Court of Appeal decision made on when is a payment rent and when is it a deposit

Newsflash from Tessa Shepperson of Landlord Law.

There has been an important Court of Appeal decision on tenancy deposits.

In the case of Johnson v. Old the tenant claimed that the six months rent she had paid in advance was actually a deposit which the landlord had failed to protect. Therefore (she argued) he was in breach of the tenancy deposit regulations and the section 21 notice he had served was invalid.

This argument was successful at the first hearing but not at the second hearing, which was an appeal to the Judge. The case then went to the Court of Appeal – and we have just learned that the landlord has won the case.

So you should now be safe in accepting rent in advance, if your tenant fails to pass referencing.

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Comments from Mark Alexander

When I first heard the outcome of this case I got all excited as I thought it could spell the end of the Deposit Protection minefield which all landlords and letting agents can so easily fall foul of. Great I thought, I will just take rent in advance instead of deposits and continue to charge my tenants monthly. It’s not that simple though. If you read the judges decisions, one of they key points in this case was that Mr Old accepted 6 months rent up front. If the landlord had continued to collect rent monthly the six months rent would have been a deposit and not rent in advance. One of the key points in the case was that if the tenant (Oldfield) had been asked to continue to pay monthly rent during the six month period the reply would undoubtedly have been, I have already paid in advance for this month. In laymans terms, I take this to mean, “you can’t have your cake and eat it”. Therefore, if you think this case will allow you to call deposits rent in advance, forget it, that will not work.

The more I think about the case, the more questions pop into my mind. What if it had been a 12 month AST and only 6 months advance rent had been paid? At the end of month one, could the landlord reasonably insist upon another months rent being paid to top the rent in advance back up to six months? If this was allowed, presumably it would not be allowed after month 6 of a 12 month tenancy?

I am still looking for a better alternative to taking deposits. I’m getting there but the price isn’t right yet. Ideally I’m looking for monthly rent on the due date whether the tenant pays or not and insurance to indemnify me of and damage caused by the tenants to my property and cleaning of properties post tenancy. All of this is available but it comes at a cost which I can’t justify.

The search continues, in the meantime we either take a deposit or we take our chances. Either way there is a risk, especially if we fall foul of deposit protection legislation and I suspect a lot of landlords and letting agents will come a cropper on this.

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