Assured Shorthold Tenancies and Section 21 Notices: Should Landlords Return Tenancy Deposits by Cheque?

Should landlords return tenancy deposits by cheque? The safest answer is, “no”, particularly if the landlord could return the deposit by another method such as by bank transfer into the tenant’s account.

In the recent County Court appeal of Richworth Ltd v Billingham [2023] EW Misc 8 (CC), His Honour Judge Luba KC held that the tenancy deposit had not been validly returned to the tenant before the service of a Section 21 notice to terminate an Assured Shorthold Tenancy (“AST”) and the order for possession previously granted was set aside.

In the case, a cheque for the tenancy deposit was sent to the tenant on 26 April 2022 and a Section 21 notice was served on 6 May 2022, but the landlord failed to consider the limited number of working days between sending the cheque and serving the notice given there was a bank holiday. 

The Judge considered that there may be circumstances in which a landlord had returned a deposit by delivery of a cheque to the tenant even if that cheque was not cashed, but this was a question of fact in each case. Therefore, an uncashed cheque may, or may not, be capable of constituting the return of a tenancy deposit depending on the relevant facts.

This is an important consideration for landlords because non-compliance with deposit protection requirements can invalidate a Section 21 notice.  If landlords have any concerns surrounding compliance, they should consider returning the tenancy deposit before serving a Section 21 notice on their tenant to mitigate this risk.

Practical Implications

1. Where possible, landlords should try to avoid returning tenancy deposits by cheque. If landlords have no alternative option however and intend to return a tenancy deposit by cheque prior to serving a Section 21 notice, they should seek their tenant’s express prior agreement to this (if possible) or obtain confirmation from their bank that the cheque has been cashed before serving a Section 21 notice. It may also be possible to incorporate a term into new ASTs to deal with such a situation.
2. Tenants, however, should not rely on their failure to present a cheque to their bank as a guaranteed defence to a claim for possession, because it may be deemed that the cheque was returned to the tenant by the landlord even though it has not yet been cashed. The Judge in the Richworth case acknowledged that there could be circumstances in which, even if the tenant sends the cheque back to the landlord or disposes of it, that the landlord could be considered to have returned the deposit to the tenant. 
3. In the usual way, landlords should take care to ensure they comply with the deposit protection requirements at the outset of a tenancy. Failure to comply could expose landlords to a claim from their tenant for financial compensation (under Section 213 of the Housing Act 2004). Damages can be between 1-3 times the deposit amount.

Each case will turn on its specific facts and landlords may want to obtain legal advice before serving a Section 21 notice to minimise the risk of an unsuccessful possession claim which – given the current Court backlogs – could delay obtaining possession of their property by many months.

The landscape of the Private Rented Sector is set to change in the not-too-distant future if the Government’s proposed Renters (Reform) Bill is passed through Parliament. We are tracking the developments on our Essential Residential hub and our timeline: Evolution of the private rented sector.