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Court Ruling Resolves Advance Rent Vs Deposit Quandary

April 26, 2013 | Company News   Landlord News   Professionals  

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The Court of Appeal has ruled that rent paid in advance does not count as a deposit. This decision was reached in the long-running Johnson v. Old case. The tenant, Mrs Old, accepted a six-month tenancy, but, because her income was not fixed, she was asked to pay the six months rent in advance.

Rather than holding over the tenancy upon its expiration, she entered into a new tenancy agreement on the flat, under the same terms, for another six-month term. Six months later this was repeated, only the rent increased from £950 to £1,000 pcm. Mrs Old fell into arrears and the landlord served her with a section 21 notice, requiring possession of the flat. Mrs Old did not vacate the flat, legally challenging the landlord on the grounds that she had paid rent in advance which should have been treated as a deposit and protected.

At the first hearing with the Deputy District Judge, her argument was successful. The landlord appealed to the County Court Judge, where the tenant’s previous victory was overturned. From that order, the tenant appealed to the Court of Appeals.

The appeal was dealt with in three parts. In the first, the tenancy agreement was scrutinised in painstaking detail to determine whether it required the tenant to pay six months rent in advance. The Judge found that it did.

The second part of the appeal was the allegation that the payment was actually a ‘security’ or deposit. The Judge rejected this argument on the basis that, “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 Judge also pointed out that her money could not be held to be security at the time of the section 21 notice being served as the rent money had already fallen due many months earlier.

The third part of the appeal was that the landlord had failed to comply with section 213 of the Housing Act 2004 (in that the deposit had not been dealt with in accordance with an authorised scheme). But, as the court had deemed that the rent payment was not a deposit, this argument could not be considered.

And so the landlord won. Had the court’s decision gone the other way, the landlord would have faced a penalty of the return of the six months’ rent in advance, with an additional penalty of up to three times the amount.

So it is with much relief that landlords and agents greet the court’s decision. Linda Howard, who represented the landlord, said, “We’re delighted with this result. The Court of Appeal has applied a bit of common sense in this case. Lots of landlords take payments up-front from tenants who fail referencing. If these payments were all at risk of being treated as a deposit, all sorts of problems would ensure.

“What this case does show is that landlords and their agents need to take care when drafting their tenancy agreements. We weren’t involved in drafting the original tenancy agreements in this case, but if it had been a bit clear, this litigation could probably have been avoided.

“Tenancy agreements do need to be written so that ordinary people will be able to work out what they mean, but it’s essential that they are also legally and linguistically precise so there is no room for misinterpretation or misunderstanding.”

Steve Harriott, chief executive of the Tenancy Deposit Scheme, said, “This is a very helpful clarification of an issue which has been concerning landlords and agents.

“The judgement in this Court of Appeal case should assist those landlords and agents who want to ask for rent in advance and who can be reassured that this is not a tenancy deposit that needs protecting under the Housing Act 2004.”

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