I am challenged on premium tenancies:
It all started with a post on Property 118 by Mark Alexander. Mark had questions about premium tenancies and he wanted answers.
I agreed to answer five questions, and do a post about it here on this blog. The questions were then sent over by Mark Reynolds of Pearce and Co.
And so the challenge started. Armed only with my Macbook, a few landlord and tenant text books and access to the internet, and with one handicap (a headcold) I set out looking for truth.
The questions:
Mark had only sent over four questions (which we will come to) saying that he had not been able to think of a fifth. However I had a question of my own. A fundamental one.
1. What is a premium tenancy?
A premium is a payment for a tenancy. They are most commonly used for long leases. You will all be familiar with this. You pay £100,000 for a 99 year lease of a flat. There is rent but just a modest ‘ground rent’.
Short residential lets such as assured shorthold tenancies are different. There is normally no premium and the rent is a ‘proper’ market rent. Say £1,000 pcm.
A bit of history
In the early part of the last century, premiums were often charged on short lets – they were known as ‘key money’ and were used by landlords at that time as a way around the rent regulation. For this reason legislation was passed making them illegal, and this legislation was subsequently incorporated into the Rent Act 1977.
The Rent Act is not relevant for tenancies created today, and we now look to the Housing Act 1988 where they are no longer illegal. What does the act say about premiums?
The Housing Act 1988 s15
S15 (4) describes a premium saying that it includes
(a) any fine or other like sum;
(b) any other pecuniary consideration in addition to rent; and
(c) any sum paid by way of deposit, other than one which does not exceed one-sixth of the annual rent payable under the tenancy immediately after the grant or renewal in question.
So presumably a premium tenancy is one where one or more of these apply.
Generally the only one of these people pick up on is (c) – a sum paid by way of deposit which is more than 1/6 of the rent, ie over two months. Although so far as the the definition is concerned, a premium is not limited to this. So if you take any other payments apart from rent and the deposit, this too could be deemed to be a premium.
The point of s15, by the way, is that it allows a landlord who does not take a premium to withhold consent to assignments, without being challenged as to reasonableness. So if you DO take a premium, then this will limit your ability to prevent your tenant assigning the tenancy.
Assignments
To remind you, an assignment is a deed which transfers ownership of a tenancy or lease to another person. Landlords who have carefully credit checked and referenced their tenants before allowing them in will NOT want this to happen. So a premium tenancy will be a Bad Thing.
I should add here that my landlord and tenant law books do not refer anywhere to a ‘premium tenancy’ as such. A quick flick through the indexes brings up nothing more than (in one of them) a reference to the prohibition on premiums in the Rent Act 1977.
Two final points
There are two other points which should be mentioned, which I also looked at in my previous post on premiums here. These are:
- That under s115 of the Housing Act 1988 you may not be able to end a tenancy within 20 years if a premium is taken and
- That where a premium is taken, the tenancy needs to be created by a deed.
The first is the most worrying, and (if the worrying interpretation is correct) is another compelling reason not to take a premium. However I suspect it may not apply as the section is specifically stated to be about long leases, which presumably will not incude a 6 month AST.
So with that background knowledge, let us proceed to the other four questions.
2. If a tenant pays six months’ rent up front, has a Premium Tenancy been created?
Here I would say no. The money is paid as rent, not as a deposit. Neither is it a ‘fine’ (s15(4)(a)) or a payment other than rent. It is rent.
I looked at this in a previous post where someone suggested that 6 months rent in advance could be a deposit. My view is that it is not. The definition of a deposit in s212 of the Housing Act 2004 is as follows:
“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.
I don’t think this includes money taken as rent. I could be wrong but if I am, I think we would have had a case on it by now.
3. What if a guarantor is prepared to pay a larger deposit to encourage a landlord to provide a home to a prospective tenant whom they would otherwise decline?
Well if the deposit sum was more than two months rent, then yes, this would count as a premium. The fact that it is paid by someone other than the tenant would not prevent this.
4. What if a tenant wants to pay rent in advance?
Again, so long as it is rent and not held as a deposit, you should be fine.
5. If a landlord takes a deposit that equates to over 7 weeks rent does this make a premium tenancy?
It depends on how much over. Anything up to two months rent worth should be OK.
So if the rent is £150 pw then you need to work out the monthly rent (£150 x 52 = £7,800 / 12 = £650) so two months would be £1,300. So (assuming my maths is OK) you need to be careful not to take more than £1,300 as deposit.
To sum up therefore
So long as you make sure that your deposits are NEVER over 8 weeks worth of rent or ALWAYS under two months, then you will not normally be at risk of creating an accidental premium tenancy. However s115 worries me. Any lawyers with any feedback on this – I would welcome your comments.
So there we are. The challenge is complete. If you have any questions or comments please put them here or over on the Property 118 post where I have put an abbreviated version of my answers.
Hello
Don’t think s115 such an issue as the definition of long lease comes from Landlord and Tenant Act 1954 and is for lease of more than 21 years.
Issue tends to be that care needs to be taken over up front rent payments . Need to make sure that you do not inadvertently create a 6 month rental period which could affect ability to serve notices. Also have not done any calculations but could affect SDLT.
Premium leases whereby the premium equals the capitalised rent used to be common for companies allowing employees to be the permitted occupier as there was a tax loophole but beleive that was shut some years ago.
Thanks Tessa.
The questions asked were to try and clear up some real life scenarios that may come up from time to time for your readers. We have been asked on several occasions if we are prepared to take 6 months up front and to avoid any doubt on this issue we have simply said no.
The subject matter here, has sparked a lot of debate on the subject, mostly surrounding interpretation and it is for this reason we do not entertain the request.
We are both aware that the law will always be interpreted and applied according to the circumstances hence case law, and some may call us overly cautious but I would rather be that, than stuck with a “premium” tenancy that has been successfully applied in the courts :)
I was somewhat confused by this premium issue and I was enlightened by this post. Thanks for the share!
Re item 4 and rent in advance.
There has been debate for some time as to whether or not rent paid in advance should be treated as a deposit. In my view and reflecting the latest thinking I have seen on the subject, I think it is even more clear than ever now from the deliberately wide wording in the 2004 Act definition of a deposit that the legislators are intentionally closing off loopholes like taking money up front and calling it rent (or anything else.
The key issue for me is when the definition clearly states (twice in different formats) that if it is in any way linked to the discharge of a future obligation by the tenant then it is a deposit.
I appreciate there may not have been a case yet – I haven’t actually murdered a Landlord or a tenant but there is still plenty of time!!
If rent is taken in advance then it need not pose any problems but there are specific techniques needed to amend the wording in the core terms dealing with the amount initially paid and what period it covers and then to goon to state that after that period the tenancy bevomes monthly periodic.
This also deals with the issue correctly raised of inadvertently making the rent payable 6 monthly and the associated notice problems that gives rise to.
This wording of the rent clause and dates due in order to avoid the payment being treated legally as what without that technique it is – a deposit – is simple enough and a belt and braces approach.
It is an interesting point. My view is that it depends on what happens.
If a landlord takes six months worth of rent, marks in his records that the rent is paid for the next six months and does not make any further demand for rent until the six month period is up, then that is rent.
However if at the start of the tenancy he takes two months rent in advance, but continues to demand rent for month two, three and so on, despite the fact that he has a rent in hand, then this rent in hand is a deposit.
The essense of a deposit or security is that it is something that is not set against an actual cost at that time, but is held separate to abide the event.
As I said here http://www.landlordlawblog.co.uk/2010/08/25/problem-with-advance-rent-payments/ if a six months in advance payment is really a deposit which must be protected then you have the situation where you have to amending your records of the rent held with the tenancy deposit scheme you are using (or in the case of DPS try to extract it from the company) every month. Which is ridiculous.
I could be wrong of course! What do other people think?
I cannot agree with Industry Observer. Rent payable in advance is simply the rent payable in advance for a period of the tenancy. Taking 6 months rent in advance is simply taking the rent for a period of 6 months. The Court of Appeal confirmed that the periods of an HA 1988 tenancy followed rent payments in Church Commissioners v Meya.
If it was correct that the payment of 6 months rent in advance for a 6 mont period made that money a deposit then any advance rent payment would, by the same token, be a deposit.
I think Industry Observer is correct, but perhaps not quite making it clear.
If the rent is payable monthly then As David said) in the Church Commissioner v Meya case the periods are those for which rent was last PAYABLE (Note not paid)under the fixed term.
However, if you have a monthly rent and you collect 6 months rent up front, the question to answer is “Why”? Commonly this is done because adequate references cannot be obtained. In this circumstance it will be hard to argue you are not doing to make sure you get paid (falling pretty clearly into the definition of a deposit). If however, the tenant has sold their house, rents your property and signs up a monthly paying agreement and then comes into the office and says they will be out of the country for 6 months and wants to pay the rent now, we might then be argued to be accepting it at the tenants request, not because we are making sure the tenant fulfils an obligation. I have to say I would be very nervous of this scenario (apart from it being very contrived!) and at least I would want written evidence of the purpose for holding the money.
The simple solution is if you want to take six months rent on move in, make the rent payable for a period of 6 months. Ie instead of £500 per month make the rent £3,000 for 6 months. This is simply paying the rent for a period at the beginning of that period (the same as a monthly at the beginning of the month or weekly at the beginning of the week). The danger here is rightly raised in respect of longer periodic notice periods but that may not be a problem in reality as would you allow a tenant “you cannot trust to pay the rent” to remain periodic. I think, ignoring the law, you would be needing a discussion about are they going to be able to pay the rent and a simple renewal on appropriate terms would be the real answer. If you are of a nervous disposition you could always serve a section 21 during the fixed term to be safe as this version can still be 2 months.
Essentially I would argue that the Housing Act 2004 definition of a deposit is essentially purposeful and if money is held (ie not yet due) to ensure the tenant fulfils an obligation, you have a deposit. The above changes when it is due to avoid the problem.
Tessa
And I could be wrong too. Problem post Localism Act is if I am right then my clients don’t have anything to fear. But anyone not treating the advance rent correctly would end up stuck with it defined as a deposit and an award of potentially x3 against them. That could be a tidy sum if the extra 5 months were £1000 each
I don’t think it can just “depend on what happens” it surely has to depend on what the Statute has stated
The additional payment is taken in contemplation of a future obligation and in fear that the tenant may not discharge said liability – the obligation he has covenanted for which is next 5 months rental payments. All that has happened is instead of discharging the obligations monthly in due course as the rent actually falls due the tenant has handed the lot over up front. Though the obligation has not yet actually arisen, but will later.
I agree 100% with your opinion on what happens if you take two months extra but then demand rent in month 2 and this is what offices used to do usually taking 6 months up front and then asking for rent from month 5 onwards. We believed they were thus always holding one month’s deposit and protected that and we also thought we were holding two months advance rent. But as per the definition in 212(8)we were unwittingly holding three months deposit but had only protected one month – oops!!
So we had to change the practice – hence the initial wording changes that are needed in the agreement.
You said
“The essence of a deposit or security is that it is something that is not set against an actual cost at that time, but is held separate to abide the event”
And that is exactly why the Statute is worded how it is – to stop a Landlord simply calling rent what the Law has clearly defined instead as a deposit. We can call anything whatever we want to – the issue is does the Law agree with what we call it. Remember we are only calling it rent to avoid an obligation that otherwise falls upon us – to protect the lot (or use the amended wording see below).
For example if I do repairs but call them an improvement I can call them what I like but HMRC won’t give me tax relief on them!!
The Statute defines as a deposit any money held in contemplation of a future obligation on the part of the tenant as in HA 2004 s212(8). It cannot be argued that he has already discharged the obligation for future month’s rent payments (and therefore defeat the Statute definition) unless it is a tenancy where the rent is payable 6 monthly and we know where that leads us. The rent has not yet fallen due for months 2 – 5 so how can the tenant have discharged a liability that has not yet lawfully arisen?
I agree with what you describe as ridiculous especially as you would have to issue a revised PIN every month too!!
But that in practice is not what happens. The normal deposit only is protected and the advance rental payment is prevented from being defined as a deposit (which is how it would otherwise be defined and would thus need protecting) by the special wording that amends the tenancy agreement.
Inconvenient though it is (and how often is the Law inconvenient?!) I just don’t see there can really be any doubt that this is what the Law is deliberately saying. The point is, this extra money up front:-
1. When is it paid?
2. Why is it paid?
Answers:-
(1) Before the tenancy commences or at that point
(2) To protect the Landlord in case the tenant does not pay say in month 4 – so the Landlord
holds the money in advance ready to discharge that tenant obligation
So the rent in advance monies are clearly caught in the net of the deposit definition in the 2004 Act – and deliberately so to avoid contrivances such as simply calling it “rent”.
I cannot accept the suggestion being put forward by DDG. You cannot say arbitrarily that 6 months rent in advance constitutes a deposit. This money is not being taken as security. It is rent paid in advance. If your argument was correct then any advance rent payment would be a deposit. There is only one reported case on this issue in the County Court. There is was held that each case had to be considered on its facts. The judge held that a payment of the first and last month rent at the start with the remainder of the monthly payments paid as normal meant that the last month’s rent was a deposit.
The rent has fallen due for the first six months if the tenancy agreement states that the rent is payable 6 monthly in advance. The Courts are quite willing to accept that the payment periods and tenancy periods do not necessarily match. It is only in Church Commissioners that this was altered.
Thank you David.
I don’t think I am “arbitrarily” calling it a deposit. I am looking at the definition of the word deposit (for the purposes of HA04) and trying to ask if the reason I have taken the six months up front (rent due monthly and tenant with no references) is “as security for—
(a) the performance of any obligations of the tenant”.
Surely if I cannot trust the tenant to pay the rent and so I insist that it is all paid up front (when it is only due monthly during the term) “to make sure I get paid”, it is going to be hard to avoid it falling into the intentionally wide definition of a deposit?
Clearly it is all different if I agree the rent for the 6 months are due the day of move in , with associated potential notice problems.
So what about an escrow service?
If we already have a trustworthy system to hold the deposit for the security of the tenant – then surely those same bodies could hold the tenant’s money for the security of the landlord…
It’s a recognised practise in the construction industry / for purchasing online, particularly digital assets such as domain names.
ie: the tenant pays a deposit, which is rightly secured / insured by a 3rd party. They then pay the LL the 1st month’s rent, and 5 months rent to the escrow service – which then release it monthly to the LL, unless requested to stop by the tenant…
As an example of what it might cost Escrow.com charges under 1% on larger amounts – and the 3rd party would have the benefit of the funds for a long period too.
Surely, it could do away with the need for a guarantor, IF the tenant has the funds available.
Could be – what does anyone else think?