A court win for landlords: upfront rent is not a deposit

A recent Court of Appeal decision clarifies the law surrounding up front rental payments and whether these are to be considered a deposit, closing a potential loop hole that could have been utilised by tenants to stifle landlords’ attempts to repossess a let property.

In the case of Johnson V Old the tenant, Ms Old, made several successive payments of 6 months rent up front to the landlords. Following service of a section 21 notice by the landlords (the intention being to repossess the property) which Ms Old did not comply with, the landlords commenced accelerated possession proceedings. Ms Old submitted a defence to the County Court arguing that the upfront payments were in fact deposits and because these had not been protected by the landlords through a rent deposit scheme, they could not serve a valid section 21 notice and could not repossess the property.   The judge decided in favour of Ms Old.

The landlords successfully appealed this decision, the appeal judge declaring that the payments made were not a security against an obligation (payment of rent) but the obligation itself. In passing judgement the judge highlighted that monthly rental payments were not required in addition to the upfront payments and that the upfront payments were never intended to be returned at any point during, or at the end of, the tenancy.

This decision was recently upheld by the Court of Appeal. The appeal itself was considered in three parts, the first addressing whether the tenancy agreement required payment of 6 months rent upfront. It seems the tenancy agreement was not drafted as effectively and clearly as it perhaps should have been but the judge declared that when considered as a whole the tenancy agreement between the two parties did require the tenant to pay six months rent up front.

The judge went on to declare that there are a number of means of minimising the risks associated with letting a property to a tenant with poor credit referencing (as was the case with Ms Old) and that requiring payment of rent upfront is one such common approach.

The second point considered by the Court of Appeal judge was whether the payment was in fact a deposit. Rejecting this argument the judge highlighted that money paid in order to discharge a liability (in this case rent) is not paid with the intention that it is held as security against payment of the rent. The judge declared that to test whether the payment made was indeed a payment of rent, it should be asked what the tenant’s response would have been to a rhetorical request that monthly rent be paid in addition to the upfront payment. He argued it was most likely the tenant would refuse to pay the rent claiming this had already been paid.

The third and final part of the appeal related to the claim the landlords had failed to comply with the requirement to protect the deposit under a tenancy deposit scheme. Since the court had held the payment was not in fact a deposit it was not necessary to consider this argument.

Comment:

Thankfully the courts have delivered a rightful win for landlords and indeed common sense. It is common for landlords to request payment of rent in advance in addition to, or instead of, requiring a deposit to be paid where a tenant has poor credit referencing. Should the courts have decided that these payments were to be considered deposits the implications for landlords would have been profound.

The case also demonstrates, however, the need to have professionally drafted tenancy agreements in place. If the agreement in this case had been drafted to a higher standard this long, drawn-out and expensive litigious process may have been avoided by the landlords. As with most things, prevention is better than cure and for landlords the best means of protecting their interests comes in the form of a custom, well drafted tenancy agreement.

David Dixey is a Landlord & Tenant Law expert at Holmes & Hills Solicitors in Braintree, offering specialist legal advice for landlords. In addition to servicing landlords in Braintree, David services landlords from Holmes & Hills four other offices located in Sudbury, Halstead, Tiptree and Coggeshall.