Commercial Property Focus - May 2009
Chasing the arrears
Recovering rent arrears from former
tenants and Section 17 notices
Since 2003 the case of Scottish &
Newcastle Plc v Raguz has been rambling through the courts
and here we give an outline of the history of this case, the
position as it is now and how it benefits landlords.
The statutory requirement for notice
to be given
Pursuant to S17 (2) of the Landlord and
Tenant (Covenants) Act 1995 (“the Act”) a Landlord can
require a former tenant to pay rent and any other fixed charge
provided notice is served on the former tenant within six
months of these sums becoming due. Pursuant to S17 (4) of the
Act a Landlord can even serve notice on the former tenant if the
amount is unknown, for example pending the outcome of a rent
review, provided the notice states that the former tenant’s
liability could be greater than that outlined in the notice
served. A further notice must then be served, within three
months after the actual amount claimed has been established,
setting out the amount due.
Brief background to the
case
The case involved two Underleases and Scottish
& Newcastle were the original tenants. There had been a
number of assignments following the commencement of the
lease. One such assignment was to Mr Raguz under an indemnity
agreement which was made pursuant to S24 (1) of the Land
Registration Act 1925. Another of the assignees had run into
financial problems racking up rent arrears and an administrator was
appointed. A rent review had been due in or about 1995 but
the new rent had not been fixed until the end of 2000. Once
the rent had been established the Landlord served Section 17
notices on Scottish & Newcastle for the recovery of the arrears
of rent and a considerable amount of back rent. Scottish
& Newcastle paid the sums requested. They went on to
demand recovery of the payments made from Mr Raguz as assignee
under the indemnity agreement outlined above. Mr Raguz
believed Scottish & Newcastle should not have been liable to
the landlord for the rent review amounts. His argument was
that the landlord had not given the correct information in the
Section 17 notices served on them as the landlord had omitted to
reserve the right to claim the unknown sums in the notices, these
being the amounts established as being due following the rent
reviews.
It was initially held by the court that the
date upon which the amounts became due was the rent review date but
this was dismissed on appeal. The court stated that the due
date is the date when liability occurs not when the exact amount of
liability is established. The top and bottom of this decision
was that landlords were left in a difficult position when rent
review processes were delayed entailing them having to serve S17
notices every six months whilst the rent review was being
considered so as to protect their position enabling them to recover
the backdated increases from a former tenant.
The case then went to the House of Lords to
interpret Section17 (2) of the Act and they interpreted it
differently. They stated that when a rent review has not been
completed then any rent that is due on each payment day will be the
pre-rent review rent. The rent then only becomes due when the
actual amount due is established. The majority held that upon
drafting Section 17 (2) of the Act it was Parliament’s intention
not to require landlords to serve Section 17
notices of protection every six months if the rent review had been
delayed.
Decision benefits
landlords
Therefore landlords are only required to
serve a Section 17 notice on a former tenant if the current tenant
has failed to pay the established sum due. Although the
court’s decision in this case appears to be beneficial to landlords
this may have an adverse effect on former tenants and guarantors as
landlords can recover rent arrears from them ore easily. Landlords
will need to ensure that all the correct steps are taken to make
certain they have a right to recover the amounts due pursuant to
Section 17 of the Act.
Karen
Neald
Solicitor
Weightmans LLP
karen.neald@weightmans.com