Can the Court Order the Release of Money from Tenancy Deposit Schemes?

In the context of possession claims brought by landlords against tenants, there is a divergence in judicial practice as to the release of deposit monies. Specifically, there are differing views as to whether a direction is suitable or ought to be made within an order for possession that pertains to the Deposit Protection Scheme paying out the deposit monies by way of partial off-set of the arrears of rent into which the tenant has fallen. This write-up briefly traces the legislative history behind the statutory provisions and offers some reasons as to why such a direction is appropriate and proper to be made at such hearings.

Prior to the introduction of a legislative footing for Tenancy Deposit Schemes, there was only a voluntary scheme which was set up by the Independent Housing Ombudsman in March 2000. This was not widely adopted and subsequently was closed down. Prior to this failed voluntarily scheme, there was no regulation to the common practice of landlords taking a deposit for shorthold tenancies.

The regime in relation to Tenancy Deposits was then codified with the introduction of the Housing Act 2004. Schedule 10 to the Act outlines requirements with which the schemes created by the appropriate national authority (in England, that is the Secretary of State) must comply. The Schedule also sets out provisions in relation to what happens upon termination of the tenancy.

There is a distinction within the 2004 Act between ‘custodial schemes’ and ‘insurance schemes’, with the former involving a scheme administrator holding the deposit monies within an account during the tenancy, and the latter involving the landlord themselves holding the monies until further disposition is required or requested.

Paragraphs 3 and 4 of Schedule 10 contain the pertinent provisions for custodial schemes. The key points are that at any point after the tenancy has ended, either the landlord or the tenant are permitted to apply to the scheme for release of the deposit. Either party may notify the scheme administrator that agreement has been reached, or that a court has decided that the deposit is payable.

Turning to potential justifications for the court ordering such a custodial scheme to pay out, the fact that Parliament have legislated such a scheme into existence in the first place is the starting point. The legislature envisaged the deposit being held to cover eventualities such as disrepair being generated by the tenant requiring expenditure to make right, or the tenant accruing arrears of rent. It would be illogical if the court were to resist directing such a payment, as arguably this frustrates one of the very purposes of the scheme being brought into being.

Schedule 10 paragraph 4(4) contemplates the situation where a court makes a specific, and final (that is, not appealed against, and the time for appealing has elapsed) decision that the relevant amount is payable either wholly to one party or partially split between both parties. There can be no more suitable grounds for such a decision as there being a monetary liability under the contract which remains unsatisfied; most commonly, this situation arises where there are arrears of rent owed to the landlord. Paragraph 4(5) sets out that within the period of 10 days following notification being given to the scheme administrator, they must arrange for this money to be paid out to the receiving party.

It therefore follows that the legislature has specifically contemplated and anticipated the scenario where the tenant falls into arrears and the deposit monies are to be used to offset those arrears. The court’s duty being to apply the law, it is a logical conclusion that the court ought to give effect to the legislative regime and direct the scheme administrator to arrange for this payment out.

Should the court be resistant to ostensibly making an order against a third party who is not a party to the proceedings, the ‘fallback position’ could be for practitioners to seek a recital to the order. Such a recital would record the intention of the court and act as an appropriate ‘signal’ to the scheme administrator that it is appropriate to release the monies upon application from the receiving party.