Rent paid in advance does not count as a deposit
The landmark Court of Appeal ruling means that landlords and their appointed letting or property managing agents are not obliged to treat rent paid in advance as a deposit, as that would require protection under the Housing Act 2004.
The Court of Appeal’s decision was made in respect of the long-running case of Johnson v Old, where the tenant was offered a six-month tenancy and was asked for six months’ rent in advance, because she did not have a guaranteed fixed income.
The agreement in the case provided a confusing element as the agreement stated that the rent should be paid monthly in advance, but also said that the rent should be paid six months in advance.
The tenancy was subsequently renewed on the same terms before becoming a periodic tenancy where the rent was paid monthly in advance.
The landlord attempted to gain possession of the property, by serving a Section 21 notice to the tenant, Anne Old.
The tenant countered the Section 21 notice, saying that it could not be legally served because she had paid the rent in advance, which she thought should have been treated as a deposit and therefore protected.
The tenant’s argument was successful at the first court hearing, but was then challenged successfully by the landlord at a second.
The tenant then appealed the judges 2nd decision, and with the help of legal aid, the case then went to the Court of Appeal, which gave its decision in favour of the landlord.
The Court of Appeal had applied the test of asking how the tenant would have responded had she been asked to make a further payment of rent for one of the months covered by the six months. It decided that the tenant would have said she had already paid it.
If the landlord had lost the case and the Court of Appeal had decided that the rent paid in advance was actually a deposit, then the penalty would have been that the landlord had to return the whole of the six months advance rent and the landlord would have been facing a fine of up to three times the original deposit amount.
The Johnson v Old case was made complicated by the vague wording of the original assured short-hold tenancy agreement, underlining the need for landlords to ensure greater care when adding clauses and making sure all terms are written with clarity to avoid confusion.
News of the Court of Appeal’s landmark decision was greeted with a certain amount of relief by UK private rented sector (PRS) landlords and lettings agents
Prior to the decision the national media had reported a great deal of concern withing the UK lettings industry surrounding the outcome and how it would affect accepting rent in advance from tenant applicants.
Linda Howard, of Shoosmiths Access Legal’s landlord and tenant team, who represented the landlord, said: “We’re delighted with this result. The Court of Appeal has applied a bit of common sense in this case. Lots of landlords take payments up-front from tenants who fail referencing. If these payments were all at risk of being treated as a deposit, all sorts of problems would ensue. What this case does show is that landlords and their agents need to take care when drafting their tenancy agreements. We weren’t involved in drafting the original tenancy agreements in this case, but if it had been a bit clear, this litigation could probably have been avoided. Tenancy agreements do need to be written so that ordinary people will be able to work out what they mean, but it’s essential that they are also legally and linguistically precise so there is no room for misinterpretation or misunderstanding.”
Chief Executive of the Tenancy Deposit Scheme, Steve Harriott, said: “This is a very helpful clarification of an issue which has been concerning landlords and agents. The judgement in this Court of Appeal case should assist those landlords and agents who want to ask for rent in advance and who can be reassured that this is not a tenancy deposit that needs protecting under the Housing Act 2004.”
Landlords and letting agents can continue to accept rent in advance and this money will not be treated as a deposit. However, being offered rent for months in advance does raise the question of what will be going on at the rental property?
This tactic of paying up to six months’ rent in advance has been used by drug gangs to deter periodic checks by landlords or their agents. Individuals offering advance rent should be treated on their own merits and individual circumstances and all deposit monies taken should be protected in one of the five Government backed deposit protection schemes.
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