Rent deposits – filling in the gaps
Cases seeking statutory payments for failure to follow the rules covering private tenancy deposits have thrown up some interesting and difficult issues, and variations in awards
With all the major work-shaking events that are at present going on around us, it is easy to overlook the smaller things, which may, nevertheless, still influence us. For example, on the Brexit/Trump scale of 0-10, the Tenancy Deposit Schemes (Scotland) Regulations 2011 (SSI 2011/176) might, on the face it, rate a 0.00001. Yet the scheme significantly impacts on landlords and tenants in Scotland’s residential private rented sector, and could, in the event of failure to comply with the regulations, result in landlords becoming liable to pay over to their tenants a sum not exceeding three times the amount of the tenancy deposit.
In a case where the monthly rent is, say, £1,560 (based upon three students sharing a flat, each paying £125 per week), the maximum penalty for non-compliance with the regulations would be £4,680, with the money going to the tenants. Many of those tenants will be students. This sanction is intended to deter non-compliance with a statutory scheme which is intended to regulate the private housing market and provide enforceable protections to tenants against non-compliant lessors.
The case of Russel-Smith v Uchegbu  SC EDIN 64 related to a dispute regarding a landlady’s admitted failure to lodge the deposit in an approved deposit guarantee scheme. Eventually, once the court action had commenced, this requirement of the regulations was complied with, but there was another failure on the part of the landlady in relation to the provision of information (under regs 3 and 42 of the 2011 Regulations) to the tenants. This note however, focuses on issues arising out of the summary application raised against the lessor by three of her four co-lessees.
For reasons which were unknown to the sheriff, one of the co-lessees, Marc Fitchett, chose not to participate in the action. Notwithstanding this, the court proceeded by assessing the level of the penalty according to the deposit amount, adding a weighting to factor in the length of time the deposit had spent outwith an approved scheme.
Given Marc Fitchett’s non-participation in the action, a problem was posed for the sheriff in relation to the quantum of the sanction. As Sheriff Welsh noted at para 6: “Only three of the four tenants under the tenancy make this application. I do not know if Marc Fitchett has waived his right to apply for sanction. He can apply up to 31 October 2016. However, if he did, the landlady could not, in my opinion, be sanctioned twice. The scheme does not provide for that.”
Clearly, this could result in some prejudice to the fourth tenant, as by not joining in the action raised by the other three the fourth tenant would lose out not only on the financial compensation at the time of the initial claim, but any further right of his to exercise this claim. Such is the nature of the doctrine of res judicata.
Res judicata, broadly stated, concerns circumstances in which pursuers are barred from continuing litigation where there has already been final judgment. It carries an implication that all losses arising out of a single incident ought to be raised at the same time: Smith v Sabre Insurance  CSIH 28; case note at www.brodies.com/node/1996. The sheriff in Russel-Smith uses the term to describe the situation regarding Marc Fitchett in that once an order is made in respect of the three co-tenants, the matter is res judicata as against the landlady, and accordingly prevents Marc Fitchett from exercising a claim against her.
Russel-Smith perhaps illuminates – in its particular statutory context – a particular quirk of the res judicata doctrine, whereby in trying to protect the defender from future litigation where a decision has already been made, prejudice actually crystallises instead on one (or more) persons who might have been potential pursuers.
The court in Russel-Smith was robust in terms of addressing the issue of res judicata. The sheriff refused to reduce the award to the three pursuer co-lessees pro-rata by 25% (so as, it had been submitted for the defender, to reflect non-participation in the action by one co-lessor). This was because regardless of the course of action taken, and notwithstanding that an award could be made to the three tenants, the effect of that award would be to prevent the fourth tenant from having an exercisable claim against the lessor. The sheriff was therefore moved to award the full amount to the three co-litigants, thereby preserving a right of the fourth tenant to claim against his former co-lessees for a 25% share of the award, an unwelcome Damoclean sword for the three successful litigants. Such a claim, it is fair to presume, may be pursued as a small claim, whilst an action under the Tenancy Deposit Scheme Regulations requires by reg 9(2) to be raised by summary application during or within three months of the termination of the tenancy.
In terms of resolving the potential inequities which might result from the blocking of any further claim on the ground of res judicata when an otherwise viable claim under the 2011 Regulations is not exercised at the same time as other claims (for example, where three co-lessees move on to another shared flat together and do not feel inclined to search out their former flatmate who has gone elsewhere), the judgment in Russel-Smith does certainly assist in granting another opportunity to claim to an initially absent party.
However, as has already been referred to above, a distinct possible downside emerges out of the relative fluidity which the approach of Sheriff Welsh gives to the tenants to achieve a resolve for them collectively. Without knowing the rationale of the fourth tenant for not joining in the initial claim, it could speculatively be said that the judgment in Russel-Smith appears to offer such a tenant the right to piggyback, as it were, on the efforts of his fellow tenants in the initial litigation after he or she had perhaps refused to be involved in that process.
The policy and statutory agenda behind the regulations is to address the problem of landlords unfairly misusing tenancy deposits, and to protect against the landlord holding the deposit and then becoming insolvent. However, it is arguable that the effect of the judgment in Russel-Smith is to create scope for tenants making claims against one another in the aftermath of a judgment against a landlord, which surely complicates the horizontal relationship between co-lessees, as well as distorting the vertical relationship between tenant and landlord (see generally, McAllister, Scottish Law of Leases (4th ed) (Bloomsbury Professional, 2013), 555-558).
Given that one of the primary aims of the Tenancy Deposit Scheme Regulations is to “ensure that deposits are returned quickly and fairly, particularly in the event of a dispute” (McAllister at 555), the judgment in Russel-Smith appears to complicate this approach, given that the sheriff proceeded in such a manner as to give the fourth tenant the opportunity to claim against his former co-lessees, thus adding a potential extra dimension to the dispute process surrounding the deposit. Whilst it is correct that the matter as regards the landlady has been resolved by Russel-Smith, the equity of the approach adopted by the court remains far from unquestionable. Now we are faced with the question of whether the matter is truly decided if the full losses have been awarded to the claimants, but there exists a right of one claimant to derive his share of the sum at a later date.
Identity of the parties
The use of res judicata in the context of Russel-Smith denotes that once a judgment is given, the effect is to bar Marc Fitchett from claiming against the landlady. However, it is worth examining whether for the plea of res judicata to apply, the parties must be identical. In Jenkins v Robertson (1867) 5 M (HL) 27 an action was raised to question the competence of an appeal by one of three pursuers seeking declarator of a public right of way. In the action of declarator, the verdict obtained by the pursuers was set aside by the court and a new trial granted. In this second action, raised by the other two pursuers against the same defender, the decree of absolvitor in the previous action was recognised as being the result of a compromise, and so could not be used to support the plea of res judicata.
Lord Colonsay (at 35) in this regard made some interesting comments on the considerations of the court, noting that: “What we look to in such a case is, whether the interest has been fairly represented. If it has been fairly represented, then that interest is for ever concluded by the verdict and judgement. But it is a different matter if, when an action of this kind having been instituted, something is done which interferes with the ordinary course of justice, and limits the question which is tried.”
This comment seems to distract attention away from whether the parties in the litigation are necessarily the same, and rather focuses on the relative interest which the case has sought to discharge. If this interest has been served, then the matter will indeed be res judicata. However, the situation of Marc Fitchett would appear to come down on the side of an interest which had not been “fairly represented”. Lord Colonsay further comments: “I think that all our authorities and the dicta of the Judges go to this, that where a case is tried in reference to an interest, and that interest has been fairly represented, others who stand in the same interest are not entitled to renew it.”
Thus, the primary consideration in determining whether a matter is res judicata is whether the relative interest has been served, rather than the identity of the parties.
Calculation of the penalty
The mechanism for calculation of the penalty in Russel-Smith deserves some attention in terms of its ingenuity. In earlier case law regarding tenancy deposit schemes, the courts began by awarding the pursuers the full three-month penalty. In Fraser v Meehan 2013 Hous LR 78, the sheriff court held that an award of three times the deposit amount should be made to the tenants for the landlord’s failure to return the deposit on termination of the lease. The court was concerned with the submission that the landlord had not paid the deposit to a scheme administrator of an approved tenancy deposit scheme, and had not provided the pursuer with information that he was entered on the register of landlords maintained by the local authority. Despite the defender’s claim at the termination of the tenancy that he was entitled to retain the deposit due to damage caused to the property by the pursuer, the averment that the defender had failed to pay the deposit to a registered scheme administrator was successful, and the court was minded to award the pursuer the full amount of three times the original deposit.
A development towards awarding lower penalties can be seen in Jenson v Fappiano  SC EDIN 6, where the landlord failed to pay the deposit into an approved scheme or to provide the tenant with information required under the 2011 Regulations. The sheriff commented that the landlord’s ignorance of the regulations could be no excuse for his failures. However, he took account of the fact that the landlord had paid the deposit into an approved scheme as soon as he was aware of the requirement to do so, which seems to suggest that where the court is aware that the landlord has not intentionally withheld payment of the deposit into an approved scheme, the award in favour of the tenant could be expected to be pitched at the lower end of the scale. The award in Jenson was one third of the deposit amount; which was said to be consistent with the “quality of non-compliance and its consequences in this case” (per Sheriff Welsh at para 18). It appears, therefore, that the court does have some discretion to fix a lower penalty; this however, is not derived from the landlord’s lack of knowledge of the regulations, but rather from the degree of non-compliance and any attempt of the landlord to mitigate this.
The approach in Russel-Smith focuses instead on the proportion of the lease’s period for which the deposit was unprotected, adding a weighting factor to reflect the landlord’s fault. Declining to use the maximum sanction as a starting point, discounted by any mitigating factors, Sheriff Welsh at para 9 adopted a two-stage process towards the calculation of the penalty. First, he adjusted the full sum of the deposit so as to be pro rata of the number of “unprotected” days out of the term of the tenancy:
“In my judgment there are two broad aspects to the sanction… First, the lease lasted 334 days, for 270 days of which the deposit was unprotected and the tenants deprived of protection from the scheme and the proper information. In my judgment, to mark the fact that the defender breached the regulations for a sustained period of time which subjected the tenants and the deposit to a risk the regulations are designed to avoid, the proportionate and appropriate starting point for sanction in these circumstances is £1,550 divided by 334 multiplied by 270. This produces a figure of £1,253.”
Then he assessed what might be termed the landlord’s culpa element:
“Secondly, to that sum I will add a weighting to reflect the fact that the landlady was repeatedly officially informed of her obligations and still failed to comply. I do not accept the suggestion this was wilful defiance of the regulations. I am more inclined, on a balance of equities, even if finely judged in this aspect of the case, to accept the submission that the defender was dilatory in attending to her obligations to protect the deposit and advise the tenants of their rights rather than in wilful defiance of the purpose of the scheme. In assessing this aspect I also weigh in the balance the fact that no actual prejudice occurred and in the final analysis the purpose of the regulations was not defeated and the deposit was returned to the tenants, in full, without dispute. I also take into account the early admission of breach in these proceedings and the responsible way the defender has remedied the situation through her agents. I had the benefit of seeing the defender during the proceedings and while it may be said; ‘There’s no art to find the mind’s construction in the face’ [Macbeth, Act 1, Scene 4], I am satisfied the assurances given by [her solicitor], that she deeply regrets the position she now finds herself in, are genuine. For all these reasons, I will set the financial penalty to reflect this second factor, at £600.”
The maximum possible penalty would have been £4,650, meaning that under Sheriff Welsh’s two step approach – with the first stage “deprivation of protection” element having been set at £1,253 – the maximum stage 2 culpa element would have been £3,397.
The determining factor in Russell-Smith appears to be that the deposit and the tenants were subjected to a risk “the regulations are designed to avoid”, due to being held outwith a registered scheme, and as such warranted a calculation based on how long that situation persisted proportionate to the length of the tenancy. The merit of this approach is found in that the calculation method, being based on objective interpretation of how long the deposit lay unprotected, results in a discounting mechanism which is far easier to use to calculate a fair award than the approach in Fappiano. This is because basing the award on the relative risk to the tenancy deposit as a direct result of the landlord’s actions enables a more scientific approach to be adopted, rather than attempting to discern the relative intention of the landlord in refusing to lodge the deposit in a scheme, as was seen in Fappiano.
Private residential tenancies – a divergence?
On 22 April 2016, the Private Housing (Tenancies) (Scotland) Act 2016 received Royal Assent. It is currently subject to commencement. Much necessary infrastructure for the new statutory tenancy regime created by the statute requires implementation, and full commencement may take some time. Under part 2 of the Act, the landlord is required to provide certain specified information to the tenant. In the event of the landlord failing to do so, the tenant may make an application to the First-tier Tribunal, which has the power to impose sanctions. By s 16 the landlord may be required to pay “the person” who made the application an amount not exceeding, in specified cases, six months' rent. Subsections (6) and (7) provide:
“(6) In a case where two or more persons jointly are the tenant under a tenancy, references to the tenant in this section are to any one of those persons.
“(7) In subsection (2), 'rent' means––
(a) the amount that was payable in rent under the tenancy at the time that notice of the application was given to the landlord, and
(b) in a case where two or more persons jointly are the tenant under the tenancy, the amount mentioned in paragraph (a) divided by the number of those persons.”
Section 5 of the 2016 Act has the effect of extending references in other enactments to tenancies and to connected expressions so as to cover private residential tenancies under the 2016 Act (unless the contrary intention appears). Accordingly, if Sheriff Welsh’s analysis in respect of res judicata in the context of tenancy deposits is to be followed, there will be the situation in which the First-tier Tribunal, which is to inherit the jurisdiction of the sheriff court in respect of private residential tenancies, will apply one rule in respect of rent deposits and another, which does not appear to accommodate res judicata, in respect of specified information.
In either case, professionalism and best practice are the landlord’s best safeguard.
Matthew Nicol is a final year LLB student at the University of Aberdeen