There has been a long-running debate as to whether or not rent paid in advance for an Assured Shorthold Tenancy is a deposit and therefore requires protecting under the provisions introduced by the Housing Act 2004. I have been very clear in my view that these payments cannot possibly be a deposit. I am therefore feeling very pleased (and admittedly a bit smug!) today as the Court of Appeal has agreed with me.
Today’s decision in the case of Johnson v Old, confirms that payment of rent in advance is not a deposit. The case is fairly straightforward in its facts but is made a little more complex because of some slightly odd drafting in the tenancy agreement. In short, Ms Old was referenced for a tenancy and was deemed to have an acceptable credit rating but to be a risk as she had no set income. The landlord offered a 6 month tenancy but elected to reduce the risk by asking her to pay the rent 6-monthly in advance. The agreement expressed the rent as being payable monthly in advance but then went on to state that the rent for the whole 6 months should be paid in advance. This unfortunate double wording certainly caused issues in the lower courts and shows the importance of careful wording in tenancy agreements.The tenancy was renewed on the same terms several times before it then carried on as a periodic tenancy with the rent paid monthly in advance. The landlord then sought to serve a section 21 notice and the tenant defended the matter on the basis that the notice could not be served because the rent paid in advance was a deposit and so was subject to protection.
The Court of Appeal cut the question down to one simple issue. Was the money paid in advance for the last tenancy renewal security, and therefore a deposit. If so, then everyone agreed that the s21 notice would be invalid.
The legislation sets out the definition of a deposit under the Housing Act 1988 as:
any money intended to be held . . . as security for – (a) the performance of any obligations of the tenant, or (b) the discharge of any liability of his
Therefore the issue was whether the payment of rent in advance was security for the performance of an obligation or discharge of a liability.
The Court of Appeal drew a distinction between security and the actual discharge or performance. It then produced a simple but devastating analysis. It asked how the tenant would have responded if she had been asked to make a further payment of rent for a month which was covered by one of the 6 month in advance payments. She would, according to the Court, have said that she had already paid the money. This being the case, then the money in advance must have been a discharge of the liability and not the security for it.
Once this conclusion had been reached then all other issues fell by the wayside.
This decision will bring relief to a large number of agents and landlords who have entered into tenancies where six months rent has been taken in advance. It also resolves a long-running debate in relation to rent in advance.