A Further Deposit From the Court of Appeal

Johnson & Ors v Old [2013] EWCA Civ 415

The Court of Appeal has been turning its mind to another of the odd questions that has sprung from the fertile litigious bosom of tenancy deposit protection. In this case the argument was over the question of rent payable in advance.

The Law and The Problem
In s212(8), Housing Act 2004 there is a definition of a deposit as follows:

“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for—
(a)the performance of any obligations of the tenant, or
(b)the discharge of any liability of his,
arising under or in connection with the tenancy.

It is the practice of some landlords and agents, in cases where the tenant’s credit worthiness is in doubt to ask the tenant to pay 6 months rent in advance. At the end of the six months they commonly pay rent monthly (either on a continued fixed term or periodic tenancy) having. so to speak, proven their worth. These situations are usually expressed in the tenancy agreement as a statement that the rent is calculated monthly obligation to pay the rent monthly with a further statement stating that it is due six-monthly in advance. Less well drafted agreements are more inconsistent and have a provision requiring payment of the rent monthly and a second provision which is in tension with it stating that the rent is to be paid for six months in advance. This has led some commentators to suggest that a requirement for rent to be paid 6 monthly in advance is actually security for the tenant to fail to pay the rent monthly and it therefore it counts as a deposit.

The Facts
And so it was in this case. Ms Old took a tenancy of a property. She had a good credit history but no immediate income and so she was offered a 6 month tenancy with the rent payable six monthly in advance. The tenancy was very poorly worded and expressed the rent as actually paytable monthly but then had a further provision expressing the rent to be payable every 6 months. The tenancy was renewed several times for further 6 month terms on the same 6 monthly payment provision and then became periodic with the rent payable monthly. The landlord duly sought possession based on an s21 notice served some time before and this was defended on the basis that at the time the notice was served the deposit (the six months advance rent) had not been protected. The situation was made worse because the agreement was worded in such a way that it appeared that the tenant was being asked to pay the rent for the periodic tenancy at a much earlier stage.

The Appeal
The Court of appeal rapidly sliced the issues put before it down to one question to consider. They then made clear that the agreement had to be considered as a whole and no one clause could be used to demonstrate that there was a deposit without looking at the whole agreement and its overall effect.
The Court approached the main issue, was rent in advance security by considering two issues. First, that there is a crucial difference between an obligation or liability and the security for that obligation or liability. A payment as security is not intended to discharge the obligation or liability. It is intended as an assurance that the obligation or liability is to be discharged at some future time. A payment which is intended to discharge the obligation or liability is just that. The fact of making the payment discharges with the liability. Having made this first point clear the Court applied a devastating analysis by asking itself how the tenant would have responded were she asked to make a payment of the monthly rent having already paid the six months in advance. It concluded that she would have responded that she had already paid the rent. That being the case the money already paid could not possibly be a security for the discharge of the obligation but rather a discharge of the obligation to pay rent. This killed the issue stone dead.

Comment
This is probably a fairly dull issue for many people. However, rent in advance is common in the private sector and particularly in relation to those on lower incomes who have weak credit status. I don’t think this case should have won on appeal and I have been making similar arguments to the Court of Appeal to anyone who will listen for several months (my wife is so bored of this case!). If Ms Old had won it would have caused a major problem for many landlords and letting agents. However, it would be nice to see some way of reducing the use of rent in advance, which is a serious kerb on many tenants being able to access the private rented sector. This case would have largely ended the practice if it had gone the other way and so there is some sadness about its lack of success.

m4s0n501
Posted in Assured Shorthold tenancy, Deposits, FLW case note, Housing law - All and tagged , , , .

About David Smith

David is a solicitor specialising in landlord and tenant matters with Anthony Gold Solicitors. He particularly specialises in newer legislation and has written widely on the Housing Act 2004.

5 Comments

  1. I agree with the decision, and think that common sense agrees with it too.
    I also have big problems with rent in advance, and the barrier it poses to a large amount of people who require housing in the private sector, especially those on housing benefit/LHA, with the payment in arrears.

    I cannot really fault landlords for requiring it though (although 6 months in advance is excessive in my opinion), especially when they face unhelpful housing benefit/LHA advisors/assessors in local authorities and no guarantee of payment.

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  4. “This case would have largely ended the practice if it had gone the other way and so there is some sadness about its lack of success.”

    I suspect all it would have done (if it had gone the other way and not been appealed further) is make landlords in the same situation switch to tenancy deposits and then have to comply with the deposit protection requirements so tenants wouldn’t have been much better off. You can fiddle around in the margins of regulating deposits and rent payments in advance but the skewed housing market radiating out from London tends to dictate what happens with the private rented sector.

  5. Hi David,

    Thanks for sharing the good news that common sense prevailed. :)

    I would just like to compliment you on your blog and the huge value you bring to the property community.

    I saw you speak at the Landlord Law Conference and was very impressed. I also value your contributions to Property Tribes and your no-nonsense approach to housing issues.

    Keep up the good work David. It is appreciated.

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