In his article, ‘Unintended Consequences: What makes a Deposit?’ Trinity Housing, Business & Property barrister, Thomas Langley examines the case law and legislation surrounding deposits in property transactions.
Sale deposits are an ancient feature of the law of property. By contrast, claims or counterclaims under s. 214 of the Housing Act 2004 are rather more modern, and may be rather less familiar to property practitioners. In essence, where a landlord takes a deposit as security for a relevant tenancy, and fails to protect it by placing it in a suitable scheme or fails to provide relevant prescribed information, a tenant is entitled to an award of between 1 and 3 times the sum paid over:
The court must order the landlord to pay to the applicant a sum of money not less than the amount of the deposit and not more than three times the amount of the deposit within the period of 14 days beginning with the date of the making of the order
The amount is discretionary, but the minimum is not: the Court must make such an award. It is now fairly settled that the Court must award separate awards per breach – so where a tenant takes several distinct successive tenancies, failing to protect each might in principle attract multiple penalties.
Perhaps understandably, most cases concern relatively small amounts of money, and turn on whether money paid was protected and whether prescribed information was given. However, legally interesting questions can arise where the status of a deposit is in issue. As set out at s. 212(8):
“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for–
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.
This definition breaks down into the following elements:
- Money (NB non-money deposits are prohibited by s. 213(7))
- Which is intended to be held as security
- For the performance the of tenant’s obligations or the discharge of his liability
- Arising under or in connection with the tenancy.
Conversely, if it secures an alternative obligation or liability, such as an agreement to purchase the Property, or is a downpayment on the same, it does not qualify.
This aligns somewhat with the definition of a deposit in a property sale context. As set out in Workers Trust Merchant Bank v Dojap Investments [1993] A.C. 573 at 578, adverting to the earlier decision of Howe v Smith, a sale deposit is an earnest for the performance of the contract which is applicable towards payment of the purchase price and forfeit if the purchaser fails to complete.
Such deposits can be invalid where they operate as penalties rather than true earnests for performance. While there are some similarities with s. 212 deposits, they self-evidently secure different types of obligations, and tend in practice to be applied in quite different ways. Not least, sale deposits are very frequently paid with or just before the balance of the purchase monies, and there is no expectation of their being returned.
The leading case on defining a deposit for the purposes of ss. 212-214 is UK Housing Alliance (North West) v Francis [2010] Bus LR 1034. That was a sale and leaseback case, in which the property’s former owner (now tenant) sought to show that £37,500 payable to him in the event that he did not terminate the tenancy for a period of 6 years was a deposit within the meaning of the Housing Act. That claim failed, the Court finding at [9]:
Chapter 4 of Part 6 of the 2004 Act was intended to deal (inter alia) with the notorious abuse of landlords requiring deposits from prospective tenants but not keeping the sums paid in any separate account or refusing to repay such sums at the end of the tenancy. On the face of it, the Act is not perhaps likely to cover arrangements such as the one with which this court is dealing, namely sales by an owner with a lease back to him whereby he becomes a tenant instead of the freehold owner.
Johnson v Old [2013] H.L.R. 26 at [26]-[27] also confirmed that at an advance payment of rent was not a deposit as not being refundable, though one notes that Renters’ Rights Act 2025 has now limited the taking of rent in advance (ss. 8 & 9).
The Court will be concerned to discover what the true intention behind the payment of the monies was, and to examine whether that falls within the statutory purpose of protecting tenants. This intention may be subject to change over time, with attendant consequences for whether the sum constitutes a deposit (Lowe v Governors of Sutton's Hospital in Charterhouse (unreported, 28 October 2022 at [67]).
Recently, I successfully appeared in a dispute over whether a payment was s. 214 deposit. By way of background, the Claimants and the Defendant were friends, and the parties agreed that the Claimants would buy the Defendant’s house and dispense with legal formalities. Prior to doing so the Defendant would move out and the Claimants would move in. The Claimants agreed to pay a sum per month as rent for the Property until they could afford to buy it outright, together with another sum per month as a continually increasing deposit towards the purchase price, and (crucially) £25,000 as a “bond refundable on the completion of the sale of [the Property]”.
The parties also entered into a rental agreement referred to as an AST in respect of the Property. That document (a) mentioned nothing about a purchase of the Property (b) gave a figure of £1,400 for the rent without restriction (c) stated that there would be a deposit of £25,000 in respect of which the landlord agrees to pay back the deposit once the tenancy is over, as long as the tenant has not broken any of his or her obligations but did not expressly define what those obligations were (d) prohibited the tenant from making modifications to the Property. It was a pro forma document which incompletely recorded the parties’ agreement.
The Claimants paid the £25,000, moved in, and made modifications to the Property on the basis that it would become their own in time once they sold their own house and paid the balance. The £25,000 was not treated as or protected as a tenancy deposit.
After completion, and the application of the £25,000 to the sale price, the Claimants sued for an award of £150,000 on the basis that there had been two failures to protect the money, which they said had in fact been a tenancy deposit all along despite the fact that it was later credited to the sale price (one failure when the AST was signed, and another when it became periodic). The Defendant, by contrast, said that the money had never been intended to secure obligations due under the tenancy, and that the Claimants were estopped from claiming as if it was.
The County Court rejected that position, holding that the £25,000 was never intended to secure the obligations under the tenancy agreement, but rather that it was always intended as a pre-payment towards the purchase price. Had the Defendant attempted to retain the monies and failed to credit them to the sale price on the basis that the tenancy had been breached by doing unauthorised modifications to the Property, the Claimants would rightly have protested.
The AST had to be read in the context of the agreement for sale that had already been reached. Its somewhat generic provisions about the nature of the deposit had to be constructed accordingly. Interestingly, the Court held in the alternative to the argument on the construction of the agreement that the Claimants would have been estopped from claiming for an award due to their assurances and subsequent conduct, particularly given that the Court found that the Property had been transferred at a relative undervalue.
Some practical points from this case and the surrounding caselaw:
- Landlords and sellers can suffer from a lack of careful drafting. Although uncommon, rental purchase agreements are not unknown, particularly in some formulations of Islamic finance agreements. While they may potentially offer some convenience and protection for sellers there may be unintended regulatory consequences.
- Advisors may need to give thought to when any interest in property passed, and whether remedies such as specific performance or the exercise of a lien would be available in a given case.
- s.214 as presently drafted can be arbitrary. In this case it could have produced a very significant windfall for the Claimants in a situation for which (the Defendant submitted) it was obviously not intended.
- There needs to be cogent and careful analysis of what a given sum of money paid by a tenant is actually doing in a specific case. A s.212 deposit cannot be assumed. Rather, the language of the initial agreement will need to be analysed carefully in its surrounding circumstances, and consideration given to whether the intentions of the parties evolved over time.