Why would a landlord need to return a deposit?

You will no doubt be very much aware that a landlord must have complied with, amongst other things,  the tenancy deposit rules if they seek to terminate a tenancy by relying upon a Section 21 notice - the soon to be abolished ‘no fault’ notice for possession.

Generally this requires the deposit to be protected in a government approved scheme and the prescribed information in connection with the deposit (including any leaflets provided by the scheme) to be given to the tenant (and anyone who paid the deposit on the tenant’s behalf) within 30 days, although this timeframe is only 14 days for deposits taken prior to 06 April 2012. Different timeframes apply to deposits taken prior to 06 April 2007, when the tenancy deposit rules came into effect.

More information can be found here about the extent of the prescribed information required by the Regulations and here about how the prescribed information must be certified, in order to be valid.  

Where the deposit is not protected in time or at all, no Section 21 Notice can be served until the deposit is returned to the tenant. Serving the prescribed information late does not prevent a Section 21 Notice from being served, although the landlord may still face a claim for financial penalties of up to three times the value of the deposit.

If there are any concerns over compliance with the tenancy deposit rules, it is often prudent/expedient to simply return the tenant’s deposit and that should be done before service of a Section 21 notice.  The sanctions preventing reliance upon the Section 21 route to possession are thereby lifted.

In circumstances where the deposit should have been but is not protected (either at all or prior to the service of the Section 21 Notice), the Section 21 notice is likely to be found invalid which will lead to dismissal of the possession claim. Even where any question of doubt about compliance is resolved in favour of the landlord, any questions about compliance can, at the very least, cause delays in obtaining possession, not to mention the additional legal costs that will be incurred in resolving the arguments arising from that issue.

We have previously advised on the restrictions on serving Section 21 notices in our October 2021 Legal Update.

The Important questions of how should the deposit be returned to the tenant?

This update focuses on the pitfalls of returning a deposit by cheque, and looks at recent case law where the landlord returned a deposit by that method.

In an appeal in the County Court in the case of Richworth Ltd v. Billingham [2023] EW Misc 8 (CC) the tenant appealed an earlier possession order by asking the Court to consider “whether or not delivery of a cheque, which the tenant elected not to (or simply failed) to cash, constitutes return of a deposit”.

A (brief) chronology of the case is as follows:

• The tenant held an assured shorthold tenancy commencing on 27 June 2011. The tenant paid the deposit as required by the agreement but the landlord failed to protect it in a statutory scheme as required by the Housing Act 2004.

• In the spring of 2022 the landlord and tenant corresponded about noise nuisance complaints relating to the flat and similar complaints made by the tenant about a neighbouring flat. On 14 April 2022 the landlord asked the tenant “Can I have your bank account number and sort code in case we ever need to make payments to you?”

• On 26 April 2022 the landlord wrote to the tenant enclosing a cheque for £780, being the sum of the tenant’s deposit. The cheque was dated the same day and drawn on the landlord’s account.

• On 5 May 2022, solicitors acting for the landlord wrote a letter to the tenant enclosing a Section 21 notice and stating “We are advised that your deposit has been returned to you by check (sic) delivered by hand on 27 April 2022”. The Section 21 notice was served by a process server on 6 May 2022.

• Upon expiry of the Section 21 notice accelerated possession proceedings were sent to Court for issue.

• There followed a huge number of errors on the part of the landlord’s solicitors, the Court staff and the tenant and his solicitors, but at a hearing on 8 November 2022 an order for possession of the flat in 14 days was granted. Counsel for the tenant sought permission to appeal, which was granted.

• On appeal, the Judge considered whether a deposit can ever have been returned, or repaid, by a cheque which has not been presented for payment.  The Judge concluded that there may be circumstances in which a landlord has returned a deposit to the tenant by cheque even if that cheque was not cashed. However, the Judge made it very clear that this would always be a question of fact on a case by case basis.

• The Judge held that in this case the tenancy deposit had not been validly returned to the tenant before the service of the Section 21 notice. This was in part due to the fact that there were a limited number of working days between sending the cheque and serving the notice, given that there was a bank holiday.

• The previously granted order for possession was set aside.

Conclusion

Whilst this case is a useful reminder of the hazards of returning a tenant’s deposit by cheque, it does not mean that it should be avoided completely. In such cases, a landlord should, preferably, wait for the cheque to be cashed by the tenant, before serving the Section 21 notice, so there is clear acceptance of the deposit by the tenant.  However, it is undeniably true that the safest method is by bank transfer so there can be no doubt that the deposit has truly been returned (and received) by the tenant.  Accordingly, having the tenant’s bank account details from the very start of the tenancy (when the tenant is more likely to hand them over) is likely a wise move.

One other point to flag up here, is that with the Renters (Reform) Bill continuing its slow progress through Parliament, the ability of a landlord to recover possession by service of a Section 21 notice is likely to be removed in the not too distant future. Whether or not the legislation, in its final form, will transfer the present embargo on service of a notice seeking possession - without first refunding an unprotected deposit - into the other route(s) to recovery of possession remains unclear.

For more information on the current position of the Renters (Reform) Bill, please see our recent Legal Update here.

If you have any questions regarding this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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