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Yes, it is illegal.
It means he can't serve a S.21 notice on you.
It does not invalidate the agreement, but he can't serve a S.21 notice on you until its served.
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Yes you can claim x3 your deposit in compensation, plus return of the deposit.
You need to write and set out your losses and request compensation within 14 days of the letter of claim, or say you will go to Court within 14 days. You should make sure you send this signed delivery and keep a copy.
If they do not compensate you then you can issue proceedings in the County Court. You can either do this online at: www.moneyclaim.gov.uk or by completing form N1 https://www.gov.uk/government/publications/form-n1-claim-form-cpr-part-7
and take it to your local County Court.
The Court will then issue a claim which a copy will be sent to the Defendant who will have a limited time to defend it, if not you can enter Judgment and enforce.
If the claim is for £10,000 or less it will be a small claim so you will not need legal representation. Over this value you would need representation for trial.