Court of Appeal decision made on when is a payment rent and when is it a deposit

by Tessa Shepperson

18:45 PM, 23rd April 2013
About 7 years ago

Court of Appeal decision made on when is a payment rent and when is it a deposit

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Court of Appeal decision made on when is a payment rent and when is it a deposit

Newsflash from Tessa Shepperson of Landlord Law.

There has been an important Court of Appeal decision on tenancy deposits.

In the case of Johnson v. Old the tenant claimed that the six months rent she had paid in advance was actually a deposit which the landlord had failed to protect. Therefore (she argued) he was in breach of the tenancy deposit regulations and the section 21 notice he had served was invalid.

This argument was successful at the first hearing but not at the second hearing, which was an appeal to the Judge. The case then went to the Court of Appeal – and we have just learned that the landlord has won the case.

So you should now be safe in accepting rent in advance, if your tenant fails to pass referencing.

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Comments from Mark Alexander

When I first heard the outcome of this case I got all excited as I thought it could spell the end of the Deposit Protection minefield which all landlords and letting agents can so easily fall foul of. Great I thought, I will just take rent in advance instead of deposits and continue to charge my tenants monthly. It’s not that simple though. If you read the judges decisions, one of they key points in this case was that Mr Old accepted 6 months rent up front. If the landlord had continued to collect rent monthly the six months rent would have been a deposit and not rent in advance. One of the key points in the case was that if the tenant (Oldfield) had been asked to continue to pay monthly rent during the six month period the reply would undoubtedly have been, I have already paid in advance for this month. In laymans terms, I take this to mean, “you can’t have your cake and eat it”. Therefore, if you think this case will allow you to call deposits rent in advance, forget it, that will not work.

The more I think about the case, the more questions pop into my mind. What if it had been a 12 month AST and only 6 months advance rent had been paid? At the end of month one, could the landlord reasonably insist upon another months rent being paid to top the rent in advance back up to six months? If this was allowed, presumably it would not be allowed after month 6 of a 12 month tenancy?

I am still looking for a better alternative to taking deposits. I’m getting there but the price isn’t right yet. Ideally I’m looking for monthly rent on the due date whether the tenant pays or not and insurance to indemnify me of and damage caused by the tenants to my property and cleaning of properties post tenancy. All of this is available but it comes at a cost which I can’t justify.

The search continues, in the meantime we either take a deposit or we take our chances. Either way there is a risk, especially if we fall foul of deposit protection legislation and I suspect a lot of landlords and letting agents will come a cropper on this.

 



Comments

Tessa Shepperson

13:23 PM, 25th April 2013
About 7 years ago

Perhaps I had better add a bit of clarification. This case is not about landlords being able to avoid the deposit regulations.

What it means is that if you have a tenancy where rent is payable by £1, 000 on 1 Jan, 1 Feb, 1 Mar, 1 Apr, 1 May and 1 June - if instead of that you just take £6,000 on 1 Jan and then don't expect the tenant to pay anything more until 1 July - that payment of £6,000 is rent and NOT a deposit.

Lots of landlords and agents take rent in six months chunks in advance rather than on a month by month basis, for example where the tenant will not pass referencing.

If you do this, this case means it is unlikely (if not impossible but we never say impossible in law as odd things happen) that you will unexpectedly find that that payment was really a deposit which needed protecting.

Thats all.

Puzzler

15:23 PM, 25th April 2013
About 7 years ago

I have been advised that if you take the 6 months rent in advance then the rental period is 6 months with all the implications such as notice period (!) and future payment periods.

Tessa Shepperson

15:36 PM, 25th April 2013
About 7 years ago

Thats almost certainly correct.

This case is about tenancy deposits, not about the implications of taking rent in advance on the subsequent periodic tenancy.

That is an issue which was not before the court so is not mentioned.

Robert M

16:34 PM, 25th April 2013
About 7 years ago

It will come as no surprise to some (and Industry Observer in particular) that I have a variation on this. With some twelve month student lettings I take a deposit (say £300) and register this. In addition, I may take (say) four months rent in advance and then the student pays monthly month 2, month 3 etc. However, no rent is payable in months 10, 11 and 12 as this was paid in advance. The agreement is fixed 12 months. There is no possibility of a periodic extension. Also the payment pattern is fixed and explained up front in the written tenancy agreement. It will be interesting to see how this fits into this ruling (if at all!).

Edwin Cowper

16:34 PM, 25th April 2013
About 7 years ago

Simples???

Why not use a commercial agreement (used everyday) which is called a Rent Deposit agreement and collect separately a Deposit and make it clear it is a deposit for the state of the property

The rent deposit deed always states that the rent must be paid on due date and if it isn't the rent is taken out of the money deposited.

Is this too simple ??? I don't think so. It seems to me that people are trying to re-invent the wheel

Industry Observer

16:53 PM, 25th April 2013
About 7 years ago

@ Robert

Interesting will investigate and take advice for you.

Can I clarify you said may take 4 months tenants then pay months 2,3 etc (what happened to month 1 I assume you meant 1, 2 and 3?) and months 10 - 12 are covered by the initial payment - I assume you mean 9-12 if 4 months was taken.

Assuming that you took 4 months up front I think that would have to cover the first four months. Tessa has just answered a similar question (12 months fixed, 6 months paid up front but to cover the LAST 6 months) and she thinks that is dodgy and I agree.

Yours is a variation on the take 6 months up front but ask the tenant to start paying the normal instalment in month 5 so you are always carrying 2 months plus the deposit. As I understand it, others disagree but for once I think I am with the majority!) the Johnson decision has made it clear that if money is collected during the fixed term monthly for months where money is already held, that that means an increased deposit. Probably the net surplus left from the initial payment and being carried forward.

I'll let you know what others say

Industry Observer

16:55 PM, 25th April 2013
About 7 years ago

@ej Cowpeer

Simples? Like all thing simple and too good to be true I think this is.

Money held for the discharge of a future obligation of the tenant is clearly defined as a deposit. What makes your Deed outside of this arrangement what you call the piece of paper doesn't matter, the purpose and possible future use of the money does.

If it is to dischage an obligation of the tenant - pay rent, cover damage etc - then it is a deposit. Johnson has now made clear that this must be clarified in the agreement in terms of rent actualy in advance.

Robert M

17:19 PM, 25th April 2013
About 7 years ago

IO On moving in (or just before) they pay four months rent. This comprises the normal rent for month one and (in effect) the rent for the last three months of the agreement paid in advance. So, assuming a calendar year tenancy, they pay 4X in 1 January, 1X 1 February, 1X 1 March etc with a final payment 1X on 1 September. They then leave on or before 31 December having paid the last three months rent in advance.

Industry Observer

19:20 PM, 25th April 2013
About 7 years ago

Robert

The whole key to this is how the rent and the periods the up front payment cover are expressed in the agreement. I have to say at this stage I think you are in difficulty if you collect 4 months before they move in, use that for january and then collect rent for Feb, March etc so you are carrying forward the other three months to use at the end. This is a payment held as security for that obligation and not discharge of the actual obligation itself.

Far as I can see those three months unspent have to be a deposit, but am still researching for you.

But I fear the worst.

Edwin Cowper

0:15 AM, 26th April 2013
About 7 years ago

But it doesn't matter if it is a deposit under the act does it?

All you do is put the money on deposit as rent, and the obligation to pay rent still exists monthly under the Deed and the Tenancy Agreement. The document (a Deed ) has been signed by the Landlord and the Tenant. So in default of payment of a month's rent by T, the L merely applies for payment from the Deposit Scheme, confirms no rent paid , produces the original deed, and after T has received notification, the Deposit Scheme provides the payment. Annoying but effective.

There has been some mention on this site of figures greater than a certain sum having an adverse effect, but how is that going to work adversely in this case against the Landlord? The money is on deposit. As the earlier corresponmdent said, it is does not matter what it is called, it is the effect. So theres no loss in calling it a deposit, and depositing it is there?

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