A Tenancy Deposit or Rent in Advance?

An interesting decision from Scotland has highlighted the distinction between a tenancy deposit and rent collected in advance. It is important to note that the decision is not even a binding decision in Scotland so will not have any significant impact on the current position in English law. Nevertheless, the case deals with a common issue.

The Housing Act (Scotland) 2006 defines a tenancy deposit as sum of held as security for:
a)    the performance of any of the occupant’s obligations arising under or in connection with a tenancy or an occupancy agreement, or
b)    the discharge of any of the occupant’s liabilities which so arise.
A similar definition is provided in England by the Housing Act 2004, Part 6, Chapter 4.

The decision in Cordiner v Al-Shaibany attempted to distinguish a payment of rent in advance from a tenancy deposit. The tenant, Ms Cordiner, signed an Assured Shorthold tenancy with the Landlord, Mr Shaibany.  In the terms of the tenancy rent for both the first and last months was payable in advance. The lease stated that the tenant was not under any obligation to pay a deposit. Before the commencement of the tenancy the tenant paid £1,050.00 to the landlord, being the payment for the first and last months’ rent. The tenant subsequently pursued a claim against the landlord for his failure to protect the deposit under the legislative requirements of s120 of the 2006 Act. Accordingly, the landlord would be liable for a financial penalty for his failure to comply with the legislation.

The primary question before the Court was whether the payment of the last month’s rent that was paid in advance fell within the definition of a tenancy deposit. In making a decision Sheriff LA Drummond QC found reasoning in the English Court of Appeal decision of Johnson v Old [2013] EWCA Civ 415 (full decision here), which considered whether the advance payment of rent at the commencement of the tenancy constituted a deposit. The Court considered whether the money was paid with the intention that it be held as security for the obligations of the tenant. The Court made the crucial distinction between a payment discharging an obligation or liability, and a payment made as security for that obligation or liability. A payment as security does not discharge the obligation or liability. Rather, it is an assurance that the obligation or liability will be discharged at a future time. The court concluded that a payment of rent in advance is a payment which discharges the obligation to pay rent and is not therefore a payment held in security for the discharge of any such obligation in the future.

Applying that reasoning to the facts of the present case the Sheriff concluded that it was wrong to describe the money that was paid for the first and last rental payments as money held as security for the performance of an obligation, if that obligation has already been discharged. It was important here that there had been damage to the property which the landlord had made a claim for. Therefore, the Court was satisfied that there was no evidence that the money was being held for any other purpose. The tenant’s claim was dismissed.

Although this is a non-binding decision, it indicates that the decision in Johnson is still good law. Where a tenancy agreement expresses rent as being payable in advance it is not money that is being held to discharge any future obligations but an obligation that has already been discharged. It remains, it seems, that rent collected in advance, which is only used to discharge the tenants obligation to pay rent, does not constitute a tenancy deposit within the definition of the Act. This structure of requiring no deposit and taking the first and last months’ rent is used in England as well and so the fact that a Judge, albeit in Scotland, is prepared to accept this practice will comfort landlords who are using it. However, it is clear that it must be a genuine arrangement and not a mechanism for masking the taking of a deposit.

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