Monday, February 23, 2009

Advance rent = deposit??

Note - the Landlord Law Blog has now moved to www.landlordlawblog.co.uk.

***

There is a report of a new tenancy deposit case on the Nearly Legal website. Although this is a County Court decision and therefore cannot bind Judges in future cases, it is interesting, and may be worrying for many landlords.

It appears that in this case there was a dispute as to whether the deposit money was actually a deposit or ‘future rent’ as alleged by the landlord. The Judge decided that the regulations say that any money paid (although in this case it was money from a former deposit paid to the same landlord in respect of a previous property) will be deemed to be paid as security, and therefore will be covered by the tenancy deposit regulations.

Many landlords have sought to evade the tenancy deposit regulations by taking two months rent in advance instead of one month in advance and a deposit. This case implies that this strategy may be more risky than has previously been thought, as if the Judge finds that in fact the payment was a deposit, the landlord will be liable for the penalty ‘fine’ of three times the deposit amount.

For more information about this case, read the Nearly Legal Report.

Stumble Upon Toolbar

7 comments:

Francis Davey said...

How is the "rent in advance" idea supposed to work? If its just that (rent in advance) then there won't be any surplus at the end of the tenancy to use to pay for any dliapidations/other tenant default.

The only use of rent in advance is that you have better cash flow when if the tenant starts to default on rent payments.

But of course since you could have asked for all the rent in advance its not that big a hole.

Tessa said...

I think how they normally do it is that they take 2 months rent up front, which is taken to be for the first month and the last month.

So the tenant then pays rent for month two (and so on), but there is a months rent in hand. Then at the end of the tenancy the tenant does not have to pay the last months rent (assuming he has paid all the rest of course).

Landlords have said to me that they prefer this, as their main worry is non payment of rent rather than damage, and they don't want the bother of the tenancy deposit scheme.

But I wonder, in the light of the case reported on NL, whether this is in fact something they can do?? What do you think?

Simon Parrott said...

This might be a very commonplace issue.
I've been speaking to an Agent this morning on this point who tells me that it is now increasingly commonplace for them to take 6 months rent up front. Unforunately their practice is simlpy to record this on the tenancy agreement as "The tenant has paid 6 months rent up front". Otherwise the normal tenancy provisions as to rent are unchanged - ie leaving provision for the tenant to pay the monthly rent on the rent days.
My view is that this will create a diffcult re security and deposit protection because the tenant can argue that the Landlord is not entitled to have that money in his pocket until each rent day proportion has become due. Thus the Agent is left to hold the up front payment and then pay a monthly proportion over to the Landlord each month.
Is the correct way to deal with this to record a single rent payment equivalent to 6 monthe payable on day 1 and then to provide for rent to become due again at the beginning of month 7

Tessa said...

My understanding is that when six months rent is paid in advance, the tenant does not have to pay any rent until month seven. I think this is sometimes done if the tenant does not pass the referencing and would not otherwise be accepted as a tenant.

When this happens, I would have thought the agent should take his commission out and pay the balance over immediately to the landlord, rather than hang on to it! An agent is just that, an agent, and my understanding is that under agency law he is not entitled to withhold the money (or indeed anything else relating to his work as agent) if the landlord requests it. At least that is what I remember from when I studied agency law all those years ago!

I also do not see how the tenant can say that the landlord is not entitled to the rent in advance when he has paid rent in advance? Surely the act of paying it implies that he agrees to it being done.

Legally, and under agency law, there is no difference in paying rent to an agent than to the landlord direct. Maybe they do not understand this and are treating the agent as some sort of stakeholder. I don’t think this is correct though.

Simon Parrott said...

Hi Tessa
I agree with you in principle but the issue I have come across is where the tenancy agreement has not been altered to reflect that no rent is payably after month 1 until month 7 - It simply says that rent is pyable at £x per month and then an additional part has been typed in to say that T has paid 6 months up front. In those circumstances it is surely the case that LL is not entitled to the full 6 months rent since it only becomes due in monthly instalments. I have advised the Agent to change the wording of the Agreement in the future and to seek a deed of variation of this particular agreement
Simon

Joonghee said...

Our leasing unit was a brand new condo when we moved in last year. When movers were carrying our furniture to this unit they scratched the hardwood floor. So there is a small mark on the floor that hasn't been there before we moved in.

Few days ago the landlord sold this property and closing it next month. We told him that we will be moving out by the end of the month but I am worried that he will deduct large amount of money from our deposit for the scratches that has been made by the movers and other small matters such as nail marks on the wall. Since this unit was a brand new property when we moved it's difficult to leave same as before after living here for one year.

We paid 1.5 times of rent for deposit last year. The rent for this unit is $2250/mo so 1.5 times of this money is not a small amount. What can we do or prepare ourselves so that we can get the deposit money back (reasonable amount) when leave this property?

Tessa said...

Hi Joonghee

I am afraid that as I am an English solicitor I cannot really comment on cases elsewhere - I assume that you are somewhere in America. Sorry.