When is rent in advance not rent in advance?

30 Nov 2017

It is well known that landlords were not particularly pleased by the introduction of rules on taking deposits from their tenants, and of penalties for not complying with these rules, initially introduced in April 2007 and subsequently amended. Landlords consider that these provisions make it more difficult for them to protect themselves against non-payment of rent, they provide for heavy penalties for non-compliance, and make it harder to evict tenants.  The way round this? Rent in advance.

One landlord, somewhat candidly, and arguably inadvisably, in pleadings before the County Court described the reason for this practice. It was:

… due to the fact that many tenants with poor references tend to fall into arrears towards the end of their tenancy and use the deposit for their last rent, they then vacate without agreement with the deposit scheme which elongates, sometimes by months, the time the deposit scheme credit the landlord with the funds held.

The Resident Landlords’ Association (RLA) initially advised that rent in advance could assist its members in avoiding the consequences of the rules on deposits, but subsequently changed its advice.

That such a practice is acceptable – and does not amount to a deposit in disguise – appeared to have been decided for certain by the Court of Appeal in Johnson v Old [2013] EWCA Civ 415. It is of interest to note that, even after Johnson v Old was decided, the RLA continued to counsel caution to members proposing to use rent in advance as an alternative to deposits. The RLA is right to do so. In the face of a landlord who has required rent in advance and who considers they can use section 21 of the Housing Act 1988 to implement a quick and easy eviction, Johnson v Old is worth a careful read. Look closely at the terms in which the ‘rent in advance’ was taken and you may well find your case can be distinguished from Johnson v Old.

If successfully distinguished and the ‘rent in advance’ is held to be a deposit, the landlord cannot rely on section 21 to evict the tenant (section 215, Housing Act 2004). Further, the tenant can make an application for payment of a sum of money “not less than the amount of the deposit and not more than three times the amount of the deposit” (section 214, Housing Act 2004).

This is a point that was successfully argued before DJ Hovington in a case earlier this year in the County Court at Manchester. He considered the issues sufficiently interesting to reserve the case to himself and to set out his decision and reasons in writing.

What does ‘deposit’ mean?

The meaning of ‘deposit’ is set out in section 213(8) of the Housing Act 2004:

“deposit” means a transfer of property 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.

In Johnson v Old the tenant, Mrs Old, entered into a six-month assured shorthold tenancy and paid a deposit of £1,425 together with rent in advance for the full six months. When six months were over Mrs Old entered into a new six-month assured shorthold tenancy, which again provided for a deposit and six months’ rent in advance. When the second six-month period expired Mrs Old remained in the property under a statutory periodic tenancy. On being served with a section 21 notice, Mrs Old sought to defend possession proceedings on the basis that the payment of six months’ rent in advance was, in fact, one months’ rent plus an amount (equivalent to five months’ rent) as security for future rent liability – ie, a deposit. The Court of Appeal considered (paragraph 26 – emphasis added) that the relevant question was:

was the sum of £6,000 paid by the tenant to the landlords’ agents on 29 April 2010 paid with the intention that it be held as security for the obligations of the tenant under the statutory periodic tenancy which arose on 1 November 2010?

The decision went on to say (paragraph 36 – emphasis added):

Money paid in order to discharge a current liability is not paid with the intention that it be held as security for the discharge of that liability. The payer’s intention is that the liability will be discharged by the payment itself; and so there can be no need to provide security for the discharge of the liability in the future.

In Mrs Old’s case the tenancy agreement included an obligation to pay six months’ rent on 1 May. It was held that this was not security for future obligations but was the performance of the obligation itself. Further, it was held that it must have been in the contemplation of the parties that after six months’ occupation the whole of the sum would have been applied in the discharge of the rent available – it would not have been available as security for other obligations (paragraph 38).  It was not a deposit.

The case before DJ Hovington

The rent in advance in this case was for the “last month”. The drafting, according to DJ Hovington, “leaves much to be desired”. The tenancy agreement stated, “You have to pay rent in advance for the period 01/02/2015 to 28/02/2015 + last month’s rent.”

There was much discussion in the proceedings as to what “last month” referred to. Was it the final month of the contractual tenancy? Or the final month of occupation of the property under the statutory periodic tenancy that then came into being? If the former, its payment would perhaps have the characteristics of discharging a current liability, as per paragraph 36 of Johnson v Old. DJ Hovington declared himself not persuaded that it was. This was because of the tenancy agreement’s further clarification of the role of this rent. It said that this rent “cannot be used for any other periods unless signed in writing with us/your landlord.”

That bit makes it sound like discharge of a current liability – rent. But the clause continued (emphasis added):

Should you vacate before the tenancy end date and before the dates of the advance rent paid, we/your landlord reserves the right to utilise any held funds to cover rents due at the time of vacating. If we cannot agree amounts for any breach, the matter will be decided by the County Court. Any monies overpaid will be refunded back to you as long as you have kept all the agreements and conditions and you have paid all the rent and bills for the property, less any reasonable charges. If you do not do so we may take from any funds held any monies owed to us or to service providers, reasonable compensation, if you have broken any of your agreements or the reasonable cost of making good any damage which is not caused by fair wear and tear.

DJ Hovington made this of the clause:

That wording of the first sentence … in so far as it purports to restrict the use to which the claimant can put the advance rental payment is wholly inconsistent with the remainder of the clause which empowers the landlord to apply “any held funds” not merely in respect of any other period in respect of which rent might be outstanding … but also in relation to deduction for “reasonable charges”, money owing to “service providers” and by way of “compensation if you have broken any of your agreements or the reasonable cost of making good any damage …”

The ambiguity … by application of the contra proferentem principle would, of itself favour the conclusion that the advance payment is consistent with the concept of a tenancy deposit … insofar as it constitutes security for the performance of any obligations of the tenant … and is not simply, as the claimant contends, confined to the obligation to pay rent in respect of the final month of the tenancy.

The contra proferentem principle to which DJ Hovington referred is well worth remembering. DJ Hovington refers to the principle of contractual interpretation that where, as here, there is doubt as to the meaning of words, they should be construed against the interests of the person who put them forward.  Even though, as DJ Hovington stated, the first sentence went in favour of the landlord’s arguments that this was not a deposit, the rest of the clause indicated that the rent in advance would be used as a deposit. Contra proferentem meant that the ambiguity would not be resolved in the landlord’s favour.  

DJ Hovington noted too that Mrs Old had made a separate payment in addition to her rent in advance. He went on:

On the basis of the wording of the tenancy agreement in the present case, and the absence of any additional sum paid to the claimant by way of security for compliance with the obligations imposed by the tenancy agreement, I am able to draw a clear distinction between the factual background of the present case and that which in Johnson v Old, led to the conclusion that the advance payment of rent did not constitute a deposit.

It is also worth noting that DJ Hovington considered the device of rent in advance, in this case, to be:

an unashamed attempt to avoid the potential inconvenience of the delayed release of funds from the tenancy deposit holder.

The landlord did not do himself any favours by being so candid.

Look at every clause: distinguish your case

DJ Hovington’s written decision is of great help, but it is not a lone case. Others have succeeded too. In another case the tenancy agreement required the tenant to pay two months’ rent at the start of the tenancy and to pay subsequent rent a month before it fell due. The landlord thus always held a months’ rent in hand. The tenancy agreement stated that at the end of the tenancy the Claimant would refund this rent in hand but is ‘allowed to take from this refund any rent or other money you owe us’. This case too was successfully distinguished from Johnson v Old. The money was a deposit.

Faced with section 21 cases in which there appears to be no deposit, and therefore no requirement to protect the deposit, but there has been a payment of rent in advance, our advice is to go through the tenancy agreement with a fine-tooth comb. Any hint that such payments could in fact operate as security for compliance with obligations, as opposed to being discharge of obligations and you should succeed in arguing that it’s a deposit. The absence of a separate payment of money labelled a deposit will also assist. And if it’s all a bit ambiguous, don’t forget contra proferentem. If the ‘rent in advance’ is, in fact, a deposit, it will be an unprotected one and will provide a clear defence to possession proceedings based on section 21.

Elizabeth Mottershaw is a barrister at Garden Court North Chambers.

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