An important question relating to 6 months rent paid in advance, tenancy deposit schemes, and service of a section 21 notice has been answered today by the Court of Appeal in the case Johnson & Ors v Old  EWCA Civ 415
Through their agent, the landlords granted an assured shorthold tenancy to Mrs Anne Old for a flat from 1 May 2009 for a term of 6 months to 31 October 2009. The rent was £950 per calendar month payable in advance but the agreement also contained a clause that the first six months’ rent were to be paid in advance. The agreement also required payment of a deposit of £1,425.
In March 2009, before taking possession, Mrs Old had paid to the landlords’ agents (i) a “holding deposit” of £300 and a non-refundable administration fee of £115 and (ii) £950 in respect of the first month’s rent. On 22 April 2009 the agents requested payment of “the deposit – £1425.00 and the remaining five months’ rent @ £950 – £4,750”: that is to say, payment of £6,175 in aggregate. Mrs Old pointed out that she had already paid the holding deposit of £300; and, after taking credit for that sum, she made a further payment of £5,875 on 29 April 2009. It was common ground that the agents paid the sum of £1,425 into a deposit protection scheme.
The landlord and tenant (via the agent) entered into a new tenancy agreement of the flat on 1 November 2009 for a further six month fixed term. The terms in that agreement as to rent, payment of six months’ rent in advance and payment of deposit were the same as in the previous agreement. On 27 October 2009 Mrs Old had paid a further £5,700 representing 6 months rent in advance to the landlords’ agents.
A further tenancy agreement was entered into on 1 May 2010 for another six month term. The rent under that agreement was increased to £1,000 per calendar month; and that agreement, also, contained the requirement for payment of a deposit of £1,425. Just like the earlier agreements, this one contained a clause providing for the rent to be paid calendar monthly but also, in relation to the the rent in advance, clause 1.7.8 of this final agreement provided “The first six months rent are to be paid in advance (£[6,000]) …”. On 29 April 2010 Mrs Old paid £6,000.
After expiry of this tenancy agreement on 31 October 2010, no further agreements were entered into and the tenancy continued as a statutory periodic tenancy by virtue of section 5 Housing Act 1988.
Payments of rent started to be missed and by March 2011 the tenant became in arrears with the rent. A notice under section 21 Housing Act 1988 was served on 15 August 2011 seeking possession on 31 October 2011.
Possession proceedings were commenced on 16 November 2011 which came before Deputy District Judge Collins, sitting in the Brighton County Court, on 20 January 2012. He dismissed the claim for possession on the grounds that the equivalent of 5 months rent paid had in fact been a deposit which hadn’t been protected thus rendering the section 21 notice invalid. The landlords appealed to the County Court Judge. That appeal came before His Honour Judge Simpkiss on 31 July 2012. He allowed the appeal, set aside the order of the Deputy District Judge and ordered that Mrs Old give possession of the flat on or before 11 September 2012 (see our note on these previous hearings here). Mrs Old appealed that order to the Court of Appeal after permission was granted by Lord Justice Lewison on 15 October 2012.
Definition of tenancy deposit
“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.
If the “rent in advance” paid by the tenant to the landlord in this case is a tenancy deposit, then, no section 21 notice may be served at a time when the deposit was not protected:
(1)If a tenancy deposit has been paid in connection with a shorthold tenancy, no section 21 notice may be given in relation to the tenancy at a time when—
(a) the deposit is not being held in accordance with an authorised scheme, or
(b) the initial requirements of such a scheme (see section 213(4)) have not been complied with in relation to the deposit.
The tenant contended that the decision of the appeal (ordering possession against the tenant) was wrong on three counts:
(1) It was denied that the relevant tenancy agreement required the tenant to pay six months’ rent in advance; (authors note: the clause requiring 6 months rent in advance wasn’t particularly well drafted which is why the tenant queried the requirement).
(2) Assuming the rent was in fact payable calendar monthly, payment of the 6 months rent money at the beginning was therefore one months rent in advance and the equivalent of 5 months was paid as security for the future rental payments and was therefore a deposit and not rent.
(3) It would follow If the above were held, that the section 21 notice could not have been served and therefore possession could not be ordered.
The Court of Appeal held that when all the clauses were read together, clause 1.7.8 (the clause requiring 6 months rent in advance) did have the effect of requiring six months rent in advance in this particular case. No part of the £6,000 paid on 29 April 2010 was paid as security for the performance of an obligation, but was payment of the obligation itself.
… it is important to have in mind the distinction … between money paid to discharge an existing obligation and money paid with the intent that it be held as security for the performance of some other (primary) obligation or as security for the discharge of some other (primary) liability. Money paid in order to discharge a current liability is not paid with the intention that it be held as security for the discharge of that liability. The payer’s intention is that the liability will be discharged by the payment itself; and so there can be no need to provide security for the discharge of the liability in the future.
… The point can be tested by asking, rhetorically, how the tenant would have responded to a demand, on 1 September 2010, for rent in respect of the month of September 2010. It is, I think, impossible to avoid the conclusion that her answer would have been: “why are you asking me for rent which I have already paid?”. And, if it had been suggested to her that she would be liable for interest at 6% per annum on rent for the month of September 2010 if she did not meet that demand by payment of £1,000 forthwith, her answer might have been expressed in stronger terms of indignation.
It’s clear in this case that the requirement of the tenancy agreement for six months rent in advance was very helpful for the landlords. The judgment seems to suggest that it is the purpose of the payment that matters (not necessarily that such a clause exists) but even with this decision, Guild members would be well advised to continue to use our replacement rent in advance pages which we introduced in 2007 when the deposit scheme legislation was introduced. These replacement pages make it a requirement of the tenancy to pay “x” number of months rent in advance like was the requirement of the tenancy in this case.
We had hoped that after such a decision, we could do away with these replacement pages but as this decision was largely based upon the fact that such a clause existed, it’s better to continue to be safe.