. 14 days from the date on which the deposit is received, and interpreted the legislation to mean that a landlord has until the date of the hearing of a tenant’s application to court to comply with the scheme. Therefore, even if a landlord fails to protect the deposit within 14 days of receipt, a landlord can rectify the position by protecting the deposit before the date of the court hearing.

The fact that a landlord has not protected the deposit does not, therefore, automatically mean the landlord will be liable for a fine of three times the deposit. A landlord can still comply with the provisions of the scheme and avoid such a claim even if proceedings are commenced against him, provided the landlord protects the deposit and provides the prescribed information before the relevant hearing date.

The court also said that a landlord’s failure to comply with its tenancy deposit obligations within 14 days of receipt does not prevent the landlord from ever giving a "no fault" notice. Once those obligations have been complied with, even if compliance is late, the landlord may serve the "no fault" notice and instigate the accelerated possession procedure.

The interpretation of the sanctions imposed for non compliance of the scheme by the Court of Appeal is good news for all landlords under ASTs. However, if you are a landlord and you leave compliance until after proceedings have commenced against you, you may well end up having to settle the tenant’s costs relating to the proceedings.

Even if the sanctions have been made impotent as a result of Tiensia v Vision Enterprises Limited, landlords should note that compliance under the scheme is still necessary.

If you are a landlord and want to rely on the "no fault" notice for possession, avoid any fallout with your tenants and, potentially, a costs bill for avoidable litigation, our advice is follow the scheme and protect the deposit within 14 days of receipt.

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