Deposit Problems on Tenant Changeover

2nd August 2021 Commercial Litigation

In the end of May 2021, the County Court at Central London heard an important case concerning a scenario that commonly occurs in shared houses or flats.

It is common practice in shared houses for there to be only one tenancy agreement covering all tenants, who jointly pay a deposit. The other option is for each tenant to have a tenancy of their room only but this has its own challenges. Over time, individual tenants may be replaced by new tenants who take up the obligations of the departing ones. Accordingly, when this swap happens, a new tenant usually pays the portion of the deposit originally paid by the departing tenant direct to that tenant, largely as a private arrangement between them. The incoming tenant then “inherits” the outgoing tenant’s deposit position. The swap may happen with or without the knowledge and/or consent of the landlord and one can easily see how the “churn” may occur several times over a period of a few years until at some point none of the original tenants remain in occupation and only replacement tenants live in the property.

This is the scenario which HHJ Luba QC had to consider on appeal in Sturgiss & Anor v Boddy & Ors [2021] EW Misc 10 (CC). The Court set out that the arrangement usually involves all tenants (a maximum of 4) deciding among themselves which room to occupy in the house/flat share and how to apportion their contributions towards rent, bills and the tenancy deposit. Often, one of the tenants collects everyone’s contributions and makes a single rent payment to the landlord.

Both landlords and tenants will be familiar with the arrangement, which many have experienced themselves during their student life, for example. Important questions of law arise in this scenario, which are often not even considered until something goes wrong.

In Sturgiss a claim was made by two of the former tenants for compensation for the landlord’s failure to protect the tenancy deposit in breach of section 213, Housing Act 2004. The two claimants were both replacement tenants and, in fact, by the time the claim was made in 2020, none of the original tenants remained in occupation at the property. All tenants in 2020 had become tenants as a result of numerous “churns” which had taken place with the landlord’s knowledge and consent at various points since the original 2004 tenancy.

The claimants alleged that they were entitled to compensation in the amount of 1 to 3 times the deposit amount paid for the property, in accordance with section 214, Housing Act 2004. The landlord had never protected the deposit as he had no obligation to do so in 2004 when the original tenancy commenced and he did not believe that he had to protect it at any later point as his position was that he had taken no deposits from any tenant since 2004.

DDJ Branfield had originally dismissed the tenants’ claim, however, this decision was overturned by HHJ Luba QC on appeal.

HHJ Luba QC considered the fundamentals of the relationship between the claimants and the defendant and found that it was clearly one of landlord and tenant. In reaching this conclusion the Court considered that on the facts the claimants had had exclusive occupation, for a term, at a rent and that both sides’ conduct had evidenced recognition of there being a landlord and tenant relationship. For example, a tenant had paid rent for a period during which they had vacated but failed to find a replacement, the landlord had provided tenants’ references and the landlord had sought to discharge his statutory obligations in terms of the condition and safety of the flat.

The Court found that on each occasion of a “churn” there was a surrender and a re-grant of a new tenancy despite the landlord not being actively involved in the “churns”. There was a prior arrangement between the landlord and the tenants that at the departure of a tenant “the property would be treated as, in effect, re-let to those remaining and the new arrival(s)”. While arrangement did not require the landlord to participate in the execution of the “churn”, this was “a structure of the landlord’s own making” and HHJ Luba QC stated that the landlord “can hardly be heard to complain if the law gives effect to what has been agreed through the medium of surrender and re-grant”.

Accordingly, on each “churn” a new tenancy had come into existence, which is an important point for the Court to clarify as landlords have legal obligations on commencement of a tenancy, for example the requirement to protect the tenancy deposit (and to provide the tenants with prescribed information, a How to Rent guide, gas safety certificates, etc. none of which was part of the Sturgiss case).

The Court applied the decision in Superstrike Ltd v Rodrigues [2013] 1 WLR 3848 where the Court of Appeal held that in certain circumstances a deposit taken at the commencement of an original tenancy may be treated as paid (again) and received (again) where a new tenancy follows immediately from an earlier one. HHJ Luba QC found that in Sturgiss the landlord must be treated as having been paid by each new cohort the deposit amount paid by the original tenants and each subsequent cohort. The Court stated that this was the only application of the law, which made sense.

In respect of the compensation payable by the landlord to the tenants, the Court rejected a suggestion that it should be apportioning the deposit in accordance with the specific tenant’s contribution; the liability was not capable of being severed in such a way. Therefore, HHJ Luba QC made an order for compensation to be paid to the claimants in reference to the full deposit paid for the property, as the co-tenants could have joined the claim had they wanted to. Compensation was payable in the sum of one time the deposit amount in this case.

This is an important decision, which may cause some concern to landlords who are involved in similar “churn” arrangements. There are questions about this decision as it could be argued that these changes are not new tenancies but actually novations of the original tenancy agreement with new parties being substituted on the same terms. However, that is now a matter that would need to go to the High Court or Court of Appeal and it is likely that HHJ Luba’s decision will carry weight in many County Courts. At least this decision makes the position very clear to landlords going forwards. In light of the decision in Sturgiss, landlords will want to be far more involved in such “churns” to ensure that they comply with their legal obligations on each re-grant of a tenancy.

The consequences of the decision in terms of there being a surrender and a re-grant of the tenancy on each “churn” are not limited to the landlord’s deposit protection obligations and will similarly require compliance with the requirements for gas safety certificates, prescribed information, etc. In addition to being exposed to claims or fines, landlords may struggle to recover possession of their property where breaches occur. Due to the nature of the arrangement, rectifying shortfalls may be complicated and landlords should seek specialist legal advice in this respect.

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Neli Borisova is a Solicitor located in Londonin our Commercial Litigation department

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