Wednesday, 24 April 2013

Court of Appeal Decision in Johnson v. Old – Good News for Landlords

The background to the case

As you may remember, at first instance, the District Judge held that Mrs Old’s sucessive payments of six months rent up front were in reality deposits – which as the landlord had failed to protect them, prevented him from being able to serve a valid section 21 notice.

The matter then went to HHJ Simpkiss on appeal on the 31st July 2012, when he overturned the decision saying that the payment was rent and not a security. 

Ms Old then secured legal aid which allowed the decision to be sent to the Court of Appeal – unfortunate for poor old Mr Johnson (although it rather looks as if he may have had insurance cover), but very helpful for the rest of us.

The Court of Appeal decision

Landlords everywhere will be relieved to hear that the decision was in favour of the landlord – the leading judgement which was made by Sir John Chadwick upheld the decision of HHJ Simkiss.

The appeal was in three parts – the first part looking at whether the tenancy agreement required the tenant to pay six months rent in advance.

The first part of the appeal

Much of the judgement looks in tedious detail at the minutiae of the tenancy agreement between Mr Johnson and Ms Old, which it seems was not happily drafted. However as it is only really relevant for the parties I will spare you this. Suffice it to say that the Judge said in para 31

"It seems to me that His Honour Judge Simpkiss was correct to hold that, read as a whole, the May 2010 tenancy agreement did require that the first six months’ rent be paid, in advance, on or before 1 May 2010."

The Judge goes on to point out that

"there are various ways of dealing with the perceived risk that a tenant who is the subject of an inadequate credit reference will not pay his rent month by month; and one of those ways is to require payment of the rent “up front”.

It seems to me plain that that is what the landlords, perhaps on the advice of their agents, decided was the appropriate way to deal with the perceived risk in the present case. The fact that they chose to deal with the risk in that way – rather than taking a guarantee or a rent deposit – is no reason for refusing to give effect to the terms of the tenancy agreement."

He also makes the point that the fact that the agents held on to the money and only passed it over to to the landlord on a month by month basis is irrelevant. He cites HHJ Simpkiss

“the arrangements between the agents and the landlord are neither here nor there” and

“whatever the arrangements between the landlord and [the agents] the [tenant] would have been able to argue successfully that she had paid the full rent for the term”.

going on to add that the Consumer Credit argument does not help Ms Old either.

"It would not be for her benefit to treat the £6,000 paid on 29 April 2010 (or any part of that sum) as security for the payment of future rent (rather than as, itself, payment of rent that had become due) in circumstances where the tenant was liable (under paragraph 1.7.5) for interest at the rate of 6% per annum on unpaid rent: her interests were best served by treating the rent as paid rather than as unpaid but secured".

A nice argument I think. The Judge then turned to the second ground of appeal which was on the allegation by Ms Old that the payment was actually a ‘security’ or deposit.

The second ground of appeal

The Judge does not accept this argument either. For two reasons

1. There is a difference between money paid to discharge an existing obligation and money paid to be held as security for some other obligation. Or as the Judge put it

"Money paid in order to discharge a current liability is not paid with the intention that it be held as security for the discharge of that liability.

The payer’s intention is that the liability will be discharged by the payment itself; and so there can be no need to provide security for the discharge of the liability in the future."

He goes on to point out:

"The point can be tested by asking, rhetorically, how the tenant would have responded to a demand, on 1 September 2010, for rent in respect of the month of September 2010.

It is, I think, impossible to avoid the conclusion that her answer would have been: “why are you asking me for rent which I have already paid?”.

And, if it had been suggested to her that she would be liable for interest at 6% per annum on rent for the month of September 2010 if she did not meet that demand by payment of £1,000 forthwith, her answer might have been expressed in stronger terms of indignation."

2. The Judge also points out that in any case this money could hardly be held to be security at the time the section 21 notice was served as the rent this money was allegedly paid as security for had fallen due (ie by 31 October 2010) – a long time before the section 21 notice was served on 15 August 2011.

So we proceed to the third ground of appeal

The third ground of appeal

This was that the landlord had failed to comply with the tenancy deposit regulations with respect to the payment. However as the court had held that this was not a deposit – there was no need to consider this.

So the landlord won, and the threat of having to pay back 18 months worth of rent to the tenant plus a penalty of up to three times that sum, is removed, hopefully for good.

Tessa Shepperson's thoughts on the case

I have to say that I am relieved that a bit of common sense has been applied here. Lots of landlords take payments up front from tenants who fail referencing, as happened in this case. If these payments were all at risk of being treated as a deposit, all sorts of ridiculous results would follow.

Thankfully the Court of Appeal has knocked these on the head.

However it also shows that landlords and their agents need to take care when drafting their tenancy agreements. It is generally accepted that the agreement in question here was a bit of a dogs dinner. Had it been a bit clearer this litigation could probably have been avoided.

So this case does not take away the requirement for people to be clear in their tenancy agreements so that ordinary people reading them will be able to work out what they mean, and it won’t need a Court of Appeal Judge to work it out for them.