The issue follows a specific case, Johnson v Old, which is due before the Court in March. 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, one of the highest in the country.
‘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,’ said Sarah Rushbrook, founding director of property management agency Rushbrook & Rathbone.
‘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,’ she explained.
‘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,’ she added.
She believes that 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 to 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,’ said Rushbrook.
She pointed out that 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,’ she said.
‘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 they are in this business,’ she added.
She believes that in the worst case scenario ‘we could potentially be heading for an industry that is going to be impossible to operate, except through charitable institutions and housing associations’.
