Can landlords return a tenancy deposit by cheque?
There are various reasons why a landlord of residential property might want to give a tenancy deposit back to the tenant. If the landlord wants the tenant to move out, early return of the deposit will help the tenant with getting together cash needed to secure new accommodation. Sometimes it is just a goodwill gesture. Sometimes the landlord may be concerned that they might not have properly protected the deposit with a government approved scheme – returning the deposit will allow the landlord to proceed with a serving a valid section 21 notice.
There is little doubt that a deposit can be returned to a tenant by cheque. Most landlords and tenants would accept that if the cheque is accepted by the tenant, and then successfully paid in by tenant, that will amount to return of the deposit.
But what if the tenant does not pay in the cheque? Has the deposit been returned, and can the landlord proceed with serving a section 21 notice. This was one of the issues considered by the court in the recent appeal Richworth Limited v Derek Billingham  EW Misc 8 (CC), which was heard by His Honour Judge Luba KC.
The background law
Chapter 4, Part 6 of the Housing Act 2004 deals with tenancy deposits. It imposes an obligation on a landlord to protect the deposit in one of the three authorised deposit protection schemes within 30 days of receipt of the deposit as well as serving deposit ‘prescribed information’. Importantly, section 215(1) provides that a section 21 notice may not be served where the requirements of deposit protection are not complied with. However, subsection 2A provides an exception to the rule where the deposit has been “returned” to the tenant.
Facts of the case
In this case, the landlord, Richworth Limited, wrote a letter to the tenant, Mr Billingham, on 26 April 2022 enclosing a cheque for £780, the full deposit paid in relation to the tenancy. On 5 May 2022, Richworth Limited’s solicitor wrote a letter to Mr Billingham stating “we are advised your deposit was returned to you” and enclosed a section 21 notice. The section 21 notice was served by a process server on 6 May 2022. Following the expiry of the notice, Richworth Limited commenced a claim for possession. On receipt of the claim papers, Mr Billingham filed a defence confirming receipt of the section 21 notice and the cheque but stating:
(1) he did not accept the cheque,
(2) he did not accept cheques due to previous bounced cheques,
(3) he did not cash the cheque and
(4) in any event, the bank account had since closed making the cheque.
Therefore, Mr Billingham claimed that the deposit was not “returned” to him as he did not receive the money. On the contrary, it was Richworth Limited’s position that they had “returned” the deposit by tendering and sending the cheque, whether or not it was cashed by Mr Billingham.
The judge’s decision
HHJ Luba KC found that the term “returned” under Section 215(2A)(a) “means what it says”. He stated that it “cannot sensibly mean returning only the precise cash, or the original cheque or postal order, by which the deposit was first “paid”. “It must mean…the return of the amount of money that the tenant had first paid or given and that the landlord had originally received”. HHJ Luba stated there is no dispute that deposit can be returned by cheque, the issue is whether a deposit can ever be returned by cheque where it is not cashed to the tenant’s account. On that question, HHJ Luba concluded that the presentation of cheque can amount to “conditional payment” and be the result of express agreement or implied acceptance due to absence of rejection within a reasonable time. In that case, the repayment date will be the date of delivery of the cheque where the date of “return” will be when the cheque is honoured. “If the cheque is presented and not honoured, there will have been no valid repayment or return of the deposit at that earlier date and the landlord will be unable to rely on the section 21 notice.” However, if the cheque is simply not cashed, and where the tenant despite accepting payment by cheque, sends the cheque back, will not prevent the landlord from reliance on the deposit being returned. HHJ Luba KC concluded by stating it is a fact specific question that depends on the circumstances of each case.
What does this mean for landlords?
For landlords, the first most important course of action on receipt of deposit is to ensure proper compliance with deposit protection requirements. In case of any non-compliance, the safest course of action is to return the deposit in full. When doing so, landlords should avoid returning deposit by cheque if it has not been expressly agreed with the tenant. Such acceptance should be in writing where possible to prevent dispute later. On the other hand, the tenant should communicate acceptance or non-acceptance of return of deposit by cheque as soon as possible on receipt of cheque returning the deposit.
Where the landlord has the option of repaying the deposit by another payment method, that is likely to always be a better option.
Disputes about deposit, and the return of deposits, are not likely to stop any time soon. When the Renters (Reform) Bill has completed its passage through parliament, depending on amendments made on the way through, when in its final form it may or may not transfer the current requirements of deposit protection (and sanctions for non-compliance) into the other routes of possession; the current version of the Bill would prevent service of a valid section 8 notice if the deposit has not been properly protected for almost all ‘grounds for possession’.
HHJ Luba KC noted that if the link between deposit protection and giving notice is retained, it may or may not do so in the same language as section 215(2A)(a) of the Housing Act 2004. The current text of the Renters (Reform) Bill contains one subtle difference from the current law, which would make a difference to how these types of case unfold. The current law provides that no section 21 notice may be given in relation to the tenancy where the obligations relating to the deposit are not being complied with. This means that the section 21 notice is invalid and by the time the matter proceeds to court it is too late for the landlord to remedy any problems. By contrast, clause 19 of the Renters (Reform) Bill as introduced to Parliament would substitute a new section 215 Housing Act 2004 which would prevent the court from making a possession order unless the deposit rules were complied with. This might mean that landlords could serve notice, wait to see if the tenant leaves voluntarily, and then remedy any issue relating to the deposit before starting a claim (or perhaps even any time before the date of the court hearing). That would be a subtle but significant reduction to the potency of the deposit protection rules.
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