Should letting agent or landlord keep 12 months upfront rent?

Reply to the comment left by "Mandy Thomson" at "11/08/2016 - 13:29":

I had a similar situation where my agents wanted to collect 6 months rent in advance from one of two sharers as their Guarantor was not likely to return the paperwork before the tenancy commenced. I wanted to clarify whether this would constitute an additional deposit and therefore contacted MyDeposits for their view. I also contacted a company who run training courses for us Landlords and the following is a transcript of the 3 emails that were sent/received (in my case the TA stipulated rent to be paid monthly) :-

A (To MyDeposits) - I recently attended a training course which touched on deposit protection and during the conversations I was advised that rent taken in advance but not mentioned as such in the tenancy agreement should be protected as if it is a deposit. I went on your site to protect this money but am unable to complete the form as the questions do not relate to this scenario. I called your help line and spoke to Joe but I wish to seek further confirmation that this is not viewed as a deposit by MyDeposits and therefore I do not need to protect it.

B (MyDeposits reply) - We would like to advise you that if it has been clarified that monies will be taken in advance towards rental payment - this is not classified as a deposit.

A deposit is taken towards any damages, outstanding rent or dilapidations which can be deducted at the end of the tenancy if the landlord/agent finds that any damage has been caused to the property or if there are any payments outstanding towards rent.

C (Response from Training Co) - I would advise you to be very careful about seeking advice on the meaning of the legislation from the schemes. The emails seeks to define a deposit, when the only definition that matters is the one in the legislation.

You will notice that the issues mentioned are all issues “arising under the contract” and they have no mention of issues “arising in connection with the contract” when the law clearly includes both.

You need do not more than to study the wording of the Johnson v Old judgement to see there is a clear indication that rent collected in advance of the date it is contractually due would be considered a deposit. The full transcript of the judgement can be found here. http://www.bailii.org/ew/cases/EWCA/Civ/2013/415.html

Para 34 of that judgement says: I turn, therefore, to the second ground of appeal: that the judge was wrong to conclude that the payment of six months' rent at the beginning of the tenancy was not a payment of five months' rent as "security". It is, I think, common ground that, if part of the payment made on 29 April 2010 was a payment as security for the future payment of five months' rent not then due, then and to that extent, the payment was a "tenancy deposit" within the meaning of section 212(8) of the Housing Act 2004.

Note how it says that if the money was not then due (this agreement did state all 6 months was due up front) then the payment (of “rent”) would have been a deposit.

Our letting agent paid the 6 months rent to us at the commencement of the TA and to avoid any possible issues in the future we raised an Addendum to correct the rent due clause to reflect that 6 months rent had been paid in advance by one of the tenants.

Reply to the comment left by "Alison Walker" at "11/08/2016 - 17:01":

The original judgment in Johnson V Old did find that advance rent is a deposit, however, it went to appeal and that was overturned.

Reply to the comment left by "Mandy Thomson" at "11/08/2016 - 17:07":

It shows you how confusing it all is if the experts can't agree. I was given the above advice after the appeal verdict!

Reply to the comment left by "Alison Walker" at "11/08/2016 - 17:45":

I agree, and after being involved in a legal hearing and associating with solicitors and barristers, it seems to me that the matter of agreement is based on how much judges agree or not with landlords or tenants and skew their findings accordingly... (e.g. Superstrike V Rodrigues...)

Hopefully after an appeal decision we can have some level of clarity on this?
Quoting the summing up of Johnson v Old appeal outcome by TDS 'A deposit is money held as security against a tenant’s obligations in connection with the tenancy and at the appeal the rent paid in advance was viewed as just that – rent. Paying the rent in advance was meeting an obligation of the tenancy in itself, and was not the payment of a security against it. It was clear to both parties from the outset that there was no intention for that money to be returned to the tenant, so it could not be viewed as a refundable deposit.'

Unusually common sense seems to have won out in the end (phew).

It should be noted that, as pointed out, the ruling in Johnson v. Old relies on the specific wording of the tenancy agreement in the case, which stated when the rent was due.
It does not say that any and all 'rent in advance' is not a deposit.

Reply to the comment left by "Raj Kirpalani" at "11/08/2016 - 15:10":

Not in the slightest Raj. My student lets are tenant find and rent collect, but I am local to the properties.

If a letting agent withheld upfront rent from me, I would require them to provide Directors personal guarantees and credit referencing at their cost. They would also be billed my hourly rate for the time taken completing these.

I use a corporate letting agent to find tenants, sort out contracts and collect the rent. They are very good and if rents are paid up upfront, don't charge me for the rent collect, as well as forwarding the whole amount to me.

Have a conversation with them and request written confirmation of their reasons for withholding the advance rent. I will add that I am a mortgage adviser working for a different national estate agent to the letting agent I use, but ultimately,it should make no difference as you are paying the letting agent to work for you.

There appear to be two issues as to who holds the monies.

The agent is saying they should hold the money in case the landlord has the property reposessed.

The landlord is saying he should hold the money in case the agent goes bust or absconds.

Easy to understand from both points of view.

The solution is, what I as an accountant and all solicitors do, to put the money in a client account which is separate to the main money of the agent. This would ring fence the money and protect both sides as the money is not the agents and the banks confirm that they recognise that it does not belong to the agent.

I have long thought that all agents should recevie monies into such an account and only transfer to their general bank account those deductions from the rent as shown on their statements. The net rents would then be transferred to the landlord from this ring fenced account. This way all rents due to landlords would be protected.

I have always wondered why the landlord professional bodies do not have rules to make their members follow this proceedure. (At least as far as I am aware they don't - I am happy to be put right if I am wrong). It protects landlords from agents who use their rents to pay other expenses and end up unable to send over the full rent due (after deductions) as and when due. It also protects landords from agents who cease to trade and do not have enough money to pay the landlords the rent that is due to them.

Reply to the comment left by "Raj Kirpalani" at "11/08/2016 - 11:40":

My concern is what happens if YOU the landlord go bust. Your wondering about the agent, but the agent is also wondering about you. By keeping the funds they are playing a happy medium. Best idea is to check the company accounts of your agency to make sure they are on sound financial standing.

If the tenant is paying rent up front other than on the usual monthly basis then surely the tenancy agreement should say so. This avoids any confusion between the parties as what has been paid and what it was for. It seems a bit sloppy for an agent to write a tenancy without setting out this fundamental term correctly.

Secondly, the agent and landlord should, ideally, have agreed beforehand what was to happen to the money. Both parties arguments are valid but I would contend, as an agent, that it is the landlord's money and he should receive it.

The only time we hold funds is when we are preparing for repairs (e.g. new windows, roofs, etc.) where the monthly rent would not cover it.

There has been comment about use of a clients' account for the agent to hold the money. This is essential and I would hope that any landlord would check at the outset of using an agent that their money is held in a protected account.

Graham