How to Serve Section 21 After Deposit Unprotected by Insurance Scheme
Here we look at the situation where the deposit was originally protected perfectly within 30 days with an insured scheme but was then un-protected by the scheme after the end of the term due to a failure by the landlord (or agent) to respond to a request for information as to whether a new fixed term is to be/has been granted or whether the tenancy has become periodic.
MyDeposits started tightening up on this some time ago. Can the landlord or agent renew the deposit protection with the same scheme before serving a section 21 notice, or must the deposit be repaid in full as if it had never been protected? This article is only concerned with insured schemes where a fee is payable. Where a deposit is protected with a custodial scheme, the deposit remains protected throughout, so it is not a problem.
The Deposit Protection Service insured scheme rules say:
The DPS will send the Landlord a reminder 1 month before the Tenancy End Date informing them that The DPS must be notified prior to the Tenancy End Date whether the Tenancy is a) at an end; b) continuing on a periodic basis; or c) renewing as a fixed term Tenancy. If the Landlord does not respond to this notification prior to the Tenancy End Date The DPS will close the Deposit and inform the Landlord and all Tenants that the Deposit is no longer protected. The DPS will send such notification via e-mail, SMS or postal communication. [Term 16a].
The MyDeposits insured scheme rules say:
C4.1 Prior to the end date of the fixed term AST, as provided to the scheme at protection, you must inform us whether the AST is due to terminate, continue on an SPT or be renewed with a new fixed term. If the member does not update the protection by 30 calendar days after the end date of the tenancy, then the scheme will automatically un-protect the deposit and inform the tenant.
The TDS rules say:
Where a Statutory Periodic Tenancy on the same terms follows a Fixed Term Tenancy no further Tenancy Deposit Protection Charge is payable. The Deposit will remain Protected until the end of the Statutory Periodic Tenancy or until there is a material change in the terms (e.g. increase in rent, change in Tenant, change in the amount of the Deposit)…
All three schemes require no further fee if the tenancy becomes periodic at the end of the fixed term assured shorthand tenancy - just that they be informed. But, all three schemes require a further fee if a renewal tenancy is granted.
Service of section 21 whilst a landlord or agent is not in compliance with a scheme rule
If a landlord is in breach of any scheme rule (for example, the requirement to notify of the current status of the tenancy), no section 21 notice may be given at a time when the deposit is not being held in accordance with an authorised scheme:
215 Sanctions for non-compliance (1) Subject to subsection (2A), if a tenancy deposit has been paid in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy at a time when– (a) the deposit is not being held in accordance with an authorised scheme
However, this part does not require the deposit to be returned before section 21 (although returning the deposit in full would work). A landlord or agent must ensure they are in full compliance when the section 21 notice is served.
Deposit un-protected during the tenancy by the scheme
Where a deposit has been unprotected by a scheme (perhaps after notification as outlined by the rules above), the position is different.
Procedure for un-protecting a deposit by a scheme
Schedule 10 of the Housing Act 2004 outlines the procedure for un-protecting a deposit, and paragraph 5 explains this procedure for an insurance scheme. The schemes may have a provision to un-protect a deposit in their rules, and paragraph 5(3B) requires the scheme administrator to give notice to the landlord (or agent) before making a determination about ceasing to retain a deposit under the scheme (un-protect the deposit).
(3A) The scheme may make provision enabling the scheme administrator to determine that, by virtue of the landlord's failure to comply with a relevant obligation, a tenancy deposit which has previously been retained by a landlord under the scheme (and which relates to a tenancy which has not ended) is to cease to be retained under the scheme.
(3B) Provision under sub-paragraph (3A) must require the scheme administrator, before making a determination, to give a notice to the landlord stating that the scheme administrator proposes to make such a determination and the reasons for the proposal.
Once that notice has been deemed received by the landlord (or agent), the scheme must wait at least 14 days before determining the deposit (to allow time for the landlord or agent to respond before a determination is made). Paragraph 5A(3) then provides the scheme to determine the status of the deposit:
(a) to determine whether the deposit should cease to be retained under the scheme and, if so, the date on which it is to cease to be so retained;
(c) if the determination is that the deposit should cease to be so retained, to give a notice under sub-paragraph (4) to the landlord and to the tenant.
Assuming, therefore, the scheme determines the deposit is to be unprotected, a paragraph 5A(4) notice must be given to both the landlord and tenant. The paragraph 5A(4) notice is a notice:
(a) identifying the tenancy deposit in question;
(b) informing the recipients of the notice of the determination made by the scheme administrator and stating the date when the deposit ceases to be retained under the scheme; and
(c) giving a general explanation of the continuing effect of sections 213 to 215 of this Act in relation to the deposit (including in particular the effect of section 213 as modified by sub-paragraph (9)).
Regarding the date that the deposit is unprotected in the notice, the date must not be within three months, beginning with the day the original 14-day notice was deemed received by the landlord or agent.
The notice must also be given at least two months before the date the deposit ceases to be retained. This has the effect that the deposit remains protected for at least three months, and the landlord will have had at least two months' notice before it is un-protected, allowing ample time to re-protect either with the same scheme or some other scheme:
(7) The date determined under sub-paragraph …, (3)(a) … must not be within the period of three months beginning with the day on which the original notice mentioned in sub-paragraph (1) was received.
(8) A notice under sub-paragraph (4) … must be given at least two months before the date on which the deposit ceases to be retained under the scheme ….
The requirement to re-protect the deposit
Section 213 of the Housing Act 2004 is the section that requires the deposit to be protected within 30 days of being received in connection with an assured shorthand tenancy.
Paragraph 5A(9) explains that where a deposit is unprotected, it is to be treated as though a new deposit has been received.
Furthermore, the wording changes the requirement to protect the deposit from within 30 days to before the deposit is un-protected (effectively giving the landlord two months to protect from when the scheme sends the notice):
(9) In the application of section 213 to a tenancy deposit which ceases to be retained under an insurance scheme (“the old scheme”) by virtue of a determination mentioned in this paragraph—
(a) references to receiving the deposit include a reference to ceasing to retain it under the terms of the old scheme;
(b) subsection (3) has effect as if for the words “within the period of 30 days beginning with the date on which it is received” there were substituted [“]before the deposit ceases to be retained under the old scheme…
To simplify this, let’s compare the two versions of section 213(3) (the requirement to protect a deposit). Where a deposit is first received in the usual way, section 213(3) says:
(3) Where a landlord receives a tenancy deposit in connection with a shorthold tenancy, the initial requirements of an authorised scheme must be complied with by the landlord in relation to the deposit within the period of 30 days beginning with the date on which it is received.
Paragraph 5A(9) of schedule 10 changes the wording of section 213(3) to the following where the deposit is being un-protected:
(3) Where a scheme administrator is ceasing to retain a deposit under the terms of the old scheme, the initial requirements of an authorised scheme must be complied with by the landlord in relation to the deposit before the deposit ceases to be retained under the old scheme.
Prohibition on serving a section 21 notice
Section 215 Housing Act 2004 contains the prohibition on serving a section 21 notice when the deposit has not been protected. Section 215 provides that no section 21 may be served if section 213(3) has not complied with subject to subsection 2A (which is the returning of the deposit in full):
(1) Subject to subsection (2A), if a tenancy deposit has been paid in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy at a time when– (a) … (b) section 213(3) has not been complied with in relation to the deposit.
Therefore, if a landlord or agent fails to protect the deposit before the deposit ceases to be retained under the scheme, then the only way section 21 can be served is by returning the deposit in full or agreeing to deductions:
(2A) Subsections (1) … do not apply in a case where— (a) the deposit has been returned to the tenant in full or with such deductions as are agreed between the landlord and tenant …
It is worthy of note that the requirement to return the deposit in full is reliant on the scheme following the procedure set out in paragraph 5A of Schedule 10. This means the scheme must do the following:
- serve a notice 14 days before determining whether the deposit should be un-protected or not
- after 14 days, determine the deposit
- if the scheme decides to un-protect, serve a notice on both landlord and tenant, which must specify the date the deposit will be un-protected and that date must be at least three months (from when the 14-day notice was delivered)
- the notice to un-protect the deposit must be served at least two months before the deposit is to be unprotected
If the scheme fails to follow this procedure, it is respectfully submitted the deposit has not been unprotected and will remain protected throughout. As a result, a section 21 notice can be served without the need to return in full.
However, as highlighted at the beginning, the landlord or agent must not be in any breach of the rules at a time section 21 is being served. Any notifications needed by the landlord or agent should be done to the scheme before service of section 21. Otherwise, if the scheme has followed the procedure correctly and the landlord failed to act, the un-protecting of the deposit is deemed as the receipt of a new deposit, which will have failed to have been protected and therefore, no section 21 can be served until the deposit is returned in full (or agreed deductions).
In addition to an inability to serve section 21, the usual penalty of between one and three times the deposit will also be payable should the tenant seek the penalty.
The landlord protects the deposit on day five after first receiving it. It is protected with an insured scheme, and the initial fixed term was for one year.
Before the term ends, the scheme requests information from the landlord about whether the tenancy has gone periodic or a new tenancy has been granted.
The landlord fails to respond and does nothing.
The scheme then un-protects the deposit following the procedure outlined above.
Three years after the fixed term ended, the landlord decided to serve a section 21.
In this case, the deposit must be returned in full to the tenant (or agreed deductions), and then a section 21 served. It will be of no benefit to the landlord to re-protect the deposit at this late stage.
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