Opinion: the case of an uncashed cheque raises many important questions

With the recent publication of the Government’s policy paper, “A Fairer Private Rented Sector” here comes more uncertainty for landlords when it comes to the unfortunate situation where a landlord needs to evict a tenant. A recent legal eviction case, in my view, raises some issues that need answers.

Gul v Bilal (2021)

The case of Gul v Bilal involved a tenant eviction, issues around tenancy deposit protection, the section 8 and section 21 processes, and the non-cashing of a presented check.

Should a landlord fail to protect a tenancy deposit in one of the approved schemes, within the 30 days allowed, then not only is the landlord subject to a penalty of up the three times that deposit, and on the renewal of that tenancy, he or she cannot serve a valid section 21 notice.

One get-out-of-jail-free card with this is that according to the legislation, a valid section 21 notice can be served, providing the deposit monies are returned to the tenant in full before a section 21 notice is served.

Gul v Bilal (2021) is a county court case, so cannot be taken as binding on other cases, but to my mind it does raise some interesting and vital issues, especially given that landlords may no longer be able to use the section 21 eviction process if the proposed changes become law, which looks likely.

The case revolved primarily around the question of whether landlord Mr Gul’s action of presenting Mr Bilal with a cheque amounted to returning the deposit, when in fact Mr Bilal said he never accepted it and never presented it to his bank.

If the action of presenting the cheque made the money available to the tenant, could this not be deemed to be legally returning the deposit? If so, following this action the landlord would be in a position to serve a valid section 21 notice, if not then he wouldn’t. This was the question facing the court.

The run-up to the dispute

The background to the case was that Mr Bilal was behind with his rent payments. Mr Gul served Mr Bilal with a Housing Act 1988 section 8 notice citing grounds 8, 10 and 11 (common grounds used for rent arrears). Unlike a section 21 notice – where the landlord does not have to state grounds (reasons) for eviction, and usually leads to an eviction without the need for a court hearing, section 8 always requires a hearing.

Grounds 8, 10 and 11 of Schedule 2 of the Housing Act 1988 are mandatory grounds. This means that the judge does not have discretion as to whether or not to grant possession, providing the grounds are met.

Unfortunately for Mr Gul, the tenant in his determination to avoid eviction came up with a couple of tactics that would help him do that: Mr Bilal counter-claimed against Mr Gul citing disrepair in the property, and also non-protection of the deposit, for which penalties would be due.

I’m not saying that there was no justification for what Mr Bilal was doing, just my observation that in many such cases counter-claims are actions sometimes used to delay or prevent an eviction.

Covid arrived and intervened in the hearing process, but in February 2021 the case was reactivated and notice was served for a directions hearing to take place. This is where the court gives instructions to the parties as to how they are to proceed and prepare their case.

However, just before the directions hearing Mr Gul presumably had second thoughts, and here I surmise, realising that taking the section 8 route for rent arrears, and subsequently receiving a counter claim against himself, he would probably have been better using the no-fault section 21 route.

There was however a major obstacle preventing section 21. That was the deposit that he had taken and not protected. He needed to use his get-out-of-jail-free card before service of the section 21 notice and that was to return the deposit in full, which by the way he had done by way of a cheque given by hand at the property to Mr Bilal in January 2020, when he served the original section 8 notice.

He decided to serve a section 21 notice, and waited for two months (the notice period) which expired just before the court hearing. Mr Gull then applied to have the court rely on the section 21 notice, which would mean he could bay-pass the section 8 proceedings.

A question of when payment is made

The question the judge had to decide was, could the landlord rely on his presenting a cheque, which was not cashed? Could it be accepted as having legally returned the deposit to the tenant, and so allowing the section 21 – the mandatory possession proceedings – to succeed?

Unfortunately for Mr Gul, the judge didn’t think so. The tenant argued that although he had been given the cheque he did not accept it, he did not accept the return of his deposit, and the landlord agreed that it had not been cashed.

The ruling

The judge agreed with the tenant that the deposit amount had not been returned, and the section 21 notice was therefore invalid. The court dismissed the application to use section 21 and directed that the claim proceed based on section 8 (rent arrears grounds) and to deal with the counterclaim. Costs for the direction hearing were awarded against the landlord because the judge argued the landlord’s section 21 application was last minute, which did not even consider the tenant’s claim, defence and counterclaim.

In making the decision the district judge had to rely on previous judgements that determined that (1) a section 21 notice would be valid only if served after a returned deposit had actually been received, (2) that a cheque would have to be accepted by the tenant to represent payment, and (3) if accepted, the cheque would have to clear, but if it did clear the deposit return date would be when the cheque was given and accepted.

So, in the Gul v Balal case these requirements had not been met in full. The District Judge therefore refused to allow the S21 notice to be relied upon and the original claim and counter-claim were directed for trial.

A similar case with a different outcome

The case of Andy Coltrane v Janice Day (2003) involved a section 8 rent arrears eviction where the tenant had given the landlord a cheque on the morning of the possession claim hearing.

In order to meet the mandatory possession grounds for section 8, the landlord needed to show that the tenant was two months in arrears – on the day of the hearing. Here again, the question the court had to decide was whether the cheque was to be deemed to have been paid when the landlord received it (on the morning of the trial) or whether the landlord would have to present the cheque at his or her the bank before the arrears were to be deemed paid in full.

At a hearing in September 2002 the tenant handed to the landlord a cheque for the full amount of the rent arrears. The landlord accepted the cheque and it was subsequently met when presented. The judge decided that the rent was unpaid on the day of the hearing and made out an order for possession. The tenant appealed.

The appeal outcome in Coltrane v Day

The appeal court determined in Coltrane v Day that delivery of a cheque was a “conditional” payment and if the cheque was subsequently cleared by the bank, and met in full, this was then deemed payment from the date of delivery.

This principle, the appeal court said, applied to ground 8. If the cheque cleared, the debt was deemed to have been paid when the cheque had been given.

So, the cheque had been delivered to the landlord just before the hearing and had been accepted by him. Further, he had been bound by his contract to accept as he had done with previous rent payments, and therefore the cheque had to be treated as payment of the arrears in full at the date of delivery, providing that it subsequently cleared through the bank.

The appeal court said that district judge at the first trial could have adjourned the claim to see whether the cheque cleared. The appeal court ruled that the judge had been wrong to make out a possession order. It was therefore set aside.

Lessons learned and issues arising

It is clearly unwise to rely on repaying a deposit by cheque before serving a section 21 notice unless it has been accepted, and preferably cleared through the bank.

Rent will not be deemed to be in arrears under the section 8 mandatory possession proceedings if a cheque for the arrears is given at the date of the hearing, accepted by the landlord and subsequently clears through the bank.

An interesting question would be, and I don’t know the answer, what if Mr Gul had repaid Mr Balal’s deposit through a back transfer directly into the tenant’s bank account?

Some general questions about section 8

In the light of the possible changes in the Government’s policy paper, “A Fairer Private Rented Sector” section 8 will be the only route available to landlords – effectively, if the suggested changes become law, and that’s far from settled, the assured shorthold tenancy (AST) will no longer exist, tenancies will be periodic from day one and effectively assured tenancies (AT).

This will certainly redress the balance of power from the landlord to the tenant and some would argue, tips the scales the other way – the tenant has full security of tenure. The Government has said that section 8 will be amended, adding more grounds and giving landlords more certainty, but it’s hard to see how this will be made to work in practice given the adversarial system of the courts – there will be no ground for possession equivalent to section 21.

Gul v Bilal raises an important issue to my mind: tenants can easily use tactics that, even in the worst cases of breach of contract, for example rent arrears, anti-social behaviour and damage to the property, certainly under the present regime, prevent or cause lengthy delays to eviction.

Filing a counter-claim is one major example of a delaying tactic. It is not easy for a landlord to disprove breach of contract for defects in the property. The hearing is usually adjured for a future hearing, perhaps 6 months down the line, pending expert reports, while all the time rent is not being paid and further hearing necessary – the process can drag on inexorably.

Further hearings mean more and more expense and if the landlord loses, he or she is paying the tenant’s legal costs. If the tenant has a barrister at public expense then he or she is unconcerned about the costs, but the landlord is really up against it, and the legal costs will certainly rack up.

Will the new system prevent these last minute payment of rent tactics, right up to the day of the court hearing, when the landlord has committed time and expense to get the case to court? Will the tenant then go on to get into arrears again, only to repeat the same process?

The courts are overstretched as it is. If every eviction is to have a hearing using section 8, how much delay will there be under the new system? Will the amendments to section 8 adequately deal with the problem of tenants using delaying tactics as above, and running up astronomical costs.

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