The critical question of whether rent paid in advance is a tenant’s deposit is to be decided by the Court of Appeal.
The case of Johnson v Old is due before the Court in March after the tenant in the case decided to appeal.
In Johnson v Old, six months rent in advance had been paid by the tenant, along with a separate sum which was taken as a deposit and duly protected.
When the landlord sought possession of the property, the tenant argued that only part of the deposit had been registered as the rent taken in advance had constituted a deposit which had not been protected, and that the Section 21 Notice was therefore invalid.
The case was heard last January at Brighton County Court, which held that the advance rent was a deposit and that the Section 21 notice was invalid. Deputy District Judge Collins dismissed the landlord’s claim for possession and ordered the landlord to pay the tenant’s costs.
However, this judgment was overturned on an appeal last July, also in Brighton County Court, by His Honour J Simpkiss, who decided that advance rent was not a deposit. As a result, possession and costs were awarded to the landlord – and the lettings industry breathed a sigh of collective relief.
However, Shoosmiths, solicitors for the landlord, confirm that the tenant – who was refused leave to appeal at the last hearing – subsequently applied direct to the Court of Appeal, using the same arguments as before. The tenant was then given leave to appeal.
The case will now be determined by the Court of Appeal, due to sit on March 5 or 6. The judgment itself may not be released for some time afterwards.
Eamonn Hogan of Shoosmiths said that the central issue for the court will be to decide what constitutes a deposit and whether rent in advance is a deposit which should be protected.
He also revealed that the tenant is still living in the property concerned, although through agreement, and the landlord is receiving monthly payments.
The outcome of the case could also give implied or actual guidance as to the question of whether 'holding deposits' paid by tenants could also be deposits for the purposes of protection – an issue that has recently been the subject of debate on this site.
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Comments
We shall have to see what the CA decides. Logically, the six month payment is rent and not a deposit. Indicators are:
1. The parties have agreed it is rent and that the tenant does not have to pay any more rent for 6 months;
2. If it is not a payment for the use of the property (i.e. rent) what is it?
3. If it is a deposit, does the tenant have to pay the monthly rent anyway, leaving the landlord with a 6 month deposit. If the tenant does not pay the rent every month, then the landlord could seek possession. (This would hoist the tenant on his own petard!)
4. If the tenant does not have to pay monthly, then how does the landlord get his hands on the money. Does he need to get the tenant's agreement every month to take one month's rent?
5. Even if the tenant agrees to release the money every month, the deposit schemes are designed to operate at the end of a tenancy, not during it.
The DPS website says: "Landlords, agents and tenants can all request the repayment of a deposit to the appropriate parties at the end of a tenancy - either jointly or independently, online or by calling us and requesting a paper form." NB "at the end of a tenancy"
How it is supposed to work if the landlord uses the Tenancy Deposit Scheme is anyone's guess. I can see a tenant arguing that the landlord has not "protected the deposit" because he has withdrawn money from it!
6. The landlord has to pay income tax on rent - he would not pay tax on the receipt of a deposit.
It appears that the tenant is hoping the judge will apply the legal principle: "You look like a residential tenant, therefore the landlord must be in the wrong" to pursue this unmeritorious argument. Given the draconian sanctions against landlords who do not protect deposits, perhaps there should be some sanctions (at least in costs) against tenants who pursue futile arguments and lose.
Industry Observer - 'What better way to ensure the tenant fulfils an obligation than to discharge it up front'
Absolutely agree and it should hopefully hold everyone in good stead but you should also be aware that in contract law the intention of the contract is always paramount. A contract is based on an agreement and in order to agree, both parties must share the same intentions that the contract was drawn up for. If its badly worded then you need to look at the facts to prove or disprove tort which is exactly what Judge Simpkiss did. It's very similar in style to when a bank mistakenly places money in your account or a retailer mistakenly prices an item. In these situations the law says they are not obliged to honour these errors as clearly it was not their intention to deposit these funds or undersell these items. Whats clear in Judge Simpkiss' decision was that although the tenancy was poorly written, the intent and the actions of the landlord were in line with the purpose of the payment. Rent in advance was received and no further rent was demanded for that period etc etc etc...well you can read his decision for yourself.
Industry Observer - 'This returnable deposit business or it was never intended to. The Case that is usually trotted out in support of this is a commercial one, isn't it'
Sorry dude but I can't make head nor tail of what you're saying here??? Bad grammar or bad keyboard, you're going to have to clarify.
Industry Observer - 'Surely the point is whether it ever has to be returned as opposed to whether it was ever intended to be'
First off, you do realise that you're questioning the decision of Judge Simpkiss? He ruled on the facts of the case and the laws pertaining to them. Remember even the Housing Act 2004 213(8) says - A “deposit” means a transfer of property INTENDED to be held...
Simply put, If you intend to hold the payment as security then its a deposit and you intend to return it. If you do not intend to hold it as security then its not a deposit and you do not intend to return it. Judge Simpkiss found it was never intended to be held as security and it was never intended to be returned so therefore it was not a deposit. He made a real world common sense decision which should hopefully withstand any further scrutiny and its a decision I totally agree with.
I have a number of these agreements BUT the period for a 12 month is described as 365 days and this is the rent period. The rent can then be used as the landlord sees fit. The only problem then is the Sec 21 Notice as to when it should be dated. Monthly agreements are just that and the two should not be mixed together. A 6 month term is 183 days and the notice period again comes into question. It is easier to issue a notice at the end of the term and not before and if the term is extended it is ideal to do this on the same terms as before.
The pre payment if the agreement was described as monthly should quite rightly been put into a protected scheme and drawn down month by painful month with all the consequences of the tenant not agreeing as there is a dripping tap in the kitchen (you get my drift).
Renting is easy innit? I don’t think so and it would not surprise me that the agent caught up in this was one of those who blatantly advertised 'WE NOW DO RENTALS' I bet they wont after this lot.
@EW
Very wise!!
@IHS
Doesn't matter what you call anything it is what the LAW calls it that matters
@ Update
What better way to ensure the tenant fulfils an obligation than to discharge it up front?
This returnable deposit business or it was never intended to. The Case that is usually trotted out in support of this is a commercial one, isn't it?
Surely the point is whether it ever has to be returned as opposed to whether it was ever intended to be?
As I say best to await the CoA decision whichever way that goes. One thing is for sure - that decision will not be based on how people wish the LAW was, but what it is.
In this case the tenancy agreement had been poorly prepared. It stated the rent as being payable both six monthly in advance and had a separate clause stating it was payable monthly. Clearly this was not what had been agreed between the parties and it would not have been possible for the landlord to enforce it. However, at first instance the judge appeared to take the document at face value and held that the rent in advance component was a deposit.
The decision was appealed by the landlord to a circuit judge who has taken the opposing view. He has restored the position on the facts as opposed to the documentary position, namely;
The rent paid in advance was not a security to ensure that the Defendant fulfilled the obligation to pay rent but was actually the obligation itself.
The rent paid in advance was never intended to be returnable.
Rent was never sought from the Defendant on a monthly basis in addition to the up front payments.
Even though the tenancy was badly worded common sense won the day and it should once again prevail…
I will reserve comment until the ruling - not just because its a landmark ruling, but because I hate being wrong. ;)
When we take six months rent in advance we advise the tenants that it we will be hold it in trust on their behalf and then pass it on to the landlord on a monthly basis as it becomes due. This is written into the contract.
My views on this are well known - suggest we all wait for the CoA decision though as the item says it may still not be definitive as what will really decide this case probably(!) will be a badly worded tenancy agreement clause.
In my laymans view if the 'advance' rent was paid to the landlord immediately and the tenant paid no more until the seventh month - it was rent?. If the agent held the six months rent and paid the landlord one sixth in each of the first six months - the running residue was a deposit?
However, the tenancy agreement should have clarified everything and a dispute would never have occured?
Petetong - 'If the money taken is not contractually due, then you would have to assume its taken as 'deposit'.
Agreed but let's clarify, if you take rent in advance then the AST must be amended to show this in order to establish the payment is 'contractually' due. That said, even if it isn't it still doesn't mean it's a deposit. Judge Simpkiss used a more rigorous test to identify rent than just this singular criteria, looking at the whether there was any intention to return the payment and whether any additional rent was charged on a monthly basis as well as the up front payment etc. I think 'common sense prevail' said it perfectly.
If the money taken is not contractually due, then you would have to assume its taken as 'deposit'.
The HA definition of a deposit is:
8)In subsection (7) “deposit” means a transfer of property 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
If the money not taken is not contractually due then it is not beyond the realms of possibility that the money should be treated as a deposit??
Very interesting and absolutely nails the importance of wording your agreements correctly which a large % of agents do NOT even consider doing.
Rent is rent. Deposit is Deposit. Never the two shall meet!
If I had a penny for every time I explained to out-going tenants that yes they do have to pay the final months rent, as the deposit isn't to be used as rent, well I wouldn't be here getting annoyed about this!
.....by the way JoP, "privvy" with 2 v's is an old word for lavatory which is what the original decision should have been flushed into.
Surely the crux of the matter is the actual AST which states (under the Housing Act) what constitutes a deposit and what constitutes rent. End of.
I have to agree with all the comments so far posted. What's the betting that this tenant is on Housing Benefit and we the taxpayer is funding this outrageous appeal! What hard working normal employed person would;
a: have the money and
b: have the time.
The appeal judge had better have some common sense, but who the hell can bet on that one!
Is it just me or should the courts have never even wasted their time and our money on entertaining this ridiculous idea. I cannot believe they allowed it to be heard when (unless there is information that we are not privvy too) it is crystal clear that 6 months advance rent never has nor never will be deemed as a deposit, and the true deposit was protected as regulated? Is it just me?
Concentrate on the purpose of the money taken and not what its called.
A “deposit” means a transfer of property 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 liabilities of his,
arising under or in connection with the tenancy
The key indicator is this word SECURITY, the latter part of the act, para (a) & (b) and indeed 'arising under or in connection with the tenancy' are redundant if the payment is not being held as security.
Judge Simpkiss – ‘The rent paid in advance was not a security to ensure that the Defendant fulfilled the obligation to pay rent but was actually the obligation itself’.
Judge Simpkiss - ‘The rent paid in advance was never intended to be returnable’
Judge Simpkiss - ‘Rent was never sought from the Defendant on a monthly basis in addition to the up front payments’.
The rent in advance was not held to compensate for a tenancy breach and it was never to be returned to the tenant because it was RENT.
Look at this way, If a tenant pays rent 6 months in advance and its to be treated as a deposit then its actually being held as security, to ensure that the tenant pays his rent….for exactly the same 6 month period. Also, if its treated as a deposit and not rent this will mean charging the tenant rent again….for exactly the same 6 month period!
Surely all rent is classed as rent in advance as no landlord will ever accept rent in arrears.
In this case it would mean that the first months rent would need to be protected. One month or six months should make no difference.
It should make no differecne of the frequency of the rent aslong as it is agreed beforehand?
Surely if it was stipulated as rent in advance on the contract, or on the tenant's receipt that clarifies it was not deposit. If it was used as a deposit, then did the tenant expect to pay his next months rent on the next due date? If he did then there has been a lack of communication, if he didn't he contradicts his argument and so its either rent or he would be in arrears.
Either way i won't want to be letting a home to this tenant!
Who knew that ill thought out deposit legislation would have far reaching implications?