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Advance rent as deposit?

When a tenant appears to be a bit of a risk, rent wise, a landlord will generally either ask for a guarantee or an upfront payment of the first six months rent.  They will normally also take a deposit which will be protected in the normal way.

But is the five months rent paid in advance also a deposit?

This is the suggestion made by David, a member of the LandlordZone forum, in a post here.  Davids reasoning is as follows:

the Housing Act 2004 contains its own definition of a deposit which says:
“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for—
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.”  (Section 212(8)).

So, he goes on to say, if six months deposit was paid up front, then five months of this is a deposit (because it is security for the tenants obligation to pay rent) and should be protected. And if it isn’t, then the tenant can go to court and ask for his penalty of three times the deposit sum.

David cites in support of this argument, several cases where advance payments have been found to be deposits, such as Da Costa v. Pinter and Piggot v Slaven.

If his argument is correct, then it is a very worrying prospect for landlords and agents.  For a start, many more landlords will be at risk of the penalty than was previously realised.

However it would also mean that the deposit would reduce every month, which would involve notifying the scheme and endless administration.  If you were using the DPS you would also have the problem of extracting the money on a month by month basis.

So far as the penalty payment is concerned, what is the deposit sum it would be based on?  The five initial months ‘deposit’, or whatever is left of it when the tenant issues proceedings?  It is likely  to have all been taken for rent by the time the tenant gets to court.

Surely Parliament can’t have intended this?

Advance rent affecting the subsequent periodic tenancy

David subsequently suggested to me in an email correspondence, that the problem might be resolved by the tenancy agreement specifying that the rent was payable in six month payments.  However the problem here then, is that at the expiry of the fixed term, the periodic tenancy which took its place would be a six month periodic tenancy not a monthly one.

The significance of this is that the notice period for the section 21 notice (if it is served after the fixed term is finished) will be much longer – it is either three months/a quarter or it could be the full six months.  Landlords are not going to want this, although I believe it is similar to the way things work in Scotland.

Maybe the tenancy deposit point will be covered (or at least implied in some way) in the forthcoming Court of Appeal  decision in Universal Estates v Tiensia, although the PainSmith blog tells us that this decision is not going to be published until October at the earliest.

What are your views?  Do you think that six months rent in advance could be a deposit, and thus need to be protected in a scheme?  What about the subsequent periodic, what steps would you suggest be taken to ensure that this is a monthly periodic?