10:28 AM, 5th October 2021, About 2 weeks ago 8
Landlords who fail to protect tenancy deposits and to serve Prescribed Information Forms correctly may be liable for a penalty. The minimum that can be ordered for each breach is one times the amount of the deposit and the maximum is three times. It is a harsh penalty if the only “offence” is to be a few days’ late in lodging the deposit or for a sufficient number of directors failing to sign the PIF, but it is the law.
Landlords who have slipped up may be on the receiving end of a claim from a lawyer or one drafted by a tenants’ advisory organisation seeking the maximum penalty of three times the deposit. Even if a tenant has left, apparently on good terms, and the deposit has been repaid in full, the landlord may receive such a letter.
It has come to my attention that some claimants’ solicitors also claim their costs and send what purports to be a “Part 36 offer” giving the landlord 21 days to accept.
For those not familiar with litigation, a “Part 36 offer” is a tactic to put pressure on the other party to settle. Suppose the claim is for three times the deposit. The solicitors may offer to settle at say one and a half times the amount of the deposit. By accepting a claimant’s Part 36 offer, a defendant would also have to pay the claimant’s solicitors’ costs up to that stage. They might ask for a suitably modest amount. After all, the lawyers have only had to take instructions and fire off a standardised letter. They will probably warn the landlord that the costs will be considerably higher if he does not settle and they take the case to trial.
The risk for a defendant in rejecting a Part 36 offer is that he is penalised if he does not beat it at court. In my example, if the court awarded 1½ times the deposit or more the landlord would have failed to beat the Part 36 offer. He would then be liable for:
(a) the claimant’s costs on what is called the “standard basis” up to the expiry of the time for acceptance of the offer;
(b) interest at 10% pa above bank base rate on the damages awarded;
(c) the claimant’s costs on an indemnity basis (higher than the standard basis) from the date the offer expired; and
(d) his own lawyer’s costs.
So our hapless landlord may consider he has a choice between (a) paying 1½ times the deposit plus modest costs or (b) risking going to court and possibly paying three times the deposit and substantially higher costs as well as having to pay his own lawyers.
In many, if not most, cases three times the deposit will be less than £10,000. This figure is currently the limit for small claims in England and Wales (it is £5000 in Scotland and £3000 in Northern Ireland). If my example case went to court it would be allocated to the small claims track. In such cases the tenant would almost certainly not recover his solicitors’ costs. It is only where the loser has behaved very unreasonably that the court will award more than limited fixed costs in a small claim.
Here is what landlords need to be on guard against. The law says that a Part 36 offer cannot be made in respect of a small claim. A purported Part 36 offer in such circumstances is a legal nullity.
There is a technical argument about whether a claim is a small claim before it is allocated to the small claims track. However, if the case proceeds it will be a small claim. In my opinion solicitors are taking unfair advantage by writing to landlords claiming costs and threatening them with increased costs if they do not settle. They know that at the end of the day the court will not award costs.
The moral of the story for landlords is that unless three times the deposit is more than the small claims limit in your jurisdiction, the Part 36 offer is a bluff. You will not have to pay the tenant’s solicitors’ costs if you lose.
I do not know how widespread this practice is and would be interested to hear from other landlords if they have received Part 36 offers in connection with a claim for breaching the deposit rules. Please don’t mention names of firms on the forum. If you or someone you know have been caught out and received what purported to be a Part 36 offer but you now realise wasn’t, please contact me at email@example.com.
If there is enough interest it may be worth investigating if landlords who have been scammed can recoup costs that would never have been awarded by the court. At the very least it would be good to put a stop to this slippery tactic.
Ian Narbeth | Consultant Solicitor | DMH Stallard LLP
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