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Tenancy deposits: buyer beware

30 Mar 2017

All landlords should be well aware of their obligations to place a tenant’s deposit in a government-backed tenancy deposit scheme. If they fail to so, the Courts can order them to pay the tenant up to three times the deposit. But fewer landlords may be aware that they can inherit liabilities to do with protecting deposits when they buy a property.

In Baptiste v Barham (2015), a landlord was ordered to pay one times the deposit to the tenant, as the deposit had not been protected within the required timeframe. The landlord had bought the property subject to the tenancy agreement in 2007. The tenant had paid a deposit when the tenancy was first granted in 2004 but the deposit was never protected. When the landlord bought the property, he renewed the tenancy, but also failed to protect the tenancy. Years later, a section 21 notice was served in order to take back the property at the end of the tenancy. But the landlord had to stop possession proceedings when the tenant raised as a defence the fact that the deposit had not been protected in a government approved scheme as required.

The tenant claimed for a financial penalty and the Court accepted that the landlord had acquired the obligation to protect the deposit and therefore ‘inherited’ the liability for failure to protect the deposit when he bought the property.

The case highlights how important it is that buyers acquiring residential properties with tenancy agreements check carefully whether the tenancy deposit rules have been followed. Otherwise they may face liability for financial penalties. In ordering the landlord pay one times the value of the deposit to the tenant, the Court recognised that the landlord was not a professional landlord and had not had a flagrant disregard of the rules. However the Court does have the discretion to order up to three times the value of the deposit. Ultimately, whatever sum ordered by the Court, such a claim is going to be a costly and time consuming battle for a landlord.

The case is a reminder of the caveat emptor rule - buyer beware. Buyers acquiring property subject to residential tenancies should always take specialist legal advice.

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