RESIDENTIAL LANDLORDS ASSOCIATION

Guide To: Do you need to protect Advance Payments of rent as Tenancy Deposits?

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Introduction

When tenancy deposits were first introduced, the suggestion of taking rent "up front" was made. If the landlord took the rent in advance in this way it could avoid the need to take a separate tenancy deposit and for this to have to be protected under the Tenancy Deposit Legislation. Initially the RLA provided its members with a form of tenancy agreement which could be used for this purpose. Subsequently, however, there were conflicting County Court decisions and we advised members against going down this route to avoid having to protect deposits. Our suggested form of tenancy agreement for advance payment of rent was withdrawn, as a result. We found, in practice, that there were problems because there were disputes about the nature of payments which were being made. Landlords were saying that they were advance payments of rent but tenants were claiming that they were disguised deposits.

Johnson v Old

Long awaited clarification of the position regarding advance payments of rent has now been given by the Court of Appeal in Johnson v Old. This case has vindicated our own legal advice that a true advance payment was not a deposit. Johnson and Old has decided that a genuine advance payment of rent is not a tenancy deposit. If therefore does not require protection.

The essence of the Court of Appeal decision is that if there is a genuine advance payment of rent this is simply a situation where the tenant is complying with his/her basic obligation to pay the rent, even if it is being paid early. A tenancy deposit is something different. It is payment made to cover the eventuality of the tenant not complying with his/her basic obligations under the tenancy agreement. In other words if the tenant fails to pay the rent it is a separate sum of money and the landlord can then take the missing rent payment's out of the deposit.

The Court of Appeal has said that the nature of any payment depends on what the landlord and the tenant intended between them and what they agreed. This can, of course, lead to disputes, especially if there are arguments about what the landlord told a tenant about the nature of a payment. There is always the risk, even if something is properly documented that the tenant may claim that something different was agreed verbally or that the landlord misrepresented the position in some way.

Johnson v Old itself illustrates the sort of difficulty which can arise. In that particular case the tenancy agreement was not clearly worded. Although the intention was that rent should be paid in full six months in advance, there were conflicting clauses in the tenancy agreement because another clause referred to monthly payments.

Taking advance payments of rent

Members are now asking, as a result of Johnson v Old whether they should start taking advance payments of rent again, rather than tenancy deposits. However, in Johnson v Old the landlord's case was undoubtedly strengthened because not only were advance payments of rent taken but also there was a separate deposit paid which was properly protected. This obviously helped make clear the difference between the various payments. When the RLA provided a form of tenancy agreement for advance payment, the way it worked was that over and above the current rent the landlord had an additional one month's rent in hand. In other words, two months rent were taken at the outset and thereafter a monthly payment was taken one month in advance of the due date. In other words, after the initial payment, for example May's rent, was due on 1st April. This meant that when you got to the last month of the tenancy no payment was due because you already had that month in hand. No separate deposit was normally taken. In practice, it is difficult to explain this arrangement in clear terms and we found that it was causing a lot of confusion. There were also issues, sometimes, about how the payments were recorded in the landlord's records.

The way forward

Taking advance payments is open to members so long as they clearly spell out when payment is due in the tenancy agreement as well as carefully explaining to tenants what is to happen about rent payments.

The RLA does not intend to reintroduce its form of tenancy agreement. Even though the Court of Appeal has decided that rent in advance is not a deposit, we found that in practice, paying rent two months in advance at the outset caused a lot of confusion and uncertainty. This gave rise to the potential for tenants to challenge the landlord and claim a penalty. There is also now the risk that if you get it wrong you cannot use Section 21 at all (at least unless the deposit is returned in full). The penalties are now more draconian than when the tenancy deposit legislation was introduced. Our advice to members, therefore, is not to go down this route. If you are considering doing so it would be wise to take a separate deposit as well which you would have to protect under the tenancy deposit legislation in any event, with one of the statutory schemes.

V1-JC-08082014
Landlord & Investment Show
Martin Co
Six Hills House
Landlord Broadband

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