Readers of the Gazette will be familiar with tenancy deposits.

In a nutshell, parliament sought to establish schemes to protect tenants’ deposits (incorporating alternative dispute resolution for resolving disputes) and punish any landlord who failed to comply with his duty to protect the deposit within an authorised tenant deposit scheme (section 213 Housing Act 2004).

First, in the event of default, the court must order payment by the person holding the deposit to the tenant or into a custodial scheme (section 214(3)).

Second, the court ‘must also order the landlord to pay to the [tenant] a sum of money equal to three times the amount of the deposit’ (section 214(4)).

Third, the landlord cannot give a section 21 notice (section 215).

In a recent Benchmarks (3 March 2011) I examined the case of Tiensia v Vision Enterprises Limited (t/a Universal Estates) and Honeysuckle Properties v Fletcher, McGrory and Whitworth [2010] EWCA Civ 1224.

In that case, the Court of Appeal held that the pre-condition of a tenant’s application to the court under section 214(4) is not a failure by the landlord to comply with the ‘initial requirements’ or the notification thereof to the tenant within the 14-day period specified in section 213.

It is the failure to comply with either of those obligations at all.

The landlord has until the hearing of the claim to comply with the requirements.

For extant tenancies, this gives the landlord every opportunity to avoid the financial costs of non-compliance and little incentive to the tenant to bring proceedings at all.

However, what if the tenancy has ended and the landlord cannot then comply with the requirements of the act by protecting the deposit, which I noted as one of the remaining issues which Tiensia had not addressed?

The Court of Appeal has now considered that issue in Gladehurst Properties Limited v Farid Hashemi [2011] EWCA Civ 604.

The essential facts of Gladehurst were as follows.

The landlord let a flat to Mr Hashemi and Mr Johnson (‘the tenants’) pursuant to an assured shorthold tenancy agreement in August 2007. The tenants paid a deposit of £6,240 to the landlord.

It was never paid into an authorised tenant deposit scheme.

In October 2008, the tenants vacated the flat and it was accepted by both parties that the tenancy came to an end.

The flat was inspected and the inventory clerk recommended a deduction of £1,123.99 by reason of breaches of covenant arising from the condition of the flat. The sum of £5,116.01 was paid to the tenants.

The tenants disputed £618 of the sum of £1,123.99 retained by the landlord.

The tenants brought a claim against the landlord.

Allowing an appeal from HHJ Cryan and restoring the decision of District Judge Manners, the Court of Appeal found in favour of the (former) landlord.

The only substantive judgment was given by Lord Justice Patten.

At paragraph 42, Lord Justice Patten stated that section 214(1)(a) should be read ‘as meaning that the initial requirements of an authorised scheme have not been but are still capable of being complied with’.

His reasoning was as follows:

In answer to the argument that this interpretation will encourage landlords not to protect deposits, he notes that section 213 does not create a criminal offence and it is up to the tenant (as with any other breach of covenant by the landlord) to bring proceedings against the landlord.

The initial requirements of an authorised scheme should be dealt with at the inception of the tenancy and no later than the expiry of the tenancy.

The Tiensia interpretation of section 214(1) refers to these requirements as not yet having been complied with, which carries the strong implication that they are still capable of being complied with.

Section 214(3) requires the court to order repayment of the deposit to the tenant or into an authorised scheme. If the court were to have a genuine discretion then both options must be available – on the facts of this case, neither was.

Anomalies would be created if the contrary interpretation is adopted. For example, take the case of a landlord who repaid the deposit in full.

He would escape the consequences of section 214(4) because it would not be open to the court to make an order under section 214(3).

Where the landlord retained some part of the deposit, he would be worse off even if he had legitimate grounds for the retention to pay for repairs.

Lord Justice Patten observed that this means that the grounds for a ­section 214 application will cease to exist once the lease expires and no order under either section 214(3) or (4) can therefore be made after that date.

From that moment on the application will cease to be ‘such an application’ as is described in section 214(2) ­(paragraph 42).

The combined effect of Tiensia and Gladehurst is to deprive section 214(4) of virtually all effect.

In the midst of a tenancy, the tenant has to send a letter of claim and possibly issue proceedings with no certainty that he will recover any of his costs for doing so in circumstances where the landlord will escape the consequences of section 214(4) if either the tenancy ends or he complies with his obligations under section 213 before the date of the hearing of the claim.

Is this what parliament intended?

For the present, the Court of Appeal has answered in the affirmative.

District Judge Pates sits at Crewe County Court