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Advanced Rent – Legal Update

Recently, I was talking to a new landlord about their first ever tenants. They had been chuffed with them. The landlord told me how disappointed he was when these great tenants had decided to move out after only 6 months.

Apparently, these tenants had paid up front with the full first 6 months of rent. I wondered if the landlord had any idea of the downsides of accepting rent up front.

My experience of up front rent

I’ve done it myself. I had an American couple, who new to the UK, were clearly never going to pass any credit checks or references. Neither did either tenant have a job. Therefore the only way of guaranteeing getting the rent paid I took a full six months rent in advance.

However, this approach can be dangerous. This is because, legally, there may be some confusion as to whether this upfront rental payment, should be considered as rent, or the tenant’s deposit. This can complicate things if any dispute arises.

So, what seems to be a shrewd move by the landlord, has the potential to unravel under the glare and scrutiny of the courts.

The risk is that these advance payments fall under the provision introduced by the Housing act 2004, as this would require the payments to of been protected. The failure to properly protect the deposit, potential would both attract an automatic fine, and would also mean the use of a section 21 notice would be unavailable to landlords seeking accelerated possession.

Failure to protect the deposit

We are all familiar with the fact that landlords are now required to protect their tenants deposit within 30 days of receipt. However, where the rent is received in advance there has always been some confusion as to whether this should be treated as either rent or a deposit. Now the Courts have clarified the legalities for landlords in a recent case – Johnson vs Old.

Clarification of deposit vs advanced rent

In the case, Ms Old, the tenant , failed to pass the credit check, so she elected to pay her first eighteen months rent by 3 payments of 6 months rent in advance. After that, Ms Old’s tenancy ran on as a periodic tenancy and she paid rent on a monthly basis.

However, when Mr Johnson tried to evict the Ms Old, the tenant, using a section 21 notice, she defended her case on the basis that those 3 payments had been deposit payments, which should have been protected under the Tenancy Deposit Scheme.

Ms Old, the tenants, argument/defence was that the section 21 notice was invalid and the claim for possession should therfore fail.

In the end, the court of appeal ruled in the favour of the landlord, Mr Johnson. A great relief to landlords every where.

The periodic tenancy problem

This case, whilst demonstrating a successful outcome for the landlord, and thankfully clarifying some blurry case law, does highlight several issues for landlord’s when it comes to a periodic tenancy.

Under the provision of s.5 of the Housing Act 1988 the terms of the periodic tenancy relate to the period of the last rent payment. In this respect, where there is doubt about whether the initial payment is rent or infact a deposit.

The lessons for landlords

  • 1. Make sure that the last payment is what you would want the periodic payment to be. For example if you make the fixed term 7 months, and that the advanced payments are for 6 months, then a final payment of 1 month.
  • 2. Create a tenancy agreement with provisions for the tenancy to run on a contractual monthly periodic tenancy, after the end of the fixed term

If you have more questions on the legal aspects of taking a deposit and advance rent please post your question to our landlord legal forum.

Or place any comments below.

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