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Not another Deposit case!

Taking six months’ rent up front is not a deposit, the Court of Appeal has ruled in Johnson & Ors v Old [2013] EWCA Civ 415.

The facts will strike chords with many agents and landlords: the rent was expressed to be £950.00 per month, payable in advance (standard AST practice), with the first six months’ rent to be paid “up front” (also common practice for example where a tenant might have failed a credit check). When the landlord brought possession proceedings the judge at first instance threw the case out on the basis that the six months’ rent up front was a security deposit, which had not been registered and that therefore the section 21 notice was not valid. The landlord appealed and won; the tenant then appealed to the Court of Appeal, which is where we are today.

The key issues included whether the rent paid six months up front was money held as security against future rent payment dates (the tenancy agreement made reference to the rent due date being the first of every month). If so, the tenant argued, it was a deposit as defined in S212(8) Housing Act 2004 and fell to be protected, which it had not been.

The Court of Appeal hearing the tenant’s appeal was unequivocal: the money paid was rent, and not “money intended to be held as security for the performance of any obligations of the tenant or the discharge of any liability of his, arising under or in connection with the tenancy”. The point was 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……her answer would have been “why are you asking me for rent which I have already paid?”….”

The court also gave short shrift to the idea that, as the agent held onto the money and drip fed it in monthly payments to the Landlord, the money held by the agent was a deposit. The Court found that the rent was paid over by the tenant, and the arrangements between the agent and landlord about how the monies were transferred was neither here nor there.

So what are the implications of this decision? The position remains as we have been advising agents and landlords to date: rent in advance does not constitute a deposit in need of protection. With the above being said, it is always advisable to have clear and well drafted tenancy agreement that all parties can follow.

It is important to differentiate this case from another common scenario: where an extra payment (usually a month’s rent) is received and held in case the tenant defaults on a rental payment during the tenancy but would be paid back. This is a deposit. Rent taken at the beginning of a tenancy in respect of the last month of a tenancy is not a deposit but an amount taken at the beginning to be applied in the event that there is any default is.

2 Comments

  • Industry Observer 24th April 2013 at 8:29 am

    Once the CoA decided Johnson was a 6 monthly tenancy then the payments were never going to be a deposit and the case was lost by the tenant. Johnson looks almost like a one off case (as often in CoA cases) clarifying the facts and legalities in a tenancy agreement that was a mess. Once that was done the decision could only flow one way from it.

    However…………………

    What of other cases and which are far more common where the tenancy is stated as a normal monthly tenancy for 6 months or a year, there is never any formal written reference to or provision for payments in advance, but the tenant is verbally advised that 6 months will need to be paid up front and maybe not even given a receipt for the money. And maybe another 6 months is demanded at the end of the fixed term if the tenant stays on. But no clauses or wording to any such effect in the agreement.

    Surely any such 6 months is held as security to make sure the money is there to draw down the rent each month. How can such money held be regarded as the discharge of an obligation as it hasn’t arisen each month yet until the monthly rent due date is reached. The money is simply held to make sure when the obligation does arise on each monthly due date it is then discharged as the money is already in hand.

    Johnson has not clarified that situation has it, which surely remains open to challenge doesn’t it?

  • Natalie Williams 29th April 2013 at 9:19 pm

    Thank you for keeping us updated on this interesting case. Has Pain Smith drafted clauses that covers the two scenarios described that may be purchased or downloaded from the document vault?

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