Rent deposits

Citation

Dowden, M. (2001), "Rent deposits", Journal of Property Investment & Finance, Vol. 19 No. 3. https://doi.org/10.1108/jpif.2001.11219cab.001

Rent deposits

Landlord and tenant update

Rent deposits

Landlords take rent deposits to ensure that, should the tenant fail to pay its rent or to remedy a breach of covenant, there is a pot of money from which they can make good at least some of their loss. However, practitioners have long been concerned that a rent deposit is at its most vulnerable when it is most needed – when the tenant becomes insolvent.

In order to guard against the loss of the deposit where the tenant becomes insolvent it has become common to create a charge over the deposit in favour of the landlord. Even though the deposit remains the property of the tenant the charge means that the liquidator of an insolvent tenant cannot reclaim it. But what if the landlord fails to perfect the charge?

Where the tenant giving the rent deposit is a company the validity of the charge depends on its being registered at Companies House within 21 days of its creation. Failure to do so is all too common, and fee earners engaged in due diligence frequently encounter rent deposits which have not been properly registered. The result is that the charge is void. So can the liquidator reclaim the deposit?

Hazel Williamson QC, sitting as a judge of the Companies Court on 1 December 2000, considered this issue. The case was Mohammed Shafi Obaray (Liquidator of Greenport Ltd in Liquidation) v. Gateway (London) Limited sub nom In the matter of Greenport Ltd (in liquidation) (2000) Lawtel.

In Greenport the landlord had taken a rent deposit but had failed to register it pursuant to section 395 Companies Act 1985. Consequently, the charge was void. However, the landlord was entitled as a matter of contract to deduct unpaid rent from the rent deposit before handing the balance back to the liquidator of the insolvent company. Because the landlord's entitlement was a matter of contract he did not have to have recourse to the charge.

The rent deposit deed contained a clause under which the landlord was to return the deposit to the company upon termination of the lease having first deducted all sums due to the landlord in respect of any default. The court held that this clause went beyond the scope of, and had an effect which was wider than and independent of, the clause that purported to set up the charge. From that it followed that the intention of the deed as a whole was not simply to set up a charge. It also followed that the clause setting out the landlord's obligations in respect of the return of the charge did not itself operate as a charge, so as to be void for non-registration.

The real issue, in the court's view, was what, as a matter of contract, the landlord was obliged to return to the company. If as a matter of contract the landlord was only obliged to return the deposit net of deductions authorised by the deed, then the liquidator could not raise an argument based upon insolvency set off.

Strictly obiter, the court also commented that the position would be no different if the deposit were held by the landlord on trust for the tenant. The terms of the rent deposit deed would delineate the trust, requiring the landlord to hand back the balance, having first made the authorised deductions.

This is an interesting decision, preserving the landlord's right to dip into the rent deposit even where (due to the landlord's own failure) the charge was not perfected. However, it is only a decision at first instance and so may well be subject to appeal. Consequently, it would certainly not be safe to assume that the requirement for registration of the charge set up by a rent deposit deed may be ignored.