The Court of Appeal has held in favour of the landlord in this case and you should read that page rather than this one which is now in archive

Archive use only

We have always been worried that the taking of multiple periods of rent in advance (for example 6 months rent in advance) could well be a deposit and therefore potentially needs protecting. It seems the county court at first thought the same although on appeal overturned that view. This however leaves the worry of not knowing which way the court may decide upon this issue next time. (Although I suspect the appealed decision below was correctly decided).

In Johnson v Old, Brighton County Court 20 January 2012 (only just published), the landlord had granted a succession of tenancies to the same tenant. At the commencement of the first tenancy and at each renewal, the landlord took from the tenant 6 months rent in advance because the tenants credit checks were not satisfactory.

There was an initial deposit of £1,425.00 which was protected with an authorised tenancy deposit scheme but the rent in advance was not protected.

After the third fixed term tenancy had expired, the tenancy continued as a statutory periodic tenancy [section 5 Housing Act 1988] and the tenant became in arrears so the landlord issued a notice pursuant to section 21 Housing Act 1988.

Deputy District Judge Collins held that each of the three payments of rent in advance (presumably 5 months of the 6) were a tenancy deposit as defined in [section 212(8) Housing Act 2004] and required protecting. If a tenancy deposit has been received and not protected, one of the penalties is that a section 21 notice may not be served until it has been protected (at the time of the case, since April 2012 it’s slightly different)[section 215(1) Housing Act 2004]. Because the deposit (rent in advance) had not been protected, it was held that the section 21 notice had not been validly served by the landlord and the claim for possession was dismissed.

Thanks to the Landlord Law Blog for the following appeal details:

The landlord appealed which was heard by HHJ Simpkiss on the 31st July 2012. The court ruled in favour of the landlord and it was found:

• the advance payment of rent was not a payment to secure the performance of an obligation to pay rent but was actually the obligation itself.
• it was never intended to be returned at any time during the tenancy nor once it had ended and the monthly rent was never sought from the Defendant on a monthly basis in addition to the up front payments.
• the intention of the parties was obvious from the out set.

Comment

In my view this decision was technically right at both hearings. Note my wording that this is “technically” right. I suspect that like the appeal outcome in this case, when this type of case gets to the Court of Appeal, a distinction will have to be ultimately made between the landlord who takes the first months rent in advance plus another “months rent in advance” but continues to claim rent despite having rent in hand. This, without question is a deposit (see for example Piggott v Slaven, Great Grimsby County Court 23 February 2009). However, the true six months rent in advance and crucially where the landlord does not seek rent during that period and so is a genuine rent in advance will hopefully avoid being regarded as a deposit when cases travel higher up the court ladder. If you think about this case and assume the rent is the same as the deposit (£1,425), five months rent in advance has presumably been deemed a deposit (no transcript is available so that’s a guess) which totals £7,125.00. This happened 3 times, so total deposits received were £21,375.00. The penalty (at the time of the hearing) was three times deposit plus return of the deposit so, the potential penalty that the landlord could have had to pay in this case had the tenant claimed would have been a whopping £85,500.00!

Please allow me to explain why I believe rent in advance could well be a deposit as found at the first hearing in this case.

The first thing to remember is that rent in advance is not rent [Clun’s Case (1613) 10 Co.Rep. 127b; Cromwell v Andrews (1583) cro.Eliz. 15.]. It is nothing more than a voluntary payment of money and is no satisfaction of future rent in law. Therefore, when taking rent in advance beyond that required by a tenancy agreement, the landlord is holding nothing more than money in law.

Current and the payment of future rent is an obligation of every tenancy agreement (including oral agreements).

Therefore, the tenant has an obligation to pay rent now and in the future under the tenancy and the landlord holds money (not rent, just money) to secure the performance of that obligation to pay future rent as and when the obligations falls due (normally monthly but can be whatever period stipulated in the terms of the tenancy). When the tenant pays the rent, or the landlord uses the money being held, that is discharging the tenants liability to pay the rent arising under the tenancy.

Now let me show you the definition of a deposit that requires protecting under Housing Act 2004 (highlights added):

“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.

And, this is precisely why, I think Deputy District Judge Collins was quite right in this decision. The landlord was holding money (to clarify, money, not rent) which was being used to secure the performance of the obligation to pay future rent and was using that money to discharge that liability arising under the tenancy. Therefore, such money requires protecting because it meets the definition of deposit in my view.

I said above that there was a simple way to fix the problem and there is. All that needs to be done is to change the tenancy agreement to one month longer than the amount of rent being taken so in the case of six months rent in advance, you would create a tenancy of seven months. Then, the first six months payment needs to be shown as one sum becoming due upon commencement of the tenancy, then the seventh month should be at the normal rate. This way, when the landlord receives the first lump sum, the landlord is not holding the money. It’s gone, used, finished and the liability has been discharged. It therefore no longer falls under the definition of deposit.

The reason for the seventh month is because if it were a six month fixed term, one lump sum and the tenant remained in occupation after the fixed term expired, then,section 5 Housing Act 1988 would kick in, a statutory periodic tenancy would arise and the periods of the tenancy would be “the same as the last rent payable”. Using our example of a six month fixed term, the periods of the tenancy would therefore be every six months [Church Commissioners v Meya (2006) 2 E.G.L.R. 39].

“… one has to ascertain first what payment of rent last fell due, in other words, what was the last payment of rent the respondent was obliged to make [under the fixed term], and then secondly of course, ascertain the period covered by that last payment.” [Ward L J para 21]

This on it’s own isn’t too bad but, the problem is, if the landlord needed to serve notice after the fixed term had ended, the section 21 notice would need to be (a) six months in length (not two months)[section 21(4)(b) Housing Act 1988] and (b) would need to expire on the day before the rent is due of which there would only be two occasions in any one year [section 21(4)(a) Housing Act 1988].

That is why, the seventh month is needed. This seventh month will be shown on the tenancy as having rent payable at the regular monthly rent thus becoming the “last rent payable under the fixed term” and the statutory periodic tenancy arising would become monthly. An example of the tenancy terms using rent of £750.00 pcm is shown below:

Fixed term

From and including 15 June 2012
To and including 14 January 2013

Rent is payable in advance on the following dates by the following amounts:

From 15 June 2012 to 14 December 2012 the amount of £4,500.00

From 15 December 2012 to 14 January 2013 the amount of £750.00

And thereafter payable in advance at the rate of £750.00 per calendar month.

There is an alternative to making these amendments and that is when creating the tenancy a statutory periodic tenancy can be avoided by creating a contractual periodic tenancy once the fixed term has ended. This way, the periods of the contractual periodic tenancy can be defined within the tenancy. A statutory periodic tenancy only arises if the fixed term tenancy “ends” which it wouldn’t if it is made to continue as periodic.

Since the deposit legislation was introduced we have and continue to provide a replacement front page for our tenancy agreements for the situation of receiving rent in advance, therefore Guild members simply need complete these replacement front pages and they will avoid the problems found here.