Rent in advance not a deposit, Court of Appeal rules

Rent paid in advance does NOT count as a deposit, the Court of Appeal has ruled.

The landmark ruling means that landlords and agents are not obliged to treat rent paid in advance as a deposit which requires protection under the Housing Act 2004.

The Court of Appeal’s decision was in the long-running case of Johnson v Old, where the tenant was offered a six-month tenancy and – because she did not have a set income – was asked for six months’ rent in advance.

The agreement in the case provided a muddling factor, because it said the rent should be paid monthly in advance, but also said that the rent should be paid six months in advance.

The tenancy was renewed on the same terms before becoming a periodic tenancy where the rent was paid monthly in advance. When the landlord tried to serve a Section 21 notice to gain possession of the property, the tenant, Anne Old, countered by saying that a Section 21 could not be served because she had paid rent in advance which should have been treated as a deposit and protected.

The tenant’s argument was successful at the first hearing, but was then challenged successfully by the landlord at a second. The tenant appealed, and with the help of legal aid, the case then went to the Court of Appeal, which gave its decision this week in favour of the landlord. â?¨
The Court of Appeal had applied the test of asking how the tenant would have responded had she been asked to make a further payment of rent for one of the months covered by the six months. It decided that the tenant would have said she had already paid it.

Had the landlord lost the case, with the Court of Appeal deciding that the rent in advance was a deposit, the penalty would have been the return of the six months’ rent in advance plus a penalty of up to three times the amount.

The case was complicated by the drafting of the tenancy agreement, underlining the need for care and clarity.

However, news of the decision will be greeted with relief by landlords and agents concerned about whether they should accept rent in advance.

Linda Howard, of Shoosmiths Access Legal’s landlord and tenant team, who represented the landlord, said: “We’re delighted with this result. The Court of Appeal has applied a bit of common sense in this case. Lots of landlords take payments up-front from tenants who fail referencing. If these payments were all at risk of being treated as a deposit, all sorts of problems would ensure.”

However, she added: “What this case does show is that landlords and their agents need to take care when drafting their tenancy agreements. We weren’t involved in drafting the original tenancy agreements in this case, but if it had been a bit clear, this litigation could probably have been avoided.

“Tenancy agreements do need to be written so that ordinary people will be able to work out what they mean, but it’s essential that they are also legally and linguistically precise so there is no room for misinterpretation or misunderstanding.”

Steve Harriott, chief executive of the Tenancy Deposit Scheme, said: “This is a very helpful clarification of an issue which has been concerning landlords and agents.

“The judgement in this Court of Appeal case should assist those landlords and agents who want to ask for rent in advance and who can be reassured that this is not a tenancy deposit that needs protecting under the Housing Act 2004.”