Sometimes advance rent is just that
Residential landlords have to be very careful to register deposits or dire consequences can follow. But what about rent paid in advance? Could that be classed as a deposit?
Keen watchers of these pages will be aware of my short series of articles about the rules that residential landlords have to follow in relation to registration of tenants’ deposits. It is critical that landlords register deposits with a proper Tenancy Deposit Scheme (TDS) and formally notify the tenant within 30 days from the start of the tenancy. If the landlord is late doing so, the tenant is entitled to a payment from the landlord of at least the amount of the deposit, and possibly up to 3 times that much depending upon the seriousness with which the Court views the Landlord’s failure. Until the landlord has properly notified the tenant of the deposit arrangements, the landlord cannot serve a notice under section 21 of the Housing Act 1988 terminating the tenancy.
Deposits are traditionally taken as security for the tenants’ liabilities, both in respect of rent and damage to the property. However, sometimes landlords operate a more rigid system of ensuring payment of rent, by asking for rent for a long period in advance rather than just one month at a time. In the recent case of Johnson v Old, Mrs Old took a 6-month lease, and paid an initial deposit of £1,425 (which was properly registered with a TDS) and also paid the full 6 months’ rent in advance (which was not registered). At the end of the initial 6 months, she had a new 6-month lease, and again paid the next 6 months’ rent in advance. This was repeated once more, and at the end of that third period the lease was not formally renewed. Instead, it was allowed to run on and automatically (under the Housing Act 1988) became a “statutory periodic tenancy” (in other words she had a tenancy on the same terms, but it ran from month-to-month rather than in blocks of 6 months).
It was at this stage that she fell into arrears and the landlord therefore served a section 21 notice. At Brighton County Court the Deputy District Judge decided that the 6 months’ rent that the tenant had paid at the start of each renewed tenancy had been 1 month’s rent and 5 months’ deposit against the rest of the rent for the period. That 5 months’ rent deposit had not been registered with a TDS, and therefore the landlord was barred from relying upon the section 21 notice.
This no doubt came as something of a shock to the landlord. By this stage, Mr Johnson would presumably have used up those rent payments and would therefore find registering them (albeit late) a rather tricky proposition. Faced with the option of never being able to use a section 21 notice to get rid of this tenant at all, he had no real choice but to appeal and on through the court system the issue went, until it reached the dizzy heights of the Court of Appeal.
Luckily for Mr Johnson, the three judges in the Court of Appeal took a rather more pragmatic view. Delivering their joint judgement, Sir John Chadwick asked, rhetorically, how Mrs Old would have responded to a demand for rent in respect of a month within that 6-month period? He concluded that her reply would have been “why are you asking me for rent which I have already paid?” – in other words, the 6 months’ rent in advance was just 6 months’ rent paid up front, not money held back to be used if she didn’t pay the rent for any of that period.
This doesn’t mean that landlords can dodge the strictures of the TDS rules by calling all deposits “rent in advance”. Only actual rent paid in advance will be rent – if the landlord expects the tenant to pay rent for the same period that the “rent in advance” is nominally there to cover, this will be a deposit and the landlord is in for a whole heap of trouble if it is not properly registered and the formalities notified to the tenant.
This is not just an academic issue – it has a direct effect on cashflow and profitability. Landlords might decide just to register advance rent payments with a TDS to be on the safe side. But the downside of that is that it can be difficult and long-winded to get that money back out of the scheme if the tenant won’t agree.
There may be landlords wondering whether they can stretch this decision to their advantage – what, we wonder, would be the position if a landlord insists upon the tenant paying just the final 2 months of the fixed 6 month period in advance, to be held by the landlord from the outset (assuming, of course, that the tenant was not going to be asked to also pay those last 2 months’ rent again)? In theory it should be all right, but imagine if the tenant then agreed with the landlord that he would leave early and the landlord wanted to use that money against damage that the tenant had done to the property? Or what if the tenant was paying by standing order and accidentally paid the rent for the 5th and 6th month without either side noticing, or if the landlords’ agents accidentally issued rent demands for those two months? At that point, does the genuinely-held rent in advance convert to a deposit – and if it did, when should the landlord register it?
Whatever landlords do, they need to take care and to make sure that they are explicit with tenants about how rent in advance and/or deposits are intended to work. If a deposit is taken, or even if rent in advance is somehow converted into a deposit at a later date, it must be registered and landlords and their agents need to be constantly aware of this issue.