Rushbrook & Rathbone comment on debate over whether rent in advance is deposit

Sarah Rushbrook, Founding Director of Rushbrook & Rathbone believes that we are at a critical turning point in the private rented sector, and a decision on whether rent paid in advance is a tenant’s deposit by the Court of Appeal due in March is going to be a vital one for the industry.

The question follows a specific case, Johnson v Old, which is due before the Court next month. It has been widely publicised that with this particular case, although six months rent was paid in advance, along with a separate amount which was taken as a deposit and duly protected, the tenant argued that the rent taken had constituted a deposit after the landlord requested possession of the property. It had been decided that the advance rent was a deposit but it has since gone back and forth following separate appeals and the case is now to be determined by the Court of Appeal.

Sarah comments: “If the outcome states that any upfront rent is a deposit then there is going to be a big dispute as to how it is going to work going forward, and the industry that we rely on so heavily for housing at the moment, housing that the Government can’t provide, will be in jeopardy as private landlords will consider leaving the market.

Looking at this case specifically, I fail to understand why there is an issue in the first place. In truth, any rental payment, even if it is an upfront payment, is for the occupancy of the property itself and if the payment is to cover a fixed term then money could not be due back to the tenant as neither party can break the agreement within the fixed term. A deposit is held as security against damages caused by the tenant throughout the tenancy and remains the tenant’s money at all times throughout the tenancy until final damages are negotiated.

Putting this aside, the judgment will have an effect on the shape of the industry. With the general state of the economy it is no surprise that the number of renters with a poor credit rating has been steadily increasing. We are currently administering or managing properties where as many as 15-20% of tenants were unable to produce satisfactory references or provide a guarantor. This doesn’t make them bad tenants, far from it, as fails can be for various reasons, but it means that there only option was to pay upfront rent. Many tenants wouldn’t be able to secure properties without paying in advance. Changing the current set-up would mean that private landlords would not be prepared to look at tenants with failed references, if tenants don’t stack up financially the landlord would be taking too much of a risk. The returns on rented property together with any capital growth are soon lost if the tenant gets into arrears and you have to go to court for possession which in itself can easily take four months or more.

In addition, there is the cost and administration of registering every deposit. The court is going to not only decide what constitutes a deposit but whether rent in advance is a deposit which should be protected. This essentially means that landlords put themselves at greater risk as the penalties for failing to register a deposit correctly are punitive. How will the rent be released as it comes due, who would hold it in the interim? There would be added costs and new risks involved when letting a property to tenants who can only offer upfront rent and it could leave landlords asking themselves ‘why am I in this business.’

One begins to wonder what will happen to the private rented sector in the future, why would private individuals invest their hard earned money into such a high risk venture. If they get it wrong it can cost them their income and future security!

Going forward, we could potentially be heading for an industry that is going to be impossible to operate, except through charitable institutions and housing associations.”

Rushbrook & Rathbone have been successfully running a property management agency for over twenty years, and have worked with hundreds of clients on thousands of instructions. Whether working with the corporate or private sector, Rushbrook & Rathbone provide property management solutions across the board. By always placing their clients at the heart of their business, they have built an enviable reputation within the property management sector and are the company of choice. R & R have a highly skilled team of ARLA trained professionals that ensure the highest standards of commitment to customer service and compliance with existing, and anticipated government legislation.