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Court of Appeal decision in Johnson v. Old – good news for landlords

articlepic7-300I am very much obliged to Linda Howard, from the Residential Property Litigation team at Shoosmiths Solicitors who has kindly sent me the approved Judgement for the Court of Appeal decision in Johnson v. Old.

The background to the case

As you may remember, at first instance, the District Judge held that Mrs Old’s sucessive payments of six months rent up front were in reality deposits – which as the landlord had failed to protect them, prevented him from being able to serve a valid section 21 notice.  I reported on this here.

The matter then went to HHJ Simpkiss on appeal on the 31st July 2012, when he overturned the decision saying that the payment was rent and not a security.  I reported on this in some detail here.

Ms Old then secured legal aid which allowed the decision to be sent to the Court of Appeal – unfortunate for poor old Mr Johnson (although it rather looks as if he may have had insurance cover), but very helpful for the rest of us.

The Court of Appeal decision

Landlords everywhere will be relieved to hear that the decision was in favour of the landlord – the leading judgement which was made by Sir John Chadwick upheld the decision of HHJ Simkiss.

The appeal was in three parts – the first part looking at whether the tenancy agreement required the tenant to pay six months rent in advance.

The first part of the appeal

Much of the judgement looks in tedious detail at the minutiae of the tenancy agreement between Mr Johnson and Ms Old, which it seems was not happily drafted.  However as it is only really relevant for the parties I will spare you this.  Suffice it to say that the Judge said in para 31

It seems to me that His Honour Judge Simpkiss was correct to hold that, read as a whole, the May 2010 tenancy agreement did require that the first six months’ rent be paid, in advance, on or before 1 May 2010.

The Judge goes on to point out that

there are various ways of dealing with the perceived risk that a tenant who is the subject of an inadequate credit reference will not pay his rent month by month; and one of those ways is to require payment of the rent “up front”.

It seems to me plain that that is what the landlords, perhaps on the advice of their agents, decided was the appropriate way to deal with the perceived risk in the present case. The fact that they chose to deal with the risk in that way – rather than taking a guarantee or a rent deposit – is no reason for refusing to give effect to the terms of the tenancy agreement.

He also makes the point that the fact that the agents held on to the money and only passed it over to to the landlord on a month by month basis is irrelevant.  He cites HHJ Simpkiss

“the arrangements between the agents and the landlord are neither here nor there” and

“whatever the arrangements between the landlord and [the agents] the [tenant] would have been able to argue successfully that she had paid the full rent for the term”.

going on to add that the Consumer Credit argument does not help Ms Old either.

it would not be for her benefit to treat the £6,000 paid on 29 April 2010 (or any part of that sum) as security for the payment of future rent (rather than as, itself, payment of rent that had become due) in circumstances where the tenant was liable (under paragraph 1.7.5) for interest at the rate of 6% per annum on unpaid rent: her interests were best served by treating the rent as paid rather than as unpaid but secured .

A nice argument I think.  The Judge then turned to the second ground of appeal which was on the allegation by Ms Old that the payment was actually a ‘security’ or deposit.

The second ground of appeal

The Judge does not accept this argument either.  For two reasons

1. There is a difference between money paid to discharge an existing obligation and money paid to be held as security for some other obligation.  Or as the Judge put it

Money paid in order to discharge a current liability is not paid with the intention that it be held as security for the discharge of that liability.

The payer’s intention is that the liability will be discharged by the payment itself; and so there can be no need to provide security for the discharge of the liability in the future.

He goes on to point out:

The point can be tested by asking, rhetorically, how the tenant would have responded to a demand, on 1 September 2010, for rent in respect of the month of September 2010.

It is, I think, impossible to avoid the conclusion that her answer would have been: “why are you asking me for rent which I have already paid?”.

And, if it had been suggested to her that she would be liable for interest at 6% per annum on rent for the month of September 2010 if she did not meet that demand by payment of £1,000 forthwith, her answer might have been expressed in stronger terms of indignation.

2. The Judge also points out that in any case this money could hardly be held to be security at the time the section 21 notice was served as the rent this money was allegedly paid as security for had fallen due (ie by 31 October 2010) – a long time before the section 21 notice was served on 15 August 2011.

So we proceed to the third ground of appeal

The third ground of appeal

This was that the landlord had failed to comply with the tenancy deposit regulations with respect to the payment.  However as the court had held that this was not a deposit – there was no need to consider this.

So the landlord won, and the threat of having to pay back 18 months worth of rent to the tenant plus a penalty of up to three times that sum, is removed, hopefully for good.

Thoughts on the case

I have to say that I am relieved that a bit of common sense has been applied here.  Lots of landlords take payments  up front from tenants who fail referencing, as happened in this case.  If these payments were all at risk of being treated as a deposit, all sorts of ridiculous results would follow.

Thankfully the Court of Appeal has knocked these on the head.

However it also shows that landlords and their agents need to take care when  drafting their tenancy agreements.  It is generally accepted that the agreement in question here was a bit of a dogs dinner.  Had it been a bit clearer this litigation could probably have been avoided.

So this case does not take away the requirement for people to be clear in their tenancy agreements so that ordinary people reading them will be able to work out what they mean, and it won’t need a Court of Appeal Judge to work it out for them.

If you want a bit more detail on the case you will find a pdf of the Judgement >> here.

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Important note. If you are reading an old post, remember that the law may have changed since it was written.




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Page 1 of 11

23 Responses to Court of Appeal decision in Johnson v. Old – good news for landlords

  1. Helpful, but what would the result have been had the tenancy agreement specified that the rent be paid monthly but the tenant were requested to pay 6 months in advance?

    Incorporating a requirement in the agreement to pay the rent 6 monthly affects S21 notice periods and can therefore prove problematic.

  2. Yes, this decision does not resolve ALL problems with payment in advance. You are still at risk of creating a six month periodic tenancy.

    Which as you say will affect the length of the section 21 notice period.

    But this case does at least remove the spectre of creating a deposit which needs protecting by accepting rent in advance.

  3. Tessa
    Philip is right but the risk of having to give 6 months notice is different to the risk of not treating a deposit as being one.

    Tessa are you saying that if an agreement was properly drafted with clear obligations to pay the rent monthly and no silly contradictory clause that might require some other amount, but the Landlord because of weak status asks for 6 months rent up front to ensure the rent is paid when due, that the 6 months is not a deposit?
    Because in that case the obligation has not arisen until say the 1st of every month. The Landlord simply wants to hold the money in advance so when it comes to each 1st monthly he knows the money is there to pay him.
    In other words he wants security.
    Johnson always revolved around the agreement wording, not the practice. Once the Court deemed it was payable 6 monthly no way was the payment a deposit, not even I would argue that.
    But do you think this judgement removes the risk from ‘ordinary’ typical standard cases where all the talk is monthly but the action on the part of the Landlord/agent is 6 months in advance of 5 of the monthly obligations?

  4. Perhaps I should say that this case *probably* removes the spectre of creating a deposit situation by accident. It is impossible to be dogmatic about it.

    But I think if a payment is made by a tenant of six months worth of rent, which is then credited to the rent account – then it is unlikely that a court will find that is actually a deposit.

    It will probably only be a deposit if it is held in reserve and is not credited to the rent account immediately.

  5. Tessa

    I don’t think were you put the money or what you call it matters. It is what the Statute calls it that does.

    Putting what is judged to be a deposit in the rent account and trying to call it something else I’d suggest won’t save anyone.

    If it looks like a duck and quacks then it probably is a duck. Call it a fish if you like but it is still a duck.

    The whole key here is whether rent takenin advance in a clear monthly obligation scenario is a security for a future obligation or the discharge for that obligation as it has been met before it even arose.

    Opinion at the moment seems to be that it is the dicharge and thus not a deposit. We’ll see as there are bound to be other cases

  6. It seems the Court of Appeal has decided;

    If it looks like rent in advance and is used as rent in advance then it probably is rent in advance.

    Call it a deposit if you like but it is still rent in advance.

  7. Ha Ha very good HB Taken, very good indeed. Very droll, very funny, sadly though not very true.
    First the CoA has decided a particular case with particular facts and reached a particular decision. Once they decided that it was a rent payable six monthly tenancy then the tenant was lost and the Landlord would win. What has happened here is that the case has had to go to the CoA for this to be finally decided, which in turn automatically decided the outcome.
    Alongside this the CoA has also clarified that if you take rent in advance but then collect other rent in advance during that period then the additional payments collected are a deposit. It has also clarified that it is wise to be careful and clear in agreement drafting and not have confusion and conflict with one clause referring to a monthly rent period and another referring to a 6 monthly commitment.
    Also that if it is anything but a straightforward 6 monthly rental period it is also wise to clarify and specify exactly what the lump sum paid up front covers in terms of period of the rent.
    All very understandable, predictable and clear.
    What is far from clear is the position in all the other ‘standard’ scenarios where it is only ever described as a monthly payment for whatever term, but the agent or Landlord demands 6 months rent up front but makes no reference to this in the agreement. Recipe for confusion and, in such cases, I would suggest disaster as a Court is still likely to decide on those facts that it is a deposit.

    So if it looks like a deposit, is obviously a deposit and is taken to provide additional security for the Landlord, then it probably is a deposit. Call it rent in advance if you like but it is probably a deposit. Anyone thinking this ruling clarifies all situations and is open season for Landlords to take whatever money they like and call it what they like is badly mistaken

    John’s comment above is understandable, and anything for an easy life, but really everyone should read the full case transcript it contains a few intersting comments not necessarily all good news for Landlords

    http://www.bailii.org/ew/cases/EWCA/Civ/2013/415.html

  8. OK…… so let’s muddy the waters a little and throw a fish amongst the ducks. If the landlord had taken six months in advance on a 12 month tenancy, and told the tenants that the sums held would be used to pay the last six months of the term, would the judge then have found in favour of the tenant who might reasonably perceive this as a deposit?

  9. @Markymark I think that if the money is not taken and used as rent immediately then the landlord is at risk of having the payment deemed to be a deposit.

    In the Johnson v. Old case the rent was taken up front for the following six months, and no further rent was asked for until that six month period was at an end (or nearly).

    The case cannot be used as authority for any other payment arrangement.

  10. @markymark

    Must admit I wouldn’t have had the answer immediately, which is probably why the CoA Judges took 7 weeks from date of hearing to announce theirs.

    Mine would have been along the same lines as Tessa though, same answer different working. I’d also say it was a deposit because the obligation had not arisen. But there is an argument, and I’d be interested in Tessa’s opinion on this, that it is a future obligation on the part of the tenant they have accepted now, by signing a 12 month agreement, so arguably they have discharged it now by handing the money over to the Landlord even though he is not legally entitled to it until it falls due start of month 7.

    I agree with Tessa I think at best it is risky.

    To get the sharks circling my ducks as opposed to fish the other argument I have seen yesterday an update in terms of the old dodge of taking 6 months but the tenant then starting to pay from month 5 so you are always holding 2 months plus deposit. I have seen very informed opinion that as the tenant has accepted that, and as it is an obligation in the contract, that the additional two payments are not deposits.

    I think it is and the commentator said they wouldn’t like to defend the Landlord in such a case, but what do you think on that one Tessa. The Johnson Judges seemd to come down that it would be a deposiot in that scenario – any rent collected for the same period that moeny was already held.

  11. @ industry observer and Tessa

    Many thanks for your learned thoughts on this matter. I know that many landlords letting to overseas students on 12 month agreements will take six months rent (the last six) to give them some comfort when there is no UK or EC guarantor. I guess they will have to ensure that their agreements are “duck tight”?

  12. I wonder if it would now be safe to take two months rent in advance to be used as the first payment and the last payment of the fixed term, as an alternative to accepting a deposit? The tenancy agreement would have to reflect this.

    In the case of a six month fixed term AST starting 1st Jan, the tenancy agreement could say that: “the rent is payable in advance by equal monthly payments on the 1st day of each month except the last month (1st June) as already paid in advance”. At the end of the fixed term you have the option of signing a new tenancy agreement with tenant and again taking two months rent in advance.

    The way I view this arrangement is that the “last month rent in advance” is not a security to ensure that the tenant fulfils the obligation to pay rent but is actually the obligation itself. If the intention of both landlord and tenant is obvious from the outset and the tenancy agreement says that no deposit has been paid I wonder if this arrangement would still be considered a deposit by the courts, especially after the Johnson v Old case? I would like to hear Tessa’s opinion on this.

  13. @Marcus Its certainly arguable. I think it would depend on the facts of the case.

    If this sort of arrangement was allowed, for example by the Court of Appeal in a case, I suspect it would only be where it was very clear that the last months rent would never be used as anything else and was already noted on the rent account as paid.

    However it is possible the CA may take a different view.

  14. Tessa your readers (and yourself) may be interested in this other opinion.

    In response to a recent exchange with one of the TDP schemes and with a person of seniority there, on this whole subject of creativity and taking any amount of rent for a future date, and especially where that date is not immediate but perhaps many months hence (typically the last month, or two months or even 6 months as I have seen posited recently), the Scheme replied:-

    A deposit is taken as security, should the tenant break any obligations under their tenancy agreement (this could be damage or even non-payment of rent). If, however, an amount of money is taken as rent in advance it must be prescribed within the TA as rent for the specific months concerned – if there is any chance that this amount is used for any other purpose than that prescribed then it is a deposit.

    The reason I didn’t use the word ‘returned’ is because I was thinking of a scenario where a tenant may pay 6 months’ rent up front but, for whatever reason, agree with the landlord to move out after 2 months. If there is a clause in the TA saying that moving out early will result in the retention of one month’s rent then the landlord may return the rest to the tenant…..this wouldn’t be classed as a deposit though.

    To which I then posed a follow up question which was:-

    What if the situation arose where, as per the initial example above, the tenant leaves early but as there is damage, some of the money is kept to pay an agreed month’s rent but some is kept to pay for the damage?

    The Scheme’s response was that he wouldn’t be able to keep any part of it for damage – if there is any intention to use any part of it to cover damage then it is a deposit and would have needed to be protected. If he had wanted to cover himself for this, he would have needed to take the rent upfront and detail it as such in the TA and then take an additional amount as a deposit against damage, the additional amount would have needed to be protected but not the rent amount.

    Everyone needs to heed Tessa’s warning that the Johnson decision is not a panacea for all ills. It is not, contrary to what TDS might have said, a statement that rent in advance is not a deposit. It is not a deposit if handled correctly in the agreement wording.

    Examine the last part of para 20 in the decision very carefully as to go back to ducks, if something looks like a contravance to avoid an obligation that otherwise applies, and is obviously designed as a contrivance to avoid that obligation, then it probably is a contrivance.

  15. I also let to overseas students and need to protect the landlord against early leavers. My typical tenancy would say:

    1) the term is 1 September to 31 August;
    2) the rent is £1,000 per month (ie this is the rate from which payments due are calculated, the definition of “Rent” if you like);
    3) £4,000 payable on or before 1 September;
    4) £1,000 payable on 1 October;
    5) £1,000 payable on the first of each month thereafter, with the last payment due 1 May.

    It seems to me that Johnson makes it reasonably clear that you have to decide if the payment is made to discharge an existing obligation (rent payment) or as security for some obligation (deposit).

    Like Johnson, I also collect a deposit. Let’s say in this case it is £1,250. So before the tenant moves in he pays £5,250. Why does he pay that? Because the contract we have agreed requires a security (deposit) of £1,250 and a payment of £4,000 to discharge an existing obligation (the front loaded rent).

    Yes, I agree Johnson does not answer the specific point where the rent is front loaded. However, what Johnson does say is that rent does not have to be paid in equally spaced installments of the same amount and that anything else you do might well be assumed to be a deposit. Instead, it says you look to see what payments are made and what do the parties intend they are for. I would suggest that and the wording of the agreement will prevails if it is not ambiguous (and presumably there is no evidence the parties have agreed otherwise).

    Read the last half of paragraph 37 of the ruling in Johnson. If I asked my tenant for £1,000 on 1 Juner they might well say that the rent has already been paid. Actually, to be more accurate, they should say what rent – no more is due under the contract.

  16. Hello again Robert

    I fail to see the difference between saying per month and monthly, but maybe there is one.

    However having looked at how you have expressed it here what is the £4000 stated as covering, what period of the rent?

    Be intrigued to see Tessa’s view, but looks to me more like 3 months being carried forward, taken in advance but with the period paid for not stated, and thus security for the future obligation.

  17. Robert

    Also meant to ask where exactly does Johnson state this:-

    “However, what Johnson does say is that rent does not have to be paid in equally spaced installments of the same amount ….”

  18. What I have been writing in my agreements:
    1.) This agreement starts on [date] and has a fixed term ending on the 5th day of the following month.
    2.) It shall then become a contractual monthly periodic tenancy, with each period starting on the 6th day of a month and ending on the 5th day of the following month.
    3.) Rent is payable as stipulated in the Schedule Of Rent Payments.

    SCHEDULE OF RENT PAYMENTS:
    Period: 6.6.2013 – 5.7.2013, Rent due: 700 GBP, Payable on (or before): 6.6.2013
    Period: 6.7.2013 – 5.8.2013, Rent due: 700 GBP, Payable on (or before): 6.6.2013
    Period: 6.8.2013 – 5.9.2013, Rent due: 700 GBP, Payable on (or before): 6.6.2013
    Period: 6.9.2013 – 5.10.2013, Rent due: 700 GBP, Payable on (or before): 6.6.2013
    Period: 6.10.2013 – 5.11.2013, Rent due: 700 GBP, Payable on (or before): 6.7.2013
    Period: 6.11.2013 – 5.12.2013, Rent due: 750 GBP, Payable on (or before): 6.8.2013

    Explanatory notes:
    This may appear a little ‘cumbersome’ at first, but has the following advantages:
    - all my tenancies have the same periods
    - different tenancies can start on any day of any month – and they still all have the same period
    - all Notices of all my tenancies have to expire on the 5th of the month (rather than sometimes on the 30th, 31st, 28th or 29th of a month, or whatever other day)
    - (apart from the rather short fixed term of between 6 to 36 days) all tenancies are always of the same type, i.e. a ‘contractual monthly periodic tenancy’, avoiding all of the confusion when having to serve the correct Notices at different stages (served during the fixed term expiring at the end of or after the end of the fixed term, or served after the end of the fixed term)
    - if a ’6 month’ or ’12 month’ tenancy is desired, simply add a term: No notice shall be served to expire before [desired date]. / However, if the tenant breaches any terms of this Agreement, the landlord may serve statutory notice after the end of the fixed term.
    - it avoids a situation where a landlord assumes the tenant wants to stay on after the end of the fixed term because they ‘haven’t said anything’, but then simply disappears at the end of the fixed term tenancy (because they don’t need to give notice when they leave at the end of the (fixed term) tenancy)
    - it aligns rent periods with the ‘silly’ tax year start on the 6th day of April, so you don’t have to apportion 5 / 25 days of April to different tax years
    - if tenants get paid on the last day or first day of the month, it gives enough time for bank transfers / payments to arrive without always being 1-2 days late
    - all rents are (if so determined) due on the same date, making it easier to check up on rents
    - I start with a few months on paper form (added at the end of the Agreement), and then send this once per month to all tenants by e-mail; whether in paper form or e-mail, this Schedule then serves as a rent statement / receipt / rent book (with the added columns: “Received on:” and maybe “Still outstanding:”); in any possession proceedings, it would then serve as a documentation of whether rent was late
    - after discussion, I can add to the e-mail a proposed rent increase in maybe 6 months time and incorporate that in the Schedule, so that the tenant for the next 6 months sees in each statement / receipt when their rent is due to increase to what amount
    - when rent is inclusive of bills, I have on occasions decreased the rent by 20 GBP when the tenant is away for a whole month
    - also, tax is payable on ‘rent due’, and if a tenant doesn’t pay, it is the taxpayer’s duty to prove that the tenant ‘wasn’t able to pay rent’ [heck knows how to do that]; if the contract says 700 GBP/month, but the tenant only pays 300 GBP one month, I assume we still have to pay tax on 700 GBP; on occasions for ‘good long term tenants’ I have agreed with them a lower rent for a month, entered that as the ‘rent due’, and paid tax on the lower amount [NB: I never had the pleasure of finding out what HMRC would say to that, but: the rent due is what the contract says is due, and the contract says what's due is written in the Schedule; I'm not aware of any law saying that the rent has to be the same every month]
    - [and, to come to our problem of 'deposit' or 'rent in advance':] there can’t be any other way to make it any clearer that whatever rent is paid at whatever time is neither ‘deposit’ nor even ‘rent in advance’ but always and only ‘rent paid when contractually due’; you can take 9 month rent at Easter and 3 month at Christmas, and if you write that in the Schedule, then it’s rent paid when it’s contractually due, and the tenancy is still a contractual monthly periodic tenancy with the same periods and Notice requirements as all other tenancies
    - the Schedule (and esp the statement / receipt I e-mail) says what period each payment relates to
    - in relation to Robert M and his approach: do you then before 1 June make a new contract going the following 1 September to 31 August with ‘front loading’ on 1 June, 1 July and 1 August – or have 3 months no rent and then 4 months rent on 1 September? If such a tenancy carried over, I think the right to receive rent in advance would be lost

    I’m aware this is a rather unconventional contract, but I feel it’s both much clearer and more flexible than the standard contracts, and removes a lot of the complications when a fixed term changes to a periodic tenancy. I do also like sending my e-mails once a month with a thank you for rents received and any other relevant messages.
    Any comments? …

  19. @ Bernd

    If I may ask are you an agent or a self managing Landlord and if I may also ask how many tenancies do you have on the go at any one time using your system?

    @Marcus April 27th

    Sorry missed yours – no it is exactly what you cannot do. Clauses 34-38 in the Johnson decision make that very clear. Johnson only one

    a. Because the judges decided it was a 6 monthly rental period

    and

    b. Because the rent that was paid was to cover the immediate following period and with no gaps.

    Johnson has not said that rent in advanve is NEVER a deposit as many people seem to think (and hope?). What Jonson said was it was not a deposit based on the facts and circumstances and intention in that case.

    I’d say any money taken that is then held to clear a payment due at a later date and not in a sequence (like next 6 months) is vulnerable to claims it is a deposit.

  20. @ Industry Observer 22.5.2013:
    Well, I’m ‘only’ a ‘lodger landlord’ renting out 2 spare rooms in my flat (but when I planned to move out, my lodgers were soon to become AST tenants, which would make it impossible to know in advance when the AST periods would start, and difficult to prove afterwards on what day the AST started, so I had to use something like the above to avoid any later uncertainty). However, even if I had 10 or 20 tenancies like that, spending the extra 1 hour or so each month to send e-mails I think would well be worth it. The more tenancies one has, the greater I think the advantage of having everything on exactly the same terms / periods.

    Has anyone any comments to my ‘system’, or does anyone see any legal disadvantages / complications with it?




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About the post author:

Tessa Shepperson

Tessa is a lawyer specialising in residential landlord and tenant law. She runs the Landlord Law website (now in its 12th 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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