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Problems with advance rent payments

Is six months rent in advance a deposit?Advance rent as deposit?

When a tenant appears to be a bit of a risk, rent wise, a landlord will generally either ask for a guarantee or an upfront payment of the first six months rent.  They will normally also take a deposit which will be protected in the normal way.

But is the five months rent paid in advance also a deposit?

This is the suggestion made by David, a member of the LandlordZone forum, in a post here.  Davids reasoning is as follows:

the Housing Act 2004 contains its own definition of a deposit which says:
“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.”  (Section 212(8)).

So, he goes on to say, if six months deposit was paid up front, then five months of this is a deposit (because it is security for the tenants obligation to pay rent) and should be protected. And if it isn’t, then the tenant can go to court and ask for his penalty of three times the deposit sum.

David cites in support of this argument, several cases where advance payments have been found to be deposits, such as Da Costa v. Pinter and Piggot v Slaven.

If his argument is correct, then it is a very worrying prospect for landlords and agents.  For a start, many more landlords will be at risk of the penalty than was previously realised.

However it would also mean that the deposit would reduce every month, which would involve notifying the scheme and endless administration.  If you were using the DPS you would also have the problem of extracting the money on a month by month basis.

So far as the penalty payment is concerned, what is the deposit sum it would be based on?  The five initial months ‘deposit’, or whatever is left of it when the tenant issues proceedings?  It is likely  to have all been taken for rent by the time the tenant gets to court.

Surely Parliament can’t have intended this?

Advance rent affecting the subsequent periodic tenancy

David subsequently suggested to me in an email correspondence, that the problem might be resolved by the tenancy agreement specifying that the rent was payable in six month payments.  However the problem here then, is that at the expiry of the fixed term, the periodic tenancy which took its place would be a six month periodic tenancy not a monthly one.

The significance of this is that the notice period for the section 21 notice (if it is served after the fixed term is finished) will be much longer – it is either three months/a quarter or it could be the full six months.  Landlords are not going to want this, although I believe it is similar to the way things work in Scotland.

Maybe the tenancy deposit point will be covered (or at least implied in some way) in the forthcoming Court of Appeal  decision in Universal Estates v Tiensia, although the PainSmith blog tells us that this decision is not going to be published until October at the earliest.

What are your views?  Do you think that six months rent in advance could be a deposit, and thus need to be protected in a scheme?  What about the subsequent periodic, what steps would you suggest be taken to ensure that this is a monthly periodic?

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12 Responses to Problems with advance rent payments

  1. I think that the up front payment of rent on a monthly tenancy is a deposit and advise clients to specify a period of 6 (or however many) months with rent being payable in advance for that period.

    Whilst there is a potential for there to be an issue with the subsequent Statutory tenancy, I think the way to deal with this is to require rent for any period from the end of the initial (6 month) period to be paid on a monthly basis 2 months in advance, and thus provide that the first payment of such monthly rent is due at the beginning of month 6. Remember that the Statutory tenancy is on the same terms that apply during the contractual tenancy, so it is perfectly possible to provide for this to take efect.

    Then if a tenant does not pay, and if he makes no payment at the beginning of month 7 ( ie say 2 days into the statutory period) the Landlord can then serve a s8 Notice and have proceedings underway before the end of month 7

  2. In the comments to Nearly Legal’s report on Piggot v Slaven – – ‘NL’ says: “advance of rent against specified periods (say month 1 and month 6) is probably OK, but could ONLY be used for EXACTLY that purpose. If used against any other default on rent due or is potentially being held against some putative default of rent, let alone anything else in breach of tenant’s conditions (damage etc.) = deposit.”

    I agree with this.

    In the case of taking 6 months advance rent, if the tenancy contract specifies that the monies received are in payment for the first six months rent, I cannot see how it could be argued that the money is being held as security for anything – *very* different to the scenario in which an extra month’s rent is taken ‘in advance’ at the commencement of Month 1 of the tenancy, but the tenant is then expected to pay for Month 2 in advance, and so on.

  3. I think that to be cautious for now, landlords receiving six months rent in advance should incorporate the rental into the tenancy agreement whilst a decision in the courts is made. One way to avoid the six month periodic tenancy problem as you have rightly flagged up, is to create a seven month fixed term. Make the first six months as due in one sum, then make “the last rent payable” (month 7) as the normal calendar monthly amount. This way, the statutory periodic tenancy created will be monthly.

    As explained by Ward L.J. in Church Commissioners v Meya [2006] 2 E.G.L.R. 39: “… one has to ascertain first what payment of rent last fell due, in other words, what was the last payment of rent the respondent was obliged to make [under the fixed term], and then secondly of course, ascertain the period covered by that last payment.” [para 21]

    Finally, I too agree with the ‘NL’ comment. I think the courts will distinguish between landlords who take a genuine six months rent in advance and crucially does not ask for further rent until month 7 and those who attempt to avoid the legislation by claiming they have taken two months rent in advance. The crucial question to be asked in my view is – has the landlord demanded rent for a period for which he already holds rent?

  4. I would be hesitant to take that view, because the rent is not “security” as it is not refundable (as long as it relates solely to the fixed term).

    Given the record of adverse county court decisions, I think it would be prudent to agree that the rent for the pre-payment period is payable in advance (e.g. one rental payment of 6 months) and then payable monthly thereafter. The extra-cautious may like to ensure that there are at least two monthly rental periods before the expiry of the fixed term.

    Another approach would be to provide in the rental agreement that the tenancy will have a fixed term of a certain period, and then be a contractual periodic tenancy thereafter (thus avoiding the application of the legislation as to the length of the periods).

  5. Not mentioned in the context in which I posted this originally is the question of why you are taking money in advance. If the tenant says “I work overseas in disaster relief, often in areas with no electricity or phone. I don’t have a bank account and may need to rush off to some disaster at a moments notice, can I therefore pay you the rent up front?” I would argue that this is not a deposit as the landlord is not holding the money to ensure the tenant fulfils any obligations.

    The reality is that this most commonly happens when someone comes from abroad with no UK referencing or cannot provide a guarantor when they are financially weak. I would therefore suggest the test is a “purposive” test, i.e. what was the reason behind taking the money up front if the rent is not due till later months. If the answer is that I”I want to make sure I am paid the rent”, then you are heading toward the argument of a deposit.

    I am not sure that I see security as having to be paid back at the end. Security can be defined as “ensuring you don’t suffer financial loss” and indeed in some security situations no money is paid up front (guarantors). Obviously where no money is paid then it is outside the remit in the act of a deposit. The act certainly makes no mention of anything about money that is refundable and the county court cases quoted the money was certainly not refundable.

    Around the period, in practice, if you take a tenant you are not sure about, should you really leave it to go periodic on any length of period. The tenant’s circumstances may have improved and you can do this but it would need to be evaluated on a case by case basis. Another 6 months rent may be appropriate.

    Lastly, if you want control over the periods and other advantages like avoiding the need for section 13 notices, why not make the tenancy a periodic after the fixed term so that section 5 of the Housing Act 1988 never kicks in and you can then define the periods you want?

    • On the point about the periodic tenancy, the answer is that it is better to consider what may happen if you do not take action, and draft your documents appropriately. If the document does not deal with what happens after the fixed period, then unless you correctly obtain possession, it will become periodic by operation of law. If it becomes a six-monthly periodic tenancy, you will only be able to obtain possession at the end of such a period.

  6. David, I think your comments have merit, in that they may well fly in the county court. However, I think that strictly speaking you have misunderstood what it means for something to be held as security.

    A guarantee is not (technically) security, it is a guarantee.

    Something is held as security when the interest of the secured party exists to secure obligations, rather than being absolute. When pre-payment is made (of any sort), the monies paid become part of the general assets of the landlord, and their interest is absolute, rather than merely a security interest. The landlord does not have recourse to the pre-paid monies, he already has them to deal with as his own, free of any encumbrance (even, indeed if he illegally evicts the tenants immediately, it is not the rent that is returned, but rather there is a separate claim).

    By contrast, with a security, the landlord can take it as his own only as a remedy for some failure by the tenant, which clearly does not describe a properly taken pre-payment (although it would described a “disguised” deposit, as discussed by NL).

  7. Interesting discussion. My comment quoted above was in the context of a ‘two months rent in advance’ with next rent payable at the end of month 1 scenario.

    Where a full 6 months was asked for in advance, I’d be tempted to agree with Marcin that what was being created was a 6 month period, no matter what the tenancy agreement says, so any subsequent periodic would have a 6 month period.

    It would otherwise be hard to avoid the conclusion that holding rent for the full term in advance on a monthly basis would be a security against tenant’s default, as there is not really any practical purpose (unlike, say Month 1 and month 6 in advance). It would be open to a tenant to ask to pay 6 months in advance – although a sane landlord would ask for that in writing.

    The only difficulty with the ‘default’ argument, is that, of course, there would/could be no default, at least for the first 6 months. So – to return to my comment on my blog mentioned above – where would the ‘security’ lie?

  8. Thank you all for a really interesting discussion. It shows that landlords and agents need to be very careful when asking for six months rent in advance.

    The Landlord Law tenancy agreements provide for the tenancy to continue on a monthly basis so hopefully this would avoid the six month statutory periodic problem.

    Do any of you know what the NTQ notice period (which are referenced in section 21) is for a six month period – is it three months or the full six months?

    • My understanding is that the NTQ hyas to be 28 but at least one period of the agreement up to a maximum of 6 months. This would mean the S21 notice would need to be at least 6 months (due to the cross reference to the NTQ in S21(4)). In practise it could be longer and possibly up to nearly 12 months depending on when in the cycle the notice was served, owing to also waiting for the last day of the rent payment period.

  9. I think a LL has to be very careful, at the moment, if taking a rent-up-front. Too risky that it could end up being a deposit, and even if later protected, any s.21 served before late protection would be invalid, too.



About the post author:

Tessa Shepperson

Tessa is a lawyer and specialises in creating products and services which help landlords and letting agents learn and understand landlord & tenant law. For example, she runs the Landlord Law website (now in its 14th year) and is a director of Easy Law Training Ltd and Your Law Store. Tessa also sits on the Property Redress Scheme Council. When not working she enjoys reading, cooking and messing around on the computer. You can also find her on Google

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Tessa is an English lawyer specialising in residential landlord and tenant law.

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