Rent in advance- Deposit or no deposit?

Recent uncertainty as to whether rent in advance is a deposit or not has been clarified by the Court of Appeal decision in the case of Johnson v Old. Much to the relief of landlords, the decision was made in favour of the landlord. This means that when rent is paid in advance, where payment of the monies is to discharge the tenant’s liability for rent only, it is not treated as a deposit and therefore does not need to be registered.

I have set out in my previous articles the requirements of deposit registration and the consequences of failure to do so. This decision is important therefore for landlords that seek to take rent in advance as it now provides them with some peace of mind that a Section 21 Notice served will not be invalidated and they will not be liable to pay a penalty.

The case itself of Johnson v Old involved the Court dealing with some issues to the drafting of the tenancy agreement. So far as to say, the clearer the terms of the tenancy agreement, the less likely any dispute is to arise. The important issue addressed by the Court was whether a payment of 6 months rent in advance was a deposit or not.

The Court held that where money is paid in order to discharge a current liability (rent), it is not paid with the intention that it is to be held as security. The money taken in advance was to be allocated for rent only for the first 6 months and it was not to be allocated elsewhere or held as security for any breach of the tenancy agreement.

Importantly, the tenant had not been asked for further payment of rent within the first 6 months following the payment in advance. Had rent been demanded within that 6 month period, the landlord would clearly be seeking additional monies when rent had already been paid (by way of the advanced payment). An amount for further rent within that initial period is likely to render the advanced payment as a deposit.

Essentially, a landlord cannot take rent in advance and then ask for further rent to be allocated to the same period. If this is done, the advanced “rent” would need to be registered as a deposit.

Therefore, where a landlord is faced with a the tenant who cannot supply adequate referencing and the landlord wishes to request rent in advance, the landlord should ensure that no further rent is demanded for the period (already paid) unless the landlord is willing to treat the payment in advance as a deposit (and thus register and comply with the initial requirements).

Speaking to a number of landlords about tenancy deposits, many don’t take deposits now. As with many things, there are advantages and disadvantages of not taking the deposit but this recent case provides now some further scope for landlords and an option to take rent in advance.

There is a potential knock on effect of taking rent in advance which applies to the length of notice to be given pursuant to Section 21 of The Housing Act 1988. Landlords should take advice and I would be happy to offer some guidance in this respect.