Rent in advance: a tenancy deposit or not?

Posted on: April 29th, 2013

Since 6 April 2007 a deposit taken on the commencement of a new assured shorthold tenancy must be protected in a Tenancy Deposit Scheme (‘TDS’). Coffin Mew’s Dispute Resolution team, take a look at a recent case that will have a direct impact on how this is viewed in the future. 

A “tenancy deposit” is defined in the Housing Act 2004 as “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”. Sanctions for non-compliance include:

  • The landlord may be prevented from recovering possession of the property by giving notice under section 21 of the Housing Act 1988; and
  • The landlord may be required to pay money to the tenant or relevant person by way of a fine.

It used to be thought that collecting two or more months’ rent in advance would not be a deposit because the monies were used up as the rent fell due: the tenant would not have to pay any further rent for an equivalent period once the advance rent had run out and would simply start to pay the rent in accordance with the terms of the tenancy. However, an unreported case in the Grimsby County Court (Piggot v. Slaven, April 2009) put this in doubt when the Judge held that a requirement for the tenant to pay monies to be held against rent due in the last two months of the tenancy was in effect a requirement to pay a deposit.

Judgment has just been handed down by the Court of Appeal in the case of Johnson v Old [2013] EWCA Civ 415 which looked at the question of whether an advance payment of rent at the commencement of a tenancy constituted a deposit.

The tenant, Mrs Old, was granted a 6-month assured shorthold tenancy from 1 May 2009 to 31 October 2009. Rent was £950 per calendar month, payable in advance, but the agreement required the first six months’ rent to be paid in advance. It also stipulated payment of a deposit of £1,425.

Prior to taking possession Mrs Old paid to her landlord’s agents the sum of £6,175, which included a £115 administration fee. The agents paid £1,425 into a TDS and £950 to the landlord in respect of the first month’s rent. The balance of £4,750 was held in the agents’ account and payment made from that sum to the landlord of £950 per month for each of the five months June 2009 to October 2009.

When the fixed term of the tenancy expired on 31 October 2009, Mrs Old entered into a new tenancy from 1 November 2009 for a further six month fixed term. The terms of the tenancy as to rent, payment of six months’ rent in advance and payment of the deposit were the same as the original agreement.

Except for increasing the advance payment to £6,000 on 29 April 2010 to take account of a rent increase, the same thing happened on 1 May 2010 (‘the May 2010 Tenancy’) when the fixed term created by the November 2009 agreement expired.

When the fixed term of the May 2010 Tenancy expired no further tenancy agreement was entered into and Mrs Old held over as a statutory periodic tenant. From March 2011 the rent account fell into arrears. The landlord’s claim for possession was defeated. On appeal, Mrs Old was ordered to give possession by 11 September 2012.

Mrs Old appealed to the Court of Appeal which distilled the relevant question to this: was the sum of £6,000 paid by Mrs Old to the agents in respect of the May 2010 Tenancy paid with the intention that it be held as security for the obligations of the tenant under the statutory periodic tenancy which arose on 1 November 2010?

Giving judgment, Sir John Chadwick said that:

it seemed impossible to contend that the whole or any part – and, in particular, an amount equivalent to five months’ rent (£5,000) – of the £6,000 paid by the tenant on 29 April 2010 was paid with intention that it be held by the landlords, or their agents or anyone else, as security for the performance of any obligations of the tenant, or as security for the discharge of any liability of the tenant, arising under or in connection with the relevant tenancy.

 

Sir John Chadwick stated that the tenancy to which the possession proceedings related was the statutory periodic tenancy that arose on 1 November 2010 and it was therefore impossible to contend that any part of the £6,000 paid at the start of the May 2010 Tenancy was paid with the intention that it be security for the tenant’s liability to pay rent (or perform any other obligation) under the statutory periodic tenancy because both parties must have intended that, by 1 November 2010, the whole of the £6,000 paid would have been applied in discharge of the rent due under the fixed term tenancy.

Comment from Coffin Mew

The Court of Appeal’s judgment is a common-sense and practical interpretation of the law and will be a welcome relief for landlords who collect a payment of rent in advance referable to a fixed period of the tenancy. However, one wonders whether the Court’s decision would have been different if, on the coming to an end of the fixed term, the landlord had requested a further six months’ rent in advance.

Although the rules relating to tenancy deposits have been with us for six years now, it is still a minefield for the unwary with tenants finding increasingly novel ways to attempt to use a landlord’s apparent failure to comply to defeat an otherwise mandatory claim for possession. As the economy continues to struggle, coupled with the impact of welfare reform, one suspects that these types of argument will become more prevalent as people fight to preserve possession. Although in this case the landlord ultimately succeeded, it serves as a timely reminder of the need for landlords to comply with the law and the possible consequences of failing to do so.