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

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

18:45 PM, 23rd April 2013, About 10 years ago 43

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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.


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Robert M

1:36 AM, 26th April 2013, About 10 years ago

"If the landlord had continued to collect rent monthly the six months rent would have been a deposit and not rent in advance."

I'm not sure that Mark's comment here is necessarily correct. Reading the full report of the case it seems that the wording of the contract is important. My contract for a calendar year tenancy would say:

1) the term is 1 January to 31 December
2) the rent is £1,000 per month;
3) £4,000 payable on or before 1 January;
4) £1,000 payable on 1 February
5) £1,000 payable on the first of each month thereafter, with the last payment due 1 September.

I would content that this is a slightly less clumsy way of wording the intentions than that used by the landlords.

I accept that by continuing to collect rent 1 February and using the advance rent for the final months is a slight variation on the facts considered by the Court of Appeal. However, I remain as comfortable as I can having read the reasoning.

What would my tenant say if I asked for £1,000 in 1 September? The rent has been paid. I can still sleep soundly, well if I wasn't typing this I would be sleeping soundly.

Mark Alexander - Founder of Property118

9:08 AM, 26th April 2013, About 10 years ago

@Robert M - I think we agree with each other on that one. Please re-read my comments.

Sally T

9:52 AM, 26th April 2013, About 10 years ago

Excuse me for sounding stupid, but on here it talks alot about taking 6 months rent in advance.
We take 2 months rent when a tenant moves in,their rent is then due again after a month, we explain that the 'spare' month is to cover their notice period of 1 month. Would this be considered a deposit ???
We don't take a physical deposit, if a tenant trashes our property it's at our expense. I know alot of people think we maybe stupid, but we collect all our rents in person, 2 of our properties have fire alarms that have to be serviced yearly and another a gas boiler, we always attend these. It allows us to keep close eye on our tenants and works for us.

Industry Observer

11:08 AM, 26th April 2013, About 10 years ago

@ ejcowper

Any reference to eaelier postings (for years!!) that it doesn't matter what you call the money, what matters is whether it is actually legally a deposit, is probably me. This is because Landlords and agents once TDP came in got very creative in terms of what they called money held, when for, where they put it and even if it was released to them by an agent monthly or not.

All this has been clarified in Johnson insofar as the actual facts Johnson has been decided on. It is important to remamber and accept this is not a cure all, an all embracing panacea that means you can take what you like in advance, call it what you like, and for it not to be regarded by HA 2004 as a deposit.

Yours most definitely is, and in any event if you call any money it a rent deposit, you are asking for trouble. In fact using the D word at all I think is a recipe for disaster (holding deposit etc). Once you call money a deposit it is, whether the Law has to do it for you or not.

In your case the money would appear to me to be held in case the rent Is not paid, as opposed to being paid for a specific period in the future. Johnson did not deal with rent for a “future” period, it dealt with rent for a long current period and again Johnson can only be relied on as a defence if the terms and condirions, facts and intent as established in Johnson apply.

This in my view is where TDS is denagerously wrong in merrily saying that Johnson means rent in advance is not a deposit. Unless dealt with correctly it most certainly is.

In your case you hide the possible use of the money for rent behind the initial statement and intent that it is for damage. I am afraid if you hold it specifically for damage that is all you can use it for (though it would still be a deposit of course as it is security!!).

Just as in a tenancy agreement you have to spell out what the deposit can be used for, and when, and anything that isn't so stipulated the deposit cannot be used for. Never could be, never mind post TDP.

In your case you have another issue, you seem to imply the money is with DPS but coivered by this separate Deed? Any deposit cannot now be drawn against until the end of that tenancy, and you certainly won't get DPS aying out bits and pieces.

Sorry, but your method is flawed and like any contrivances designed to get round it, any Court would take a dim view. Plus if you hadn't protected it and should have done..................

Industry Observer

11:44 AM, 26th April 2013, About 10 years ago

@ Robert (& Mark)

I think I have your answer, though see on ejcowper below in terms of what Johnson actually decided and current periods of payment as opposed to future.

In theory if you were challenged there is on the face of it no reason this should not come to the same conclusion as Johnson. The difference would be that in Johnson the rent collected was for a “current” period of the tenancy (and great emphasis was laid on this) whereas the rent in the example below is for a future period.

There could be an argument this is the difference and what you need - and what I think is very difficult to achieve having had a brief think about it - is very good wording in the agreement specifying what payment period is covered by what money.

I have seen a scenario posted on Tessa's site which asked what happens if it is a 12 month agreement and I take 6 months now but to cover the last 6 months? In theory that should be OK but again would require careful drafting of the agreement and again has the weakness that the money paid is not covering a current period but a future one.

That is the danger and where that money may be held by a Court to be future security (as opposed to the discharge of a current obligation, which is why Johnson won - luckily in my view the more I see, hear, read and discuss on this case.

As ever only the courts can decide.

Johnson was different in that there was written agreement for the rent to be paid 6 months up front. If there is no written agreement then it is open to the tenant to come up with a very different story about why you are holding the money! Hence there is still a danger if not written in, so whatever you do it must be precisely spelled out in the agreement.

Where I think it can be said to be different might be, though I cannot say for certain is that in Johnson the rent for the first 6 months was contractually due and was actually for a period that was starting pretty much at the point the money was paid. That may be enough to cause a judge to view the case as not bound by the Johnson decision, particularly if not written in the agreement (another difference).

The first question would be is this a contractual obligation as per Johnson (clearly the answer will be yes).

Secondly in what ways might it be different from Johnson? Johnson collected money for a “period” that was starting at the point of collection. This example of yours does not. One month of it is but the other three are not and this could cause a court to view it as different from Johnson.

This in principle is the same as we have already talked about, in the contract but not for a current period. If written in the agreement I see no reason why your example is not exactly the same as Johnson, they are fulfilling an obligation, the problem is the payments are not current, and there is a gap between them.

Out of curiosit why Jan - Dec when the academic year is Sept to June?

Mark Alexander - Founder of Property118

12:41 PM, 26th April 2013, About 10 years ago

@Sally T - Unless you have a VERY cleverly worded tenancy agreement which explains this I'd suggest you have a BIG problem. Even if the agreement is water-tight, which I very much doubt, the second you decide to deduct money for damages or missed rent (other than the final payment) you will be wide open to a claim.

Industry Observer

13:12 PM, 26th April 2013, About 10 years ago

@ SallyT

Driving at 85mph on the motorway works for me, but doesn't make it legal!!

You may not think you are taking a deposit but you most definitely are. This "carry forward" or rolling months methos is clearly completely out of the window courtesy paras 34 - 38 in the full Johnson judgement. Always was post TDP but now completely so.

No more months in hand are allowed!!

Industry Observer

13:34 PM, 26th April 2013, About 10 years ago

@ Robert

Bad news further considered opinion from a brain and analyst far better than me believes that Johnson is flawed in terms of the payments made 1st October for November and December and thereafter bi-monthly when it had gone into the periodic state.

If the contract (as in your case) was clearly to pay monthly but you would not let me have the property without giving you enough money to pay for all the rent, or that which fell due at a later date be it the next month or many months later, this has to be money held to make sure I paid the rent due at a later date.

Taking rent in advance of the period for which it is due used to be ilegal but is not now, though is still deemed as difficult. But any such payments should be considered a deposit.

Robert M

13:46 PM, 26th April 2013, About 10 years ago

"Out of curiosity why Jan – Dec when the academic year is Sept to June?"

That was simply an example. In reality we only do this for foreign (usually postgraduate) students.

Landlords want a 51 week let and as you say the academic year is September to June. If the last three months is not paid in advance, your foreign student may vacate without notice at the end of June.

If the contract is clear and given the real commercial reasons, I'm happy even post Johnson v Old.

Though it does not seem to matter according to the judge, the rent is passed to the landlord as paid, though I might retain a few pounds out of month 10 to cover any bills in the last three months.

I suppose the advantage with student lets is that the tenants do usually want to move out at the end of the fixed term. You could dispense with s21 notices for students (not could, not should or would!). No problems with losing jobs, claiming benefits and spending the benefit money on booze and fags. (Generalise moi?) I would not expect a Johnson v Old position personally.

Sally T

13:46 PM, 26th April 2013, About 10 years ago

Thanks for reply, looks like we wont be doing that anymore. On our bedits we take a £50 key deposit which we give back to the tenants when they return the keys, is this still allowed.
Should add we only rent to workers but at the bottom end of the market (minimum wage),most of them don't have large deposits.

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