Must advance rent be protected as a deposit or not? Can ADR make me pay 3X?

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    #31
    Originally posted by bureaucrazy View Post
    That makes sense from a practical point of view, but a person can discharge payment in advance for food or even life and death medical treatment. There must be some law or judgement that decided that a tenant cannot pay rent until the period of occupancy.

    I have found this case but can't find the details

    https://www.landlordsguild.com/payme...t-of-rent/443/

    If I can't get to the bottom of 'why' I will just have to accept it as fact to be on the safe side.
    But a T CAN pay rent in advance of the period of occupancy, as long as he is then not asked to pay twice, effectively for the same period (eg month 2). Many international students pay six or 12 months rent in advance because they have no UK based guarantor. The difference is that they are not asked for more rent from the time when the tenancy begins, to the end of the last month for which they have already paid in advance.
    'Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation fo the first link on one memorable day'. Charles Dickens, Great Expectations

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      #32
      Deposits are are two types.

      The first is where goods or services are contracted for and the customer makes a down payment when the contract is concluded and the full payment when the goods or services have been supplied. Whilst there is a security element involved because the supplier may have the right to retain the whole or part of the deposit if the customer does not comply with the contract, the customer does not expect to get the deposit back if the contract is performed.

      The second is where the price for a service is agreed, but in addition the customer pays a deposit to ensure that he complies with the terms of the contract because he is supplied with something that the supplier expects to get back in (more or less) the same condition it was in when handed to the customer. The customer expects to get the deposit back if he complies with the terms of the contract.

      Subject to contrary agreement, in the first case the money belongs to the supplier because it is a payment on account; in the second it does not but remains the property of the customer. Accordingly, rent deposits are a different animal from the deposit you put down when you book a hotel.

      When it comes to rent "in advance" is usually contrasted with "in arrear" and simply means paid at the start of a rental period and not at the end. However, it can also mean paid before due, which is not the same as payable before the first day of the period to which it relates. The law recognises that rent can be made payable before the first day of the period to which it relates as the Rent Act 1977 expressly forbade it. There is no such provision in the Housing Act 1988.

      I think that saying that the distinguishing element between a deposit and any other payment is that the tenant expects to get the deposit back is fine up to a point, but I think we also need to look carefully at the circumstances surrounding payments not described as deposits to see if there is not some security element to them which justifies them being classed as deposits for the purpose of the Housing Act 2004. In this respect it is wise to assume that the courts will proceed on the basis that if Parliament has seen fit to accord protection the courts will look carefully at anything they perceive is designed to get round that protection.

      We can consider the following:

      (a) The rent is payable monthly in advance and the tenant pays it a day or two early to make sure it is paid on time. No one is is going to argue that, even though the money paid is not rent until rent day, the sum received requires protecting.

      (b) The tenant has signed an agreement which provides for the tenancy to start in a week and for the first instalment to be paid on the day the tenancy begins. However, because the landlord insists, the first instalment of rent is paid when the agreement is signed. Whilst the tenant does not expect to get the rent back, there is an element of security involved as the landlord wants to make sure of at least the first instalment of rent. One would hope that no court would find that the early payment of rent was a deposit since this is almost standard practice and is clearly not what Parliament had in mind.

      (c) Here we have the same situation as in (b), but there is a long gap between the signing of the agreement and the start of the tenancy - a not uncommon situation with student lettings. The security element is rather more to the fore. Demanding the first instalment of rent before it is due cannot be justified on the grounds that you need a few days to clear the funds. Is the advance rent a deposit? Would the position be different if the agreement provided for the first instalment to be paid on the signing of the agreement?

      (d) The agreement provides for the rent to be paid monthly in advance, but, on the landlord's insistence, the first six months' rent is paid on or before the beginning of the tenancy. This is what happened in the reported case. The first judge seems to have emphasised the security element whilst the second the fact that the tenant did not expect to get the rent paid back. There is no telling what conclusion a higher court would come to.

      (e) The agreement provides for the first six months' rent to be paid at the start of the tenancy. Here we seem to be all right because no money is paid before it is due. However, for all practical purposes if the tenancy does not end early, the effect is the same as (d) as the tenant has parted with six months' rent; it really ought not to be the case that the landlord's obligation to protect what the parties may regard as non-refundable depends on how the agreement is worded.

      (f) The agreement provides for the the first and last months' rent to be paid at the start of the tenancy. Here again we seem at first sight to be all right because no rent is paid before it is due. However, as the OP himself admits, this arrangement is to ensure that the last month's rent is paid, emphasising the security element and possibly making it a deposit. Making the first and last months' rent payable at the start of the tenancy whilst leaving the intervening months' rent payable during the course of the tenancy also creates a bit of a conundrum. The last month's rent can only be attributable to the last month and since that month's rent has been paid it has to follow that the tenant must be entitled to occupy the property during that month. So, what happens if the tenant does not pay rent from the second or any subsequent month on? Can the tenancy be brought to an early end? Surely better to have a deposit which can be applied as soon as it is needed.

      Whatever the position may be, theartfullodger's advice to keep things simple is best followed - at least until the position is clarified by a decision of a higher court.

      Comment


        #33
        S.212(8) HA2004 –

        "tenancy deposit", in relation to a shorthold tenancy, means any money 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.
        [The appeal judge], HHJ Simpkiss, found as follows:

        - the rent paid in advance was not a ”security” to ensure that the Defendant fulfilled the obligation to pay rent but was actually the obligation itself.
        - the rent paid in advance was never intended to be returnable at any time during the tenancy or once it had ended and that the monthly rent was never sought from the Defendant on a monthly basis in addition to the up front payments.
        - He also found that whilst the rental clause was convoluted, the intention of the parties was obvious from the out set.
        I think this is correct, both in the interpretation of the rent in advance being the obligation itself, not security held against the obligation, but moreover in terms of the judge’s emphasis on the parties’ intentions.

        I can understand the opposing argument, because one cannot discharge rent before it falls due (and a portion of the rent would have been refundable if Ms Old's tenancy had ended before the six month point), but I think the intentions, as Simpkiss says, were clear.

        I recently had a student tenant whose parents found it more convenient to pay the rent in two or three month chunks. These were voluntarily rent-in-advance payments, not at my insistence as in the Brighton case.

        If a higher court were to rule that the Brighton rent-in-advance was a deposit, irrespective of the parties’ intentions, a LL in my position would have to closely monitor his bank account in order to protect, within 30 days, any unexpected incoming advance payments by the T. An unscrupulous T, perhaps knowing that the LL was due to go abroad, could time a payment to be discovered too late, then bring a non-compliance claim – therefore, I think intentions must be a crucial factor in determining the nature of monies paid in advance.

        Comment


          #34
          I have given this further consideration.

          Before the deposit protection legislation come about we all thought we knew what a deposit was and no one had to consider what a deposit was. If asked for a definition I may have said that a deposit was a sum of money set to one side which a landlord could call upon if the tenant failed to comply with his obligations but which otherwise was returnable to the tenant when the tenancy ended.

          It is almost inevitable that when a law is passed to deal with some mischief that there will be some who try their best to devise schemes to get round the law. It is in the nature of legal drafting that you can rarely cover all the angles or that circumstances change. If you do not believe this go here and type in the word "amendment" and see how many results you get.

          Because the legislation does not define deposit (the draftsman not unreasonably considering it did not need defining) various methods have been suggested to get round the legislation. Now of course once that happens it is necessary (having regard to the mischief the legislation addresses) to consider whether the proposal is one which (to use the words of the judge in Street v Mountford) drives a coach and horses through the legislation.

          Accordingly, it seems to me that the test should not be whether the tenant expects to get back the sum paid, but whether (a) the sum is required to be paid before it is due under the tenancy agreement or (b) the tenancy agreement requires rent to be paid under an unjustifiable non-standard regime.

          In retrospect, a significant failure of the deposit legislation was not to introduce the safeguards set out in the Rent Acts, namely: (a) restricting the deposit to a specified amount (b) restricting the amount of rent which can be made payable in advance (c) the prohibition of rent being made payable before the first day of the period to which it relates.

          Comment


            #35
            Originally posted by Lawcruncher View Post
            Because the legislation does not define deposit (the draftsman not unreasonably considering it did not need defining)...
            But it does define it - ?

            Originally posted by Lawcruncher View Post
            ...various methods have been suggested to get round the legislation. Now of course once that happens it is necessary (having regard to the mischief the legislation addresses) to consider whether the proposal is one which (to use the words of the judge in Street v Mountford) drives a coach and horses through the legislation.

            Accordingly, it seems to me that the test should not be whether the tenant expects to get back the sum paid, but whether (a) the sum is required to be paid before it is due under the tenancy agreement or (b) the tenancy agreement requires rent to be paid under an unjustifiable non-standard regime.
            I am not sure what you mean by the 'proposal', but I do not think that HHJ Simpkiss' ruling drives a coach and horses through statute (if that's what you're implying).

            The [presumed] aim of the legislation is to provide additional safeguards in the event that a LL unfairly withholds a deposit at the end of a tenancy - to address this particular mischief.* In the Brighton case, there was no such mischief.** The LL acted in good faith and set the advance payment against rent for the whole of the six month term[s], as agreed and as intended by both parties; LL made no attempt to demand further rent during the term.

            I would envisage far more potential for mischief, shenanigans and horse-drawn carriages, if a higher court were later to rule that the rent-in-advance was a deposit. For a start, the Brighton case LL, Johnson, could be facing a 3x penalty under s.214 amounting to in excess of £53K, as well as having to return £17K+ in rent before he could serve a valid s.21 notice. Note, according to landlordlawblog, the tenant, Ms Old, is apparently still in occupation and has meanwhile stopped paying rent (no doubt in anticipation of her £70K 'bonus'; and what's the betting that if LL applied for possession under s.8 that she'd counterclaim for spurious disrepair, as her case is publicly funded by legal aid...).

            In terms of such a ruling's wider application, obviously LLs in Johnson's position would be advised to make the first rental payment a six monthly one, with subsequent payment[s] due monthly, but as I said above, a T could make carefully timed 'surprise' payments, unknown to the LL, wait 30 days, then claim under s.214.

            Even if LL discovered and protected the payment in time, he'd then be faced with the
            administrative hassle arising when rent fell due and he sought to release a portion of the deposit to pay the rent every month/week. And

            a) T could refuse to release the deposit as requested, or merely be the uncommunicative type.
            b) LL could refuse to release the deposit, and instead demand further rent (as the 'deposit' wouldn't be 'rent in advance') and seek possession under s.8.

            Again, take the example of my student tenant whose parents opted to pay in random chunks. Why on earth should it be the case that the two of us cannot simply agree to this mutually acceptable arrangement without statute intervening and making a huge song and dance of it?

            ====
            * Though IMO little has changed. The T may still end up having to claim for a refund in the county court, a remedy which was previously available. And although a deposit is more effectively shielded from events such as LL bankruptcy if it is protected with either DPS or TDS, the protection will be invalid if the LL has used MyDeposits. It would have been far simpler to make it a requirement for the T to pay the deposit into a scheme and to provide the LL with the certification; and for it to be prohibited for the LL to take a direct cash payment, with penalties similar to s.214/5 for doing so.

            ** Indeed, I've done the same as Johnson myself in the past, with no mischief intended, albeit I do it no longer. The last time I took six months up front I made the first payment due for a six month period, with monthly following on.

            Comment


              #36
              When it comes to the landlord requiring payment of rent before it is due, the tenant is at risk because the money tendered is not rent. This means that if the landlord sells before what is paid on account is exhausted the buyer can legitimately demand rent on any rent day following completion if the landlord has not accounted to him for the funds he has in hand. A tenant paying six months' rent at the start of a tenancy where the agreement provides for rent to be payable monthly is therefore at risk for considerably more than a tenant paying a deposit equal to one or two months' rent.

              I do not think that a tenant would get away with claiming that a sneak payment of rent before it was due amounted to a deposit. I think it has to be the case that the landlord requires payment before it is due.

              The definition of what amounts to a deposit should not be governed by the fact that in some cases the penalty may be very high and not what was intended. What should surely be relevant is whether what the parties agree puts the tenant at some risk.

              Comment


                #37
                So what is the student landlord to do with the first month's rent in advance which he takes, on the signing of the contract, as surety of the tenant's taking up the tenancy some months' hence?
                'Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation fo the first link on one memorable day'. Charles Dickens, Great Expectations

                Comment


                  #38
                  Originally posted by mind the gap View Post
                  So what is the student landlord to do with the first month's rent in advance which he takes, on the signing of the contract, as surety of the tenant's taking up the tenancy some months' hence?
                  It would seem that this would be covered if the tenancy agreement makes the first instalment of rent payable on the date of the agreement. However, there is still an element of risk because (assuming the absence of a deed) there is in fact no tenancy until the tenant goes into occupation and so the tenant is at risk that the landlord will sell without disclosing the agreement. I think we can though ask why the landlord should want the first month's rent if he has a deposit and what is so different about the first month's rent that it has to be paid "up front".

                  Comment


                    #39
                    Originally posted by Lawcruncher View Post
                    there is still an element of risk because (assuming the absence of a deed) there is in fact no tenancy until the tenant goes into occupation and so the tenant is at risk that the landlord will sell without disclosing the agreement.
                    Surely the purchaser (or his legal adviser) would demand to see the tenancy agreement before exchange of contracts and would be aware that the T had paid £x in rent up front?

                    I think we can though ask why the landlord should want the first month's rent if he has a deposit and what is so different about the first month's rent that it has to be paid "up front".
                    That is a valid point, but if the LL took a tenancy deposit and protected it, then the T failed to move in, would he not be obliged to return the deposit?

                    Perhaps it would be advisable to make the tenancy agreement a Deed?
                    'Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation fo the first link on one memorable day'. Charles Dickens, Great Expectations

                    Comment


                      #40
                      Originally posted by mind the gap View Post
                      Surely the purchaser (or his legal adviser) would demand to see the tenancy agreement before exchange of contracts and would be aware that the T had paid £x in rent up front?
                      My point was that the landlord can sell without disclosing the agreement. If not disclosed the buyer is not bound by the agreement (if not a deed, but also see further below) since there is no legal estate "good against the world".

                      Originally posted by mind the gap View Post
                      That is a valid point, but if the LL took a tenancy deposit and protected it, then the T failed to move in, would he not be obliged to return the deposit?
                      The deposit is taken against the tenant's failure to comply with the agreement. However, since there will be no tenancy the landlord has an obligation to mitigate his losses and if his losses are less than the deposit he must refund the difference.

                      Originally posted by mind the gap View Post
                      Perhaps it would be advisable to make the tenancy agreement a Deed?
                      Possibly, at least from the tenant's point of view. The agreement must be be phrased in terms that it actually grants a tenancy and not follow the format of an executory agreement. One does though need to be a little a wary about making something a deed that does not need to be a deed. Whilst it makes no difference to the enforceability of contractual obligations whether the contract is made by deed or under hand, a party is estopped from denying the truth of assertions he makes in a deed - not perhaps a huge worry for a standard tenancy agreement, but all sort of things creep into tenancy agreements with doubtful pedigrees.

                      Comment


                        #41
                        Originally posted by Lawcruncher View Post
                        One does though need to be a little a wary about making something a deed that does not need to be a deed.
                        But it sounds as though it does need to be a Deed if neither the LL nor the T otherwise has any guarantee that the other will honour the agreement to create a tenancy at a point some months hence, or at least any guarantee of financial recompense in the LL's case, if the T does not.
                        'Pause you who read this, and think for a moment of the long chain of iron or gold, of thorns or flowers, that would never have bound you, but for the formation fo the first link on one memorable day'. Charles Dickens, Great Expectations

                        Comment


                          #42
                          There are two possible instruments:

                          1. One which actually creates a tenancy, whether the tenancy begins immediately or at a future date. This has to be a deed. Once such a deed is made the tenancy exists and (assuming the landlord has a legal estate vested in him) creates a legal estate which (ignoring possible registration requirements and other exceptions which need not detain us) is good against the world.

                          2. One which operates as an agreement to grant a tenancy. This can either be under hand or by deed and the effect is the same whichever it is. The only possible reason for making such an agreement a deed that occurs to me is if a guarantor joins in. Even if the tenancy is expressed to begin immediately, it does not start until the tenant takes possession. Until possession is taken the tenant's position is precarious because his interest is equitable only. So long as the landlord remains the owner the tenant can sue for specific performance requiring the landlord to allow him into possession. However, if before the tenant goes into possession the landlord sells to a buyer who has no notice of the agreement (and we will not go into what constitutes notice or how the tenant can ensure that a buyer has notice) the tenant's only remedy is to sue for damages. The landlord's position is that pending the tenant taking possession he "just" has a contract like any other; it is only when the tenant takes possession that the relationship of landlord and tenant arises and with it all the rights, remedies and advantages incident to a tenancy.

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