Can rent paid in advance be considered a deposit?
Letting legislation tends to keep changing and as an individual landlord it is difficult to keep up with the latest regulations. Click through to know more about it
Buy to let is as much about knowing and understanding the legals as it is about making money and, because lettings legislation tends to keep changing, it's very difficult for individual landlords to keep up with the latest regulations. The best way to ensure you don't fall foul of the law is to either use a letting agent who belongs to a Lettings Ombusdman service (via membership of professional bodies, such NALS or ARLA) or a landlord association, such as Residential Landlords Association or the National Landlord Association.
A good example of the importance of understanding your legal rights and responsibilities is a recent landlord case, 'Johnson v Old', which has concluded that rent paid in advance cannot be classed as a deposit. If you have been taking rent in advance, rather than a deposit, under an Assured Shorthold Tenancy Agreement, then this may have implications for you.
What was the case?
A landlord and tenant went to court to argue whether rent paid in advance could be classed as a deposit or not and whether it should therefore have been protected in a deposit protection scheme.
The landlord was trying to serve a Section 21 notice, which the tenant was arguing he couldn't do, because she had paid six months' rent in advance.
In the first court case, it was concluded that the landlord couldn't serve a Section 21 notice because he hadn't protected any of the rent paid in advance in a tenancy deposit protection scheme.
However, on appeal, this was rejected.
What was the conclusion?
The case looked at various elements of the agreement between the landlord and tenant. Firstly, it checked whether the landlord had the right to take six months' rent up front. As the tenant didn't have good credit references and it had been made clear this was what she needed to do to secure the tenancy, the tenancy agreement and financial arrangement was judged to be valid.
Secondly, the appeal concluded that the rent paid in advance wasn't a deposit, it was to discharge a 'current liability' (to pay the rent on a monthly basis). This meant that the whole amount was classed as rent and, because the landlord hadn't taken any other monies, he couldn't be accused of not protecting a deposit in a tenancy deposit protection scheme.
Why is 'Johnson v Old' important for landlords?
The case highlights the importance of understanding the legals of the business. In this situation, it's essential that as a landlord or agent entering into an agreement with a tenant you know what is classed as a deposit, which needs legally protecting, and understand when you can legitimately take rent up front.
If you choose not to work with a letting agent whose membership of a Lettings Ombudsman service (or NALS/ARLA) ensures they have to keep up to date with the legals, you have some way of keeping on the right side of the law yourself when it comes to renting property.
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