PP 2013/80

The Court of Appeal has distinguished rent paid in advance from a tenancy deposit. Sections 213-214 of the Housing Act 2004 require landlords to protect tenancy deposits received from assured shorthold tenants using an approved tenancy deposit scheme. The legislation defines a tenancy deposit as “any money intended to be held … as security” for the performance or discharge of the tenant’s obligations or liabilities.  Failure to comply allows the tenant to recover the deposit and a penalty of up to three times the deposit. The legislation contains a further sanction; the landlord will be unable to serve a notice under section 21 of the Housing Act 1988 to recover possession. However, there are other ways of dealing with tenants who are poor credit risks. A landlord can require full payment in advance or, alternatively, a guarantee.  The question in Johnson v Old (2013) EWCA CA Civ 415 was whether a tenant, who paid six months rent before her lease began, had paid a tenancy deposit to her landlord. The tenant entered into an assured shorthold tenancy agreement for a six-month term in 2009. The tenancy agreement stated that the rent was payable monthly in advance. However, it also contained a provision requiring the tenant to pay the entirety of her rent in advance, as well as a deposit in the sum of £1,425, because she did not receive a salary. The managing agents used the amount paid to cover the rent to make monthly payments to the landlord. The additional sum received was protected with a tenancy deposit scheme. The tenant renewed the tenancy agreement at the end of the fixed term on two further occasions and subsequently held over, paying rent monthly in advance during the statutory periodic tenancy. The landlord served a section 21 notice on the tenant when she began having difficulty paying the rent. The tenant pointed to the monthly payment provision in her lease and claimed that she had paid a rent deposit, which had never been protected in accordance with the legislation. The Court of Appeal dismissed the tenant’s argument. It decided that the way in which the managing agents accounted to the landlord for the tenant’s money was neither here nor there. It accepted that the payment provisions in the lease were badly drafted.  Nonetheless, it must try to make sense of the tenancy agreement and construe it as a whole. The court contrasted money deposited as security for future liabilities, which a tenant would expect to recover after satisfying its liabilities in full, with sums paid to discharge a current liability, which are not paid with the intention that they should be held as a security for future payments, leaving the debtor to rack up interest unless and until such payments are made. The court suspected that the tenant would have given short shrift to demands for rent and interest during the final fixed term and decided that she had made a genuine payment of six months’ rent in advance, as opposed to having provided a tenancy deposit in disguise. Consequently, there was no need to decide whether the provisions of the Housing Act 2004 prevented the landlord from relying on the section 21 notice served on the tenant. Allyson Colby is a property law consultant