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?

Tenants legal help

As the value of money keeps going down and the cost of things keeps going up, your landlord is at some stage going to want to increase your rent.

That’s understandable, but if you have just received a letter from your landlord setting out a whopping big increase, your first thought (or maybe your second) is going to be “Can he do this?” The answer will depend on how he does it.

• If you have been in the property a long time and have a fair rent registered, the answer will be ‘No’.  Rent increases can only be set by the Rent Service.

• If you have an assured shorthold tenancy, your fixed term is ending and your landlord wants you to sign a new tenancy agreement at a new rental, the answer is ‘probably’. Because if you don’t sign, your landlord can end your tenancy, and (eventually) evict you.

• If your tenancy agreement has a rent review clause AND the landlord is following the procedure in the clause, then the answer will be ‘yes’. Always assuming the clause is not void under the Unfair Contract Terms Regulations.

• If your AST fixed term has ended, and your landlord has served a properly drafted notice of rent increase on you, the answer is ‘yes’ unless the new rent is higher than the market rent value for your property AND you apply to the Rent Assessment Committee for the decision to be reviewed within the one month time limit.

• However if you are at the start or part way through your tenancy fixed term, there is no rent review clause, and your landlord has just sent you a letter saying your rent is going up, the answer is ‘no’! You can write to him saying you won’t be paying the increase as it is invalid, and suggest he take legal advice.

Have you experienced problems with your landlord trying to increase your rent when they are not entitled to?  Do you have any tips for readers?

(Photo by Darren Hester)

Are your tenants giving you a headache?

If your tenants are running up arrears of rent and you don’t know what to do about it – here is the answer.  My new FREE >>  seven day email course!

The Rent Arrears Seven Day Course from Landlord Law (and its free!)

The course is a series of seven emails sent to you every day over seven days.  Each one looks at a different aspect, for example preparing a rent schedule, the different notices you can serve an when they are appropriate, going to court, what defences your tenant might have to a claim for possession based on rent arrears etc.

Bonus material

The course also comes with extra materials – documents from and links to some ‘members only’ pages on Landlord Law.  For example the documents include a letter and checklist, my self calculating rent arrears schedule, and several members only articles and links to members only FAQ pages on Landlord Law.

Most of the course content is stuff which is already up on the Landlord Law site, however even though members will have access to most of it already, if you are a member you may still find it helpful to have the content emailed to you rather than have to go and find it.

Deadline for signing up

I am only making this course available however for a limited period of time.  If you want to sign up, you will have to do this by 20 July 2010 as I will then be taking the course offline.

Make life easier for yourself

Rent arrears are a real problem, but if tackled the right way, you can limit the damage. This free short course will give you the confidence to deal with them and keep things under control.

You can >> read more and sign up here.

With the current economic climate rent arrears is the number one problem for landlords. Here are some tips to help you deal with them before they happen (always the best time to deal with a problem!).

1. Always, always reference tenants. Make no exception to this rule. Remember – con men succeed because they are persuasive. Never allow tenants to have the keys until you have checked them out.

2. If you have any doubts whatsoever about a tenants ability to pay rent, take a guarantor. Make sure you reference the guarantor also

3. Do not give tenants a long fixed term. If they prove unsatisfactory it will be difficult to get them to leave before the fixed term ends and you may be stuck with them for longer than you wish. Six months is about right for a new tenant.

4. Serve a section 21 notice early on (although not on the same day that they sign the tenancy agreement – about a week after they have moved in perhaps). If this upsets the tenants, say that you hope that you will not have to use it, but that you are serving it as a precautionary measure.

5. Get into the habit of checking rent payments so that you will be able to contact the tenant as soon as a payment is missed. It is if rent arrears are allowed to mount up that big problems generally occur. If you deal with things promptly tenants are less likely to allow arrears to develop.

If you follow these five steps your tenants will be less likely to fall into arrears and you will be in a better position to deal with it if they do.  Note that if you are unfortunate enough to have teants fall into rent arrears, my rent arrears action plan can help. 

Do you agree with my five tips? Do you have any tips for precautions landlords can take? In your experience are more tenants falling into arrears nowadays?

Common law tenancy changes on 1 October 2010

As you should be aware by now, on 1 October (unless the coalition government decide to change things) all non regulated/common law tenancies where the rent is between £25,000 and £100,000 will convert automatically to assured shorthold tenancies.

Except that some of them won’t.

As pointed out by the PainSmith blog, in some circumstances, the tenancy will become an assured tenancy.  Which will be very serious, because assured tenants have long term security of tenure.  This means it is very difficult to evict them.

So a tenant who now can be evicted after service of a 4 week Notice to Quit, will then only be vulnerable to eviction if they fall into arrears of rent, or if the landlord is able to find them suitable alternative accommodation.

When a common law tenancy will convert to an assured tenancy

The situations where tenancies will convert to assured tenancies are:

• Where the tenancy was an assured tenancy originally but turned into a common law tenancy after the rent was increased to more than £25,000, or

• If the tenancy was created before 27 February 1997.  The reason for this is that for a tenancy created before 27 February 1997 to be an assured shorthold tenancy, the landlord had to serve a section 20 notice, properly drafted, on the tenant before the tenancy agreement was signed.  If all parties thought that the tenancy was to be unregulated, it is most unlikely that this will have been done.

This rule change will not affect many properties, but where it does, it will be a very significant change and will substantially affect the value of the property.

Solutions

If you are a landlord of a long running high value tenancy you need to consider whether this is likely to happen to you.  If so, there are two courses of action you can take.

• Evict the tenants as soon as possible  This is the safest course of action.

• Sign a deed of surrender and then re-let as an AST.  This is suggested by PainSmith on their blog post.  It is better to do this than nothing.  However you would run the risk that if you later wanted to evict the tenants, they might be able to challenge the validity of the surrender, if in fact they continued to live in the property uninterrupted.

What do you think?  Do you think a surrender and re-grant will be effective or do you think all landlords should play safe and evict?