Sheriff decides ‘advance rent payments are not a tenancy deposit’

Guest article by Jane Rattray, Solicitor – Housing and Private Letting at Lindsays Solicitors.

In a recent case at Dundee Sheriff Court, Cordiner v Al-Shaibany, Sheriff Drummond QC determined that an advance payment of rent by a tenant did not amount to a deposit.

The payment included the first and last months’ rent and the court ruled that a landlord had not breached the Tenancy Deposit Schemes (Scotland) Regulations 2011 (hereinafter referred to as ‘the Regulations’) by failing to place a deposit in a scheme.  As this case was heard at Sheriff Court level it is not binding on future cases, however, it could be persuasive.

The key legal issue for the court was whether payment of the last month’s rent was a deposit under the definition of Section 120 of the Housing (Scotland) Act 2006.

Section 120 of the 2006 Act states:

“(1) A tenancy deposit is a sum of money held as security for

• the performance of any of the occupant’s obligations arising under or in connection with a tenancy or an occupancy arrangement, or
• the discharge of any of the occupant’s liabilities which so arise.”

This case highlights that there is no obligation on landlords to insist on a tenancy deposit and that advance rental payments can be permissible (and not a deposit) when taking into consideration the intention of the parties, the terms of the tenancy agreement and any relevant evidence.

The facts

The tenant and the landlord entered into a short assured tenancy on 30 September 2013 commencing on 1 October 2013. The lease was for the duration of one year and the rent was payable at £525 per month.  The lease stated that no deposit was payable, however, payment of the first and last month’s rent was payable in advance. The tenant paid £1050 on 30 September 2013 to include the first and last months’ rent.

The last regular payment of rent was in June 2014 and the tenancy agreement ended on 11 August 2014.

The tenant raised court action under the Regulations seeking a judgment that the landlord:

• had breached his obligation to place the deposit in a tenancy deposit scheme within 30 days of the commencement of the tenancy
• had failed to provide the tenant with the required information
• was liable to pay the tenant up to three times the deposit as a penalty for failing to comply with these duties

The tenant gave evidence that there had been no discussion with her landlord about a deposit, she paid the first and last months’ rent in advance and she understood that the last month’s rent was a deposit.

The tenant’s solicitor invited the court to conclude that the advance payment of the last month’s rent was a deposit and that the landlord had attempted to side-step the Regulations by requesting two months’ rent in advance.

The landlord’s position was that at no point had he sought a deposit from the tenant and the lease specified that no deposit was due.  The landlord explained that the last month’s rent was payable in advance because of his experience of tenants leaving properties without paying the final month’s rent. He did not request a deposit because in his view tenants would be unable to afford advance payments of rent and a deposit.  The property had been damaged by the tenant and in repairing the damage the landlord had not used any of the advance rental payments.

The Decision

Sheriff Drummond QC concluded that the advance payments were for rent and not being held as security for the performance of Ms Cordiner’s tenancy obligations, i.e.as a deposit.

The Sheriff’s decision was influenced by the evidence that the lease clearly stating that no deposit was payable, that the tenant understood no rent was to be payable for the last month of the tenancy and that there was no basis to support the tenant’s claim that the advance payment was for a deposit.

Sheriff Drummond QC considered the case of Johnson v Old ((2013) EWCA 415) to be persuasive.  This is an English Court of Appeal case which held that advance payments of rent are not payments made to secure compliance with an obligation, but are payments made to comply with the obligation to pay rent. The English decision was determined by the wording of the tenancy agreement and the intention of the parties.

How far in advance can landlords request payment of rent?

Although the case at Dundee Sheriff Court decided that the advance rental payments were permissible, landlords should be aware that under Section 89 of the Rent (Scotland) Act 1984, landlords are generally prohibited from imposing a requirement of advance payments of rent before the beginning of the tenancy or in advance of six months before the rent is due.

It would appear that the landlord in the case at Dundee Sheriff Court did not comply with section 89 of the Rent (Scotland) Act 1984, however, there was no mention of this legislation at the hearing. If a landlord breaches this regulation, a tenant can recover the rent payments for up to two years and a landlord could be liable to pay a fine of up to £1000.

What should a landlord do if he/she wants to request advance payments of rent?

A landlord who wishes to receive advance rental payments without a deposit when a tenancy is granted, continued or renewed should ensure:

• the tenant understands the purpose of the advance payments and that no deposit is required
• the tenancy agreement explains the arrangement
• payments are not made in breach of the requirements of Section 89 of the 1984 Act. The legislation is poorly drafted and legal advice should be sought if you take or wish to take rent in advance, particularly as to the specific terms of the lease.

Guest article by Jane Rattray, Solicitor – Housing and Private Letting at Lindsays Solicitors.