Wednesday, November 11, 2009

Another tenancy deposit problem – what happens when the receivers step in?

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I have been contacted by a landlord who has drawn my attention to a thread on the popular LandlordZone forum:

“Briefly, the rental property has been in the hands of the receivers since July 2008. The receivers accepted the tenancy and collect rent from the tenant (the tenancy is now periodic). The deposit was originally protected by the landlord, however, Mydeposits cancelled the landlord's membership (and therefore the protection) because the landlord was subject to a receivership order, which is contrary to the rules of the scheme.

The deposit has not been paid to the receivers (so it appears they are not liable). The landlord cannot protect the deposit as it's against mydeposits' rules (I guess it's possible the DPS would accept it). Tenant may not succeed in a claim for return of the deposit because the tenancy hasn't ended. So, how can the tenant take action under s.214(1) to ensure the deposit is protected when firstly, the landlord did comply and the cancellation was not his decision, and secondly, the deposit has not been 're-paid' so can there be any duty to comply a second time when the landlord has complied once.

It seems completely crazy to me that the scheme is permitted to cancel a protected deposit in these circumstances - the whole point of the schemes is to protect against landlords/agents' 'bad' behaviour. Landlords cannot unprotect a deposit during a tenancy without evidence of reprotection, so why are schemes allowed to do this?”
This does seem to be a difficult situation and one that may become more common with more landlords falling into receivership. What do you think?

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NL said...

Of the top of my head and without checking, the receiver is the LL's agent. Wouldn't the usual rules on deposit protection by the LL or persons acting on his behalf apply? The receiver should get the deposit from the LL and protect it, otherwise, just conceivably, a 3x 'unprotected deposit' claim could be brought against both LL and the receiver (as agent).

Anonymous said...

Or couldn't the landlord just pay it into the custodial scheme?

Tessa Shepperson said...

The problem is, that if the landlord is insolvent (which is probably why the receivers have been called in), the money may no longer be available for him to pay into the custodial scheme.

Normally if the landlord loses the money, the tenant is still protected by the scheme. However here it seems the scheme cancelled the landlords membership, because of the receivership.

*TRUFAX* said...

"The receiver should get the deposit from the LL and protect it, otherwise, just conceivably, a 3x 'unprotected deposit' claim could be brought against both LL and the receiver (as agent)."

Problem 1: receiver isn't interested in obtaining the deposit, according to the thread.

Problem 2: if T issues claim against both LL and receiver, double the risk of exposure to costs in the event claim fails, or fails against one of the Ds. And I think there is reasonable doubt as to whether a claim would succeed as LL did comply with deposit protection so there appears to be no cause of action under s.214(1) HA2004 (ignoring s.214(2)(b))

NL said...


Whether the receiver is inclined to get the deposit from the landlord is more or less beside the point. They are now the LL's agent under the LPA provisions, not the mortgage lender's. So the usual rules on agents liability under HA 204, as they have been established, apply. The receiver has very arguably assumed responsibility for the tenancy.

So, as a course of action, how about 'suggesting' to the landlord that the deposit is either returned or passed to the receiver to protect, because otherwise a 3 x claim is coming his/her way. Copy in the receiver, pointing out that they have accepted responsibility for the tenancy, are receiving rent and are a person acting on the LL's behalf under s.212(9)(a).

Yes, there is a risk on the claim, but probably no higher than usual as either the LL or the receiver, or both, are likely to have to Part 20 claim against the other, including for their costs in defending.

The landlord may be insolvent or not, but if the receiver was appointed under a BTL mortgage provision, then there is no reason to presume the landlord is bankrupt or that the money is unrecoverable. Likely - yes. Certain -no.

It doesn't matter whether the LL had protected the deposit, what matters is that it is now not protected - s.213(1) and s.214(1)(b). (In any event, the 'initial requirements' are likely to include the deposit being held in the scheme until the end of the tenancy).

Not an easy situation, certainly, and the Mydeposits approach is not helpful (if understandable for an insurance scheme) but I just don't get the idea that the receiver is somehow different from any other managing agent...

SE1 Tenant said...

Another twist on this, as far as I can see, is that as the deposit is now unprotected the LL or LPA-R can not notice the tenant to end the tenancy, right?

So, the LPA-R will not be able to fullfill his/her obligation to the mortgage lender as long as the deposit is unprotected and the tenant pays the rent.


SE1 Tenant said...

Can I just clarify what I meant above: LPA-R cannot fullfill its obligation to the mortgage bank/lender as they cannot now evict the tenant (as deposit unprotected) and therefore not sell the flat on the morgtage lender's behalf. Right?

Also, in these circumstances should the tenant file a county court claim (deposit protected/back + 3 times deposit) against LPA-R, original LL or perhaps both?

Tessa Shepperson said...

Thats a good point about the section 21 notice. Any notice served while the deposit is unprotected will be void.

However this would not help the tenant if the mortgagee wanted to evict under ground 2. said...

My|deposits is an insurance-based scheme, because of this it has to undertake risk assessment. The scheme rules clearly state that in the event of a member being placed into receivership their membership will be cancelled. For the same reason the other insurance-based scheme, The Dispute Service, would also be governed by the same principles and be unable to protect the deposit. The Deposit Protection Service, the only custodial scheme, exists and is described as ‘the default scheme’ for this very reason; it allows everyone to comply with the law for free and has to accept everyone for membership.

We do not have the full details of the case here, but from what we can see the tenant has two options:
1. After expelling a member, my|deposits provides three months run-off deposit protection and, if the tenancy ends during that period, the tenant can request the landlord to repay him the deposit. If this was not forthcoming from the landlord the tenant could then raise a dispute with my|deposits. In this instance, and if necessary, the scheme could then claim on their insurance policy and the tenant will get their deposit money back.

2. If the tenancy doesn't end (as seems to be the case here) the tenant will need to ask the landlord for proof of re-protection before the expiry of the three month run-off protection. If this is not provided on time the tenant would then have to apply to the county court for ‘an order to protect’. If there is no ‘proof’ as required by the Housing Act 2004, the judge can then order that the landlord either:
• Refunds the deposit to the tenant, or
• Places the deposit in the custodial scheme.
If either of these is ordered then the judge must also order that the landlord pays three times the deposit amount to the tenant as compensation within 14 days of the order being made.

As a footnote, the scheme rules of all three authorised schemes have all been approved by the government as meeting the tenancy deposit protection requirements of the relevant legislation and have not been written unilaterally.

David said...

Surely section 214(3)(a) is clear and that there can be little doubt the person holding the deposit is the landlord not the LPA Receiver. Therefore the LPAR claim cannot succeed.

The legislation would seem in 214(2)(b) and in 215(1)(a) to allow for a deposit that was protected and is now not protected and clearly seems to make this an issue (as the wording is separate to the initial requirements of the scheme). Indeed in the 214(2)(b) quote surely the landlord was not holding the deposit "in accordance with an authorised scheme" by not following the scheme rules and having the money available, but having spent it?