How Tenancy Deposit Protection affects current practice: a detailed legal analysis of the Tenancy Protection Legislation

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Common situations which might be affected

  1. Taking a holding deposit so that residential accommodation is taken off the market but no contractual commitment is entered into at that stage relating to the tenancy.
  2. An initial deposit taken at the time the tenancy agreement is entered into which is intended to be in part payment of the rent. For example a flat is let for £500 and the landlord takes £250 off the tenant initially before the tenant moves in to go towards the first month’s rent with the balance of the first month’s rent is being paid when the tenant actually moves in.
  3. Advance payment of rent e.g. a landlord takes one months rent and the next month’s rent as well and the tenancy is initially entered into so that the landlord always has one month’s rent in hand. 
  4. Taking payments for rent by a series of post dated cheques. 
  5. Taking a guarantee.
  6. Collecting an administration fee.
  7. Agreement to refund rent if the tenant complies with the tenancy.

The definition of Tenancy Deposit

For the purposes of the Housing Act 2004 Tenancy Deposit is defined. It means “any money intended to be held by the Landlord or otherwise 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”.

Money is defined as being in the form of cash or otherwise.

Prohibition on non-monetary deposits

Taking a transfer of property other than money as security is specifically prohibited by the Act. The Act provides that no person may require a deposit which consists of property other than money. Property is defined as moveable property so it is likely that this would mean all types of personal property.

The definition would extend to what are called choses in action and intangible property. The Act prohibits any transfer of moveable property, other than money.

There is no definition of transfer of property but it would seem that it means that what is prohibited is any passing over of a legal right in or relating to property from one person to another. Only money (as defined) may be passed over for these purposes.

Purpose of the Act

It is clear from looking at the relevant sections of the Act that the underlying purpose is to safeguard money which is held as a deposit.

It is either to be paid into the custodial scheme or safeguarded by an insurance backed scheme. 

What the draftsman appears to have in mind is that when the Landlord (or agent or other person on his behalf) receives the sum of money intended to be held as a deposit or bond he should deal with this as required by the Act.

However the problem is that when one looks at the definition of Tenancy Deposit, as is often the case, this could be read as imposing wider restrictions.

Consideration of what is a deposit

The statutory definition of tenancy deposit contains a number of key words which are not generally defined.

Although there is a statutory definition of tenancy deposit the word “deposit” itself has certain connotations.

Generally a deposit is an “earnest” or guarantee that the contract will be performed. Forfeiture of the amount is permitted in the event of a breach of the agreement.

The statutory definition refers to money which is defined but only as cash or otherwise.

It would seem, on general principles to mean cash in the form of coin or bank notes, postal orders and cheques, as well as bank transfers and presumably credit card payments.

The reference is to money “held” as security. Again “held” is not defined but the general law suggests that it would extend to possessing a sum of money once it has been received.

Perhaps the intention of the draftsman is to apply the requirements relating to tenancy deposit to sums of money which are intended to be put on one side and which are returnable provided that the tenant complies with his obligations.

It is very important to note that the expression “returnable” does not appear as such, although it is implicit in the scheme of the Act.

“Security” is not defined. Again applying general principles it could be described as a right given with a view to securing the payment of money. The alternative is anything that makes that money assured in its payment or more readily recoverable.

The statutory definition refers to money “intended” to be held as security for the performance of any obligation of the tenant or the discharge of any liability of his relating to the tenant.

Arguably there are two parallel tracks envisaged in this definition. Essentially at the outset each is independent of the other.

On the one hand, on one track, there is the primary obligation of the tenant to perform his obligations under the tenancy agreement i.e. to pay the rent, make good damage etc.

On the second track, and separately, there is a deposit of a sum of money to which recourse can had but only if the tenant fails to perform his primary obligations.

If the tenant performs his primary obligations on the first track to pay the rent etc then no recourse can be had to this sum of money which is then to be repaid to the tenant at the end of the tenancy, untouched.

Clearly it is not intended that the absolutely identical sum of money paid as a deposit is repaid but an equivalent.

If this interpretation is correct then the requirements of the Act relating to tenancy protection only bite on the second track i.e. the sum of money which is deposited as security or the tenancy deposit (the bond as it is colloquially known).

Anything done in discharge of the primary obligation e.g. payment of rent or other payments under the tenancy agreement (not being sums of money by way of tenancy deposit) are not touched by the scheme.

Putting it simplistically, if a combined cheque is paid representing £500.00 as the first months rent and £500.00 as the deposit then only the £500.00 appropriated to the deposit is to be dealt with under the tenancy deposit scheme.

Whether or not this interpretation based on separation in this way is correct could be fundamental in deciding how widely the net is cast in bringing monies into the scope of tenancy deposits so that they are subject to the statutory scheme under the 2004 Act.

It is to be noted that the draftsman uses the word “held”. It is suggested that this could distinguish the deposit from the discharge of the tenants primary obligations (such as to have to pay the rent). A payment made to discharge these primary obligations can then said to be “applied” by the landlord for this purpose; rather than “held” by the landlord.

It is important to note that the word “intended” is used in the statutory definition of tenancy deposit.   It is clear that the intention of the parties could also be crucial in determining the status of any sums of money paid.

Provided there is a genuine intention on the part of both parties that a particular sum should be held in a particular way this determines the status of the sum although the Act is not clear in determining the time of which the intention of the parties is judged. Presumably it is the time of payment.  

If the intention is a sham different considerations could apply.

Reference is made to the tenant’s obligations “arising under” or “in connection” with the tenancy. This is very wide and is clearly intended to catch collateral documentation etc.

“Arising under” clearly refers to the actual obligations under the tenancy agreement itself i.e. to pay the rent to carry out any repairs or not to cause any damage etc.

Use of the phrase “in connection” suggests that this could relate to matters centered on the formation of the contract; rather than just the carrying out of the contract once made.

The reference to “performance of any obligations of the tenant” or “the discharge of any liability” clearly refers to payment of rent and all other contractual terms including obligations such as paying for utilities or paying administration charges (such as charges for sending out arrears letters or for bounced cheques).

It does not matter if the deposit is paid to the Landlord or someone on his behalf such as a Managing Agent and it clearly does not matter by whom the payment is made.

It does not have to be paid by the tenant but to be paid by someone on the tenant’s behalf. This would encompass payments under a local authority deposit scheme where funds are actually provided to the tenant to enable them to pay the deposit.

Application to common situations

At the outset of this note there is common situations where identified. There are no doubt others. Looking at each one in turn in the light of the discussion set out above the decision would appear to be as follows:

  1. Deposits
  2. If  the payment is made purely to hold the property i.e. ensure that it is taken off the market it cannot be said that the payment made is intended to be held as security for the performance of the tenants obligations.  At this stage there is no tenancy contract and none may come into existence. It does not seem this would be caught.

  3. Initial deposits
  4. The position here is more complicated. As is often the case (e.g. on the purchase of a house) a deposit can be paid not only as a deposit but in part payment.

    In this case the deposit has two separate functions.

    However, when the tenancy is granted the intention would be that this money would be applied in part payment i.e. in part discharge of the tenants obligation to pay rent.

    Coming back to the argument that there are two tracks in parallel the purpose of the payment of money is to go in discharge of the tenants primary obligation to pay rent; not to set it aside as security.

    As has already been noted the whole statutory scheme is based on returning deposits at the end of the tenancy, although provision is to be made by secondary legislation for single claims in certain circumstances. This seems to be based however on there being some default where the Landlord is making a single claim.

    Whilst the position in relation to initial deposits is more uncertain than that for holding deposits, on balance, the initial deposit paid once a contract has been entered into should not be caught by the tenancy deposit scheme so long as the intention is that this go in part payment; rather than a security.

  5. Advance payment of rent
  6. Essentially here rent is paid in advance of the due date.

    The Landlord takes say one months rent in front but the intention is that the “upfront” payment goes towards the last instalment. The intention is to apply this payment towards discharge of the rent; rather than as security.

    This again comes back to the contention that there are two tracks in parallel. There is never any intention to return the instalment of rent which is held by the Landlord.

    It is not therefore held as security but rather on account and to applied at the due point in time when it becomes payable. There is an alternative construction however which would bring it within the tenancy deposit scheme.

    One can argue that it is held by the Landlord to secure the performance of the tenant’s obligation i.e. to pay the last instalment.

    However this would not seem to tie in with the underlying statutory purpose of securing returnable monies. It would seem that such advance payments are outside the statutory scheme but this is not free from doubt.

  7. Post dated cheques
  8. Essentially, the intention of the parties is that when the appropriate time comes i.e. the date for payment of the cheque which will co-incide with the rent payment date the Landlord with “cash” the cheque and take this as payment.

    In one sense it could be said that this is security payment. On the other hand the cheque is to be applied at the appropriate time to discharge the tenants primary obligations.  

    The landlord has agreed to take the cheque as payment rather than legal tender.  Whilst clearly the cheque is money within the 2004 Act that underlying money represented by the cheque is not held as security; rather it is intended as actual payment.

    On this basis it would be outside the Act particularly as, again, there is no mechanism under the statutory scheme for regular withdrawals. However because of the definition used by the Act, a counter argument can be made that the cheque could be said to be security for payment when it actually becomes due eventually.

    In view of the underlying statutory scheme, it would seem that such cheques are outside the scope of the scheme, but again this is not entirely free from doubt. Similar considerations could apply with advance credit card payments.

  9. Guarantees
  10. A guarantee is an accessory contract by which the promisor under the guarantee (a third party) agrees to be responsible for the payment of the debt or other performance of the contractual obligations of the tenant.

    The tenant however remains primarily liable for the discharge of these obligations and for paying the rent.

    An issue which can arise in relation to a guarantee is whether or not there is a transfer of the property.

    In one sense the guarantee could be argued as being an item of property but (and this coincides with the Government view) one would be very hard put to make a case that the giving of a guarantee is the transfer of a property. 

    Therefore one can safely say that the giving of the guarantee is outside the Act but if that guarantee were backed up with a cash deposit then the position would of course be different.

  11. Administration fees
  12. So long as any payment is genuinely an administration fee (e.g. a set up fee for processing tenancy documentation) then clearly this is not intended to be held as security.

    One must however bear in mind sham contracts.

    If the payments is a sham or cover for something else (and both parties do not genuinely intend it to be paid as an administration fee) then it could well be caught by the Act.

    However so long as this is genuine, it is outside the Act.

  13. Refunds
  14. The agreement (or a side agreement) could provide that so long as the tenant pays the rent etc there is to be a refund at the end of the tenancy. Clearly the element identified for refund could be said to be intended to be held as security so this will be caught by the scheme.

Conclusion

This note only sets out views and ultimately it is a matter for the courts to determine what is or is not a tenancy deposit for the purposes of the 2004 Act.

The definition is potentially wide and from previous experience a court could well determine that a particular payment is a tenancy deposit particularly where there is some kind of avoidance. 

A cautious approach therefore needs to be adopted but it all comes down to how far attempt at the courts look at the underlying statutory scheme when it comes to determining what is or is not a tenancy deposit for the purposes of the 2004 Act.

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