So, we went to High Wycombe again today, for the re-scheduled hearing.
Left early, due to worries about the roads & the traffic, although we actually made very good time, & got there quicker than last time (took us ~2hours to get there today, a little less on the way back).
Got to Court, & found we had a different District Judge to last time - a woman, who had actually taken the time to read everything beforehand (unlike the previous DJ, who seemed to effectively go "Oh no! There's too much paperwork! It has to be re-scheduled!", back in November).
The DJ reminded me of Judge Judy. No nonsense, cut through the BS, straight to the point.
And she'd made her mind up before we even got in there...
Judge Judy - "I've had some time already to read through all the paperwork from both sides, & it seems to me that the claim & counter-claim have drifted from the core issue - the (non) return of the Claimants' deposit.
The main thing as I see it is Mr Landlord's letter to the Claimants of 19th January 2006, in which he told them that if they moved out by 31st January 2006 their deposit would be returned in full; and the Claimants' subsequent acceptance of these 'walkout terms'. This constituted a contract, and the deposit should have been returned. Everything else is irrelevant.
Mr Landlord, you cannot counter-claim, or make deductions. You had a contract with the Claimants, & they did their part of it, so you should have returned their money. The state of the house is not an issue. Deductions & charges cannot be made for alleged dirtiness, breakages, etc., when the Claimants were clearly living in what was effectively a building site, according to the photographs, and according to statements from various official independent witnesses such as the police (1), Transco & the HSE (2), The City Council's Environmental Health Dept (3), etc.
Claimants, you cannot claim for anything else, as you accepted Mr Landlord's 'walkout terms' without putting any kind of 'without prejudice' caveat in your reply to him. If you do want to still claim further damages, it then potentially opens the door for Mr Landlord's counter-claim."
Mr Landlord - "But..."
Judge Judy - "No. There is no defence. You must return the deposit."
Mr Landlord - "The wording of my letter though....surely, the
spirit of the law......"
Judge Judy - "No. There is no defence. I am ordering that the Claimants' deposit be returned in full, within 14 days, together with £x statutory 8% interest, £y court fees, and £z travel costs for coming to High Wycombe & back."
Mr Landlord - "What about my record?"
Judge Judy - "If you pay within 14 days, then you will not get anything on your record. If you fail to pay, however, then you will have a County Court Judgement (CCJ) against you, plus the Claimants could also then apply to have enforcement proceedings issued against you for not paying."
Us (outside court) - "YESSSSSSSSSSSSSSSSS!!!!!!!!!!!!!!!!!!!!!!!"
Whole thing took ~10 minutes, rather than the two hours the previous DJ said it would take.
WE WON!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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(1) "Mr Landlord" got the police involved, just before we moved out. He falsely claimed that we stole some drill bits & a tile cutter. Why we'd feel the need to do that, I do not understand. He also falsely accused us of criminal damage, as the replacement bathroom window he fitted cracked one day while we were all out at work. The local neighbourhood PC came round on the 31st January 2006, while I was in the process of moving out & loading the van, so I showed him round the "house", & told him the whole story. He said he thought Mr Landlord's accusations were "a load of bullcrap". Mr Landlord wrote to the police, afterwards, asking about their investigation. The local PC replied, saying that we were not suspects, that the case had been filed, plus said "the house looked like a building site". Mr Landlord included the PC's letter to him in his "Defence Pack" submission.
(2) Reports from visits they made due to the gas boiler fiasco.
(3) Reports from a visit they made at our request to investigate/inspect the general state of the "house".
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I've been to court over issues with landlords, and I've won, so I know the feeling. Well done! 
