Returning Tenancy Deposits By Cheque- Considerations For Tenants And Landlords

Tenancy Deposit Protection: The Background

Landlords often take deposits from their tenants in the hope that this will discourage tenants from causing any damage to properties and motivate them to keep the properties clean and tidy. However, landlords often don’t properly understand the law in this area which is complex. This misunderstanding of the law can lead to certain hazards that landlords often miss when taking deposits from their tenants. These include:

1. Failing to protect the deposit in time, or to serve the deposit protection certificate correctly,
2. Failing to serve prescribed information in time or correctly,
3. Failing to complete the required information properly.

What are the consequences of mismanaging the tenant’s deposit?

Mismanagement of the deposit can cause headaches for landlords who are pursuing section 21¹ (sometimes called no-fault) possession claims because mistakes with taking a deposit can protect the tenant until the deposit is returned. For this reason, it is important that tenants familiarise themselves with the law in this area and know what to look out for, when dealing with deposits as part of a possession claim.

Additionally, tenants may be able to claim three times the value of the deposit for each instance where there has been a failure to protect² it (every renewal of a periodic tenancy being a new failure). These failures can mount up to massive claims where fixed terms have expired, and the tenancy has continued for several years thereafter. For landlords, it is therefore extremely important that they return the deposit as soon as possible to stop their liability from continuing to grow.

So what exactly happens when landlords fail to protect deposits in Assured Shorthold Tenancies³ (tenancies which are generally private and for a set period where the tenant has exclusive possession of their property)?

Methods of returning the tenant deposit

Once a landlord has discovered that they have made a mistake, the deposit can be returned with the consent of the tenant (or the relevant person who contributed to the deposit) in the usual ways. Any method of return can be used, but as deposits are required to be bound up in a deposit protection scheme, the most common way is for both parties to agree the return the deposit within the designated protection scheme. However, some tenants may not agree to the return and may actively seek to frustrate the return of the deposit where:

1. They are aware that their rights regarding protection of the deposit have been breached⁴, and
2. They are worried about a potential section 21⁵ claim and know that an improperly protected deposit can protect them⁶, or
3. They are aware that they can make a claim for between one and three times the value of the deposit in respect of each breach⁷.

Returning the deposit to the tenant by cheque

Where tenants do not consent to the return, and are not, for example, willing to share their bank details with the landlord, some landlords have attempted to make a return of the deposit by delivery of a cheque to the tenant’s address. A problem then comes about if the tenant does not actually cash the cheque and so receives back the deposit that is intended to be returned.

So, the question that comes up for many landlords, tenants and often for their lawyers trying to understand the matter after an attempt to return the deposit has been made by cheque is, can an effective return of the deposit be made by cheque and if so, has it?

The Renter’s Rights Bill – What does this mean for the return of the deposit to the tenant by cheque?

The current legal position creates some challenges for landlords, but possession can still be achieved if a landlord uses the section 8 possession procedure⁸. However, debates about the return of the deposit, the best method, procedure, and timings will become much more significant in the near future because of the proposed Renters Rights Bill which is currently working its way through the House of Lords. The draft of the Bill at the time of writing indicates that:

“(1) Where a tenancy deposit has been paid in connection with an assured tenancy, the court may make an order for possession of the dwelling-house let on the assured tenancy only if the tenancy deposit is being held in accordance with an authorised scheme. …
(5) Subsections (1) to (3) do not apply where—
(a) the tenancy deposit has been returned to the tenant in full or with such deductions as are agreed between the landlord and tenant…”⁹

(this may change before the Bill passes into law).

This means that being unable to return the deposit to the tenant could frustrate a landlord’s intention to retake possession entirely.

Can deposits be returned by cheque?

The leading case on this question is Richworth Limited v Billingham 2023¹⁰.

The first matter which was assessed in that case was whether there was some relevant difference between the requirement to “return” the deposit, (which is the technical requirement of the Act for a valid section 21 notice to be served¹¹) and the requirement to “pay” the deposit which is the term used throughout the rest of the Act¹². What this means is that, if the court had applied a strict interpretation to the term “return”, then it would need to be the same funds that were sent for the purpose of paying the deposit that would need to be given back to the tenant. This is relevant in deposit protection matters because those funds are held by the relevant deposit protection scheme and cannot be released without the consent of the tenant, whereas funds paid by cheque come from the landlord directly and can be sent separately. The court found that if they applied this strictly then they would have been required to hold that the precise cash, postal order, or cheque by which the deposit was first (quite possibly a long time ago) paid would need to be returned. The court therefore held that the terms “paid” and “returned” were identical which is sensible practically and means that in principle a cheque is a valid form of payment for the return of the deposit.

Authorities are clear that it has long been the case that the presentation of a cheque can amount to at least conditional payment (conditional on the cheque being honoured at the proper date)¹³. There is also authority for the argument that payment made by cheque is made on the date that the cheque is given¹⁴ (so it does not matter for the purpose of the return of the deposit, whether or not the tenant has actually cashed the cheque). For example, if I pay my tailor with a cheque, they cannot sue me for non-payment until they have at least attempted to present the cheque for payment and discovered that it is bad. This principle has also been applied in other authorities in a property context¹⁵. However, in the property context, the following condition was added:

“If he is sent a cheque… which it is not possible to have cleared… in time for the hearing, he can refuse to accept it. He should obviously do so promptly and return the cheque, otherwise he may be taken to have accepted it.”¹⁶

On this basis, the court concluded that it is possible to return a deposit by cheque provided that the landlord has either:

“express agreement to accept payment by cheque or of the imputation of agreement by the absence of rejection within a reasonable time from receipt.”¹⁷

However, just because the court found that it is in theory possible to consider the deposit returned this does not, in and of itself, mean that the cheque is returned. The court was very careful to detail that:

“As ever, the result in a particular case will need to be determined by the particular facts. … the “question of whether a deposit was returned” is a “factual question”. … it is a “fact sensitive exercise”.”

It is unfortunate that there is not further case law on this point to give clearer guidance about what facts are needed for what result, but it is a reflection of the fact that most landlords who are risk sensitive will not look to rely upon a section 21 notice which may or may not be valid and will instead find a more secure method of returning the deposit and re-serve the notice, or pursue alternative possession proceedings.

That said the case gives a helpful insight into some of the relevant considerations. In particular it highlighted that a tenant who receives a cheque from a landlord cannot simply ignore it and then wait until they come to file a defence to allege that the deposit was never returned because they chose not to cash the cheque and did not inform the landlord that the cheque had not been accepted.

Different scenarios for both landlords and tenants

So, what is the answer to the question I set out with at the start? Ultimately, as with so many legal issues the answer must be – it depends.

What are the considerations for landlords?

Generally, there are more secure ways to return a deposit to a tenant. I have previously had to instruct process servers to attend the tenant’s property and had to have them record themselves counting out cash into the tenant’s hands to effect and evidence proper return of the deposit. However, this method is extreme, and the most preferable option is to get the tenant on side so that they accept a consensual transfer of the deposit amount back into their account.

If this cannot be achieved there are technical arguments to rely on which show that return of the deposit amount by cheque can be a good return, regardless of whether the tenant cashes the cheque. If they intend to rely on this method landlords should look to provide cheques early, and in any case well in advance of serving notice. They should carefully record the details of how and when the cheque was sent, and they should prepare to have to persuade a court that the deposit was properly returned.

Landlords should be aware that they are unlikely to be able to rely on the accelerated procedure to achieve a quick and cheap possession.

What are the considerations for tenants?

Tenants should consider their position carefully on receipt of a cheque. It is not enough to sit on the cheque, and refuse to acknowledge it. It goes without saying, but it is always a very bad idea to be dishonest or suggest that a cheque was never received when in fact it was.

Tenants should make clear to their landlord if the cheque is refused. It is not clear whether the court will hold the deposit returned if the tenant refuses to accept the cheque unreasonably, but a sensible tenant would be well advised to make clear the reasons for refusing a cheque when doing so.

Tenants may be concerned that acknowledging receipt of the cheque in this way might tip off the landlord who will then look for other methods of returning the cheque. This is balanced against the possibility that the court may hold a cheque implicitly accepted for lack of reply as this will almost always be the preferable choice.

When to get legal advice and to better understand your housing rights

If any of the matters discussed in this article relate to your own situation, whether as a tenant or as a landlord, and you would like to explore your options then please contact our housing team specialists on 0330 822 3451 or through the contact form on this page.