The Localism Act - When is a deposit not a deposit?

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Michael MorganReaders of Letting Agent Today might have seen the heated response to the recent article Agents warned over illegality in taking tenants' money too early. The subject of what constitutes a deposit and what needs to be protected is a recurring one, and the impending Localism Act seems to have set the hare running once again.

Our view is that agents’ fears of breaking the law by not protecting holding deposits or other advance payments, are unfounded. The Localism Act does not change what a tenancy deposit is with regards to assured shorthold tenancies, and therefore does not change what must be registered with a tenancy deposit protection scheme.

What is a deposit?

Any money taken for security in respect of a tenant’s obligations or liabilities connected with the tenancy is a tenancy deposit and must be protected with an authorised scheme.

A holding deposit is not a tenancy deposit for the purposes of section 212 of the Housing Act 2004, and does not need to be protected with an authorised scheme.

What you call the money is of relatively little importance – it is its purpose which you need to consider. A deposit is only required to be placed in a scheme if it is paid as security for the performance of any obligations of the tenant or the discharge of any liability of his, arising under or in connection with the tenancy.

So, if the tenancy agreement has not been entered into, or there are no contractual obligations on the tenant, the deposit paid is not a deposit for the purposes of the Housing Act 2004.

However…

If a landlord has a holding deposit in respect of a person who subsequently becomes his tenant, the holding deposit must either be returned to the tenant and then repaid as a tenancy deposit, or be retained by the landlord and then protected within 14 days (30 days from 6th April 2012) of entering into the tenancy agreement, and prescribed information issued.

Retention of the money is likely to be the more practical option, and therefore it is advisable for agents to put a clause in their documentation defining what event transforms a holding deposit into a tenancy deposit and commits them to register the deposit and issue the prescribed information.

What is the Localism Act changing?

In summary, the Localism Act is updating the time limits and penalties associated with the registration of tenancy deposits.
The window for registering the deposit and issuing prescribed information is increasing from 14 to 30 days, and in order to close a loophole previously open to agents and landlords, this limit is now absolute - tenants will be able to bring a claim from 31 days after the payment of the deposit and/or after the tenancy has ended. Previous court cases had allowed landlords to escape penalties if the tenancy had ended, or if the deposit had been registered prior to the hearing.

If the landlord has not issued the prescribed information within 30 days, no section 21 notice can be served until s/he has done so (and this can be after the 30 days).

If the landlord has not registered the deposit within 30 days, no section 21 notice can be served until either the deposit has been returned to the tenant or, if court proceedings have been taken against the landlord, proceedings have concluded.
The penalty which a court can award is between one and three times the amount of the deposit and it is worth noting that if the deposit is protected outside of the 30 day limit, the court will take this into consideration when deciding this amount.

A more detailed guide to the changes made by the Localism Act can be found here on the TDS website: The Housing Act 2004 and the changes introduced by the Localism Act 2011”

 


Posted by Michael Morgan, Head of Adjudication on 2 March 2012

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