>> See the Court of Appeal decision on this case (23 April 2013)
In past posts on this blog, I and others have maintained that where a tenant pays six months rent in advance this is not a deposit.
I therefore need to mention a County Court decision which thinks otherwise:
Johnson v. Old
Brighton County Court – 20 January 2012
Here there were a succession of six month fixed term tenancy agreements. A deposit was paid (which was properly protected) and the landlord also required the tenant to pay rent in advance as she had not passed their credit checks.
When the tenancy fell became periodic at the end of the third fixed term, the tenant fell into arrears and the landlord served a section 21 notice and applied for possession.
The Judge however, DJ Collins, decided that all three payments of rent in advance had been a deposit and therefore the section 21 notice was invalid.
Comment
This is a County Court decision and is therefore not binding on anyone.
My view remains that a payment of rent up front cannot be a deposit. Provided it is credited to the rent account immediately, if fails to fall within the definition of a deposit in s212 of the Housing Act 2004 – as it will not be money intended to be held as security – it will be rent.
The rather brief report of this case in the June LAG Journal does not say why the Judge found that the payments fell within the definition of a deposit and it would be nice to know more about this. As one commentator pointed out on my earlier post – if six months rent paid in advance is a deposit then any rent paid in advance is a deposit.
Where do you stop? Is it a deposit if it is paid a month in advance? A week in advance? Two days in advance??
It would be helpful if a case on this point could go to one of the higher courts so we could get some clarification. The current state of affairs is most unsatisfactory.
If a payment of six months rent up front IS a deposit
- it would result in considerable unnecessary administration dealing with the tenancy deposit scheme requirements (as the ‘deposit’ would need to reduce on a monthly basis as rent is paid over) and
- as a result this would put landlords off taking tenants who fail credit checks but who can pay rent in advance. And I can’t see that this would do anyone any good.
It would be interesting to know what the tenancy deposit schemes have to say about this.
I agree with you Tessa, but the case must have turned on the wording of the AST.
If rent was stated to be paid monthly in advance the 6 month payment should have been found to be 1 months rent and the balance as a deposit. Perhaps the tenancy did not state that rent was to be paid in advance in which case the judge would have been correct since rent is normally payable in arrears in those circumstances.
It is perfectly possible to create a tenancy where rent for greater than 1 month is payable at the outset and in advance. In commercial leases it is the norm for rent to be payable quarterly in advance. A well drawn AST can make it clear that the rent for the whole period is payable at the beginning
I agree that it is a good idea for large up front payments of rent, especially for the whole fixed term, to be set out in the tenancy agreement.
But if the courts are finding that rent payable in advance (other than as set out in the tenancy agreement) = a deposit, then that must present huge practical problems if they are supposed to be registering it.
What if the rent is paid one week in advance?
Note that TDS in twitter have referred me to this post http://blog.tds.gb.com/blog/when-is-a-deposit-not-a-deposit/ but that does not specifically look at advance rent payments and is more about holding deposits.
This is exactly what we have been warning of. I accept that another judge could, and some probably would, come out with a different decision.
Clearly the issue will be about the agreement. If the rent is being defined as payable monthly then there is a risk. If the rent is defined as £XXX for 6 months then it would not be a problem. I would guess we are all scrabbling to find more info!
Tessa, to answer your question I think you have to consider the definition which you quote, it is “purposeful”. In other words the reason the money is taken early is significant, (held to ensure). this means a tenant who, for example, says “I have just won a week’s rent in the slot machine and I don’t want to carry the coins around, can I pay you early for next week’s rent?” is not paying to ensure an obligation is fulfilled, but rather to save the tenant having to carry the weight around (purely hypothetical and ignoring proceeds of crime issues!). Therefore the payment may not be considered a deposit. In the most common situation the money is demanded by the agent because adequate references cannot be obtained. Actually you could still collect the rent monthly even if you had no references. Therefore I suggest it you ask “why is the rent being collected up front, when it is not yet due?” the answer has to be “to make sure they pay”, and I would suggest this is exactly why it falls into the definition of a deposit. You are asking a tenant to “fulfill” the obligation before it even exists (all assuming the rent remains defined as due monthly).
Although a lower court this decision is even more interesting because the judge is reported as holding that “each” of the three payments was a deposit, also potentially adding to the point about each new tenancy needing protection. And of course a periodic teancy is a new tenancy.
What will be far more significant is that having decided the payments were a deposit a subsequent penalty claim by the tenant heard by the same Judge is bound to succeed!!
I have said it before and will say it again the point is it doesn’t matter what anyone calls it, what matters is the purpose. The payment is taken in case the tenant defaults on a future obligation under the tenancy – therefore it is a deposit caught as clearly and deliberately defined in the 2004 Act
Indeed the Landlord seems to hold all the aces – which the Courts dislike – in that he has also already received the money even before the obligation or failure to meet it has arisen!!!
Simon above hits the nail right on the head. If a tenancy allows for monthly payments AS THEY FALL DUE then anything else paid in advance has to be suspect. The deposit definition in the 2004 Act was drawn very widely and deliberately so.
In my view and I think the Statute is very clear on it any money being held in avance and in contemplation of a future obligation is a deposit. It is extra security for the Landlord otherwise why is it being taken. Whether the agent holds it and drip feeds it monthly to the Landlord as the rent falls due (in my view the correct approach payent to the landlord as and when due)or even worse if it is all paid to the Landlord in advance then he already holds the money in case the tenant diodn’t pay in the future.
Seems crystal clear to me even if it is a tad inconvenient – the Law often is!!
Tessa it doesn’t matter two hoots what the TDP schemes, or the OFT, or CLG or you or me or anyone says or thinks, believes, wishes or prefers what matters is what the Statute says (even if it should say otherwise) and how a Judge (I agree ideally in a Court of Record) interprets that.
There is a very simple solution to this which the RLA has been advising its members on for some time and to which Simon alludes above and that is simply to amend the wording in the rent payment and due date clause in the tenancy agreement to say that (Assume £3000 paid for 6 x £500 in advance on 1st January)
1. The term is for 7 months
2. The rent is £3000 from 1st January 2012 to 30th June 2012
3. On 1st July it is £500 and monthly thereafter payable 1st monthly
The other solution is to create a contractual tenancy from the start
The whole thing is odd. I’d agree that 6 months rent in advance should not be construed as a deposit. I can only imagine there were elements to this decision that didn’t make it into the report (I’ll see what I can find out).
But 6 months rent in advance runs a clear risk of setting up a six monthly periodic on the expiry of the fixed term if the fixed term was 6 months.
I’m curious about how Industry Observer thinks a contractual tenancy could be created from the start, assuming none of the Housing Act 1988 exceptions apply. One can’t opt out of creating an AST.
It is infuriating that these nitpicky problems keep arising. Its quite fun for us lawyers but not very helpful for your average landlord who just wants to make sure he gets paid his rightful.
One thing that occurs to me is that maybe the money could be put in a separate bank account – rather like the special accounts set up by credit unions to ringfence housing benefit – so the money is not paid to the landlord (and therefore (I hope) cannot be a deposit) but is still there when needed.
Might be worth speaking to your local credit union about this.
I am at a loss to see how Simon and Ind Obs can suggest that a rent payment in advance can be a deposit. The obligation is not to pay rent monthly and then have a further payment of six months in advance. The obligation IS to pay six months in advance. Therefore the six months in advance is not security for the obligation, it is the obligation itself. I would also point to the Court of Appeal decision in UK Housing Alliance v Francis which stated that the entire trajectory of the chapter was that a deposit was money which had been paid in contemplation of it being returned. Rent paid in advance clearly does not fall into this category as there are no circumstances where it would be returned.
Incidentally I cannot imagine why the RLA would take the view that an agent should hold six months advance rent and then drip feed it to the landlord. I always thought the RLA was on the landlord’s side?
NL
read the wording at the end of my post this is why it does not set up a 6 monthly periodic etc
DS
If the RLA comment was in relation to something I said I cannot see it in what I posted.
The return of rent by the way can come from a frustrated contract. What happens if a bus runs into the building, or it was in the scene of ther recent Welsh floods. Landlord has to return the unpaid portion of the rent, thus making the money refundable.
I’m getting confused here.
Are people in effect saying that if, say, a tenant pays his rent three weeks early – that is actually a deposit which a landlord must protect within 30 days or be at risk of not being to evict under s21 unless he pays the money back??
SURELY that can’t be what Parliament intended.
Not if it is just the initial rent, of course not. But if the tenant pays 6 months up front 3 weeks in advance, or three months, three days or on commencement date, yes.
Probably not what Parliament intended but the letter of the Law is what has to be followed for better or for worse. Witness the Localism Act 2011 which corrected a lot of what they didn’t intend in the 2004 Act, or at least not how they intended Judges to interpret what they created.
But nothing was done to change what was set out in 2004 and in fact if anything the deposit definition was reinforced.
David at 1.20 on 26th also hits nails on the head. Take 6 months where the rent is payable 6 monthly no problem. Take 6 months where the rent is payable monthly and you have a problem, and need to cater for it with amended wording in the tenancy agreement. It is very simple to do and if it is done then no matter who is right or wrong you are covered and absolutely no-one is worse off.
The tenant pays what they were going to anyway and then starts monthly payments in month 7 onwards.
The Landlord gets his money up front and then monthly
The agent doesn’t get sued for not protecting.
The only problem, the only one, is if you aree going to want 6 months up front from month 7 not sure you cn cater for that nomatter what your wording is.
This argument about what we’d all prefer to happen is very akin to the one about post Localism Act is it necessary to reprotect a deposit once a tenancy goes periodic. Section 5 of 1988 Act makes it abundantly clear that it is a new tenancy that arises – therefore the deposit has to be re-protected. More commentators seem to be agreeing if reluctantly with that position – but this is it rent or a deposit argument rumbles on.
The real issue is student lets. How can money taken in January 2012 for a tenancy not even starting until September 2012 be anything other than a deposit – that’s why the definition is as it is in the 2004 Act.
We quite often get Phd students coming in from abroad for a 3 month period. They have no security and can’t pass through reference checks so we get round this by getting them to pay the full rent in advance. When the tenancy comes to an end they hand the keys back and return to their own country. We rarely take a deposit because it takes too long and the students want to close any English bank account prior to returning to their country.
We usually put in the tenancy that the rent is due monthly but has been paid in advance. Should we word this differently?
If you don’t take a deposit then the problem discussed here won’t arise. Particularly if the tenants just zip off back home after their course ends.
These things only cause a problem when people are in dispute about something and resort to the courts. If everyone is reasonable and in agreement then things are usually OK. Thankfully most people are most of the time.
Tessa
Re Sandra how can you say if you don’t call it a deposit (or claim not to take one) that the rent taken in advance is not a deposit. Surely that is what this whole debate is about, that no matter what you call the money is it a deposit or not.
If Sandra creates three monthly tenancies with the rent paid three monthly and doesn’t take a deposit, no problem.
But if she takes this payment in advance in contemplation of the discharge of a future oligation by a tenant i.e. paying the rent – you are back to square one and the 2004 Act defines that money held as a deposit.
You can put the money where you like, call it what you like, name the account what you like. The whole issue is why has the money been taken if for the discharge of any future obligation by the tenant i.e. as extra security for the Landlord, then it has to be a deposit
No, this is not so. A deposit is not ‘for the discharge of a future obligation’. It is to be held against a tenant’s possible failure to discharge a future obligation. The only way a six month in advance payment could be a deposit is if the tenant was still expected to make the monthly rent payments.
I currently have a tenant whose rent is due monthly, but he usually pays it in lump sums of, say, three months, without being asked to. He makes a bank transfer directly into my account and emails me to tell me how much he’s paid.
So, “If a payment of six months rent up front IS a deposit…” I would have to protect these advance payments. But what if the tenancy contract provided that the deposit could not be set against unpaid rent?
What if I then applied to evict the tenant for non-payment of rent? Would the tenant have paid the rent or not?
What if I didn’t know my tenant had paid three months’ rent in advance, and only discovered it after 30 days had elapsed? Then he claimed against me under s.214. It’d be a very nice earner for tenants.
What if the tenant paid a month’s rent one day before it fell due? (intentionally or not; a standing order could easily arrive a day early). The ‘deposit’ would effectively vanish several hours later. Would I be required to protect the non-existent ‘deposit’, held as security against a future obligation at midnight? Would DJ Collins consider that any s.21 notice served would be invalid if served before I’d returned the ‘deposit’?
Does the landlord in Johnson v. Old now have to pay the tenant 18 months’ worth of rent before he can serve a s.21 notice?
Mad.
this is ludicrus its quite simple in my eyes, Rent is rent and a Deposit is a deposit simple! why do all these do gooders have to keep bashing us landlords with these silly laws. When my tenant pays me rent in advance its to cover rent not damages and its normally because the tenant has failed the credit or earnings check or they are a student with no income so there parent is paying,there lucky we are aggreeing to house these un qualifying people yet they keep trying to bash us landlords by going against us in court time after time.