Welcome relief for landlords following u-turn in Raguz
November 2008
The recent House of Lords decision in Scottish & Newcastle plc v Raguz, has overturned the highly criticised judgement of the Court of Appeal that had lumbered landlords with a time-consuming property management task. The Court of Appeal had held that landlords were required to serve “protective” section 17 notices to preserve their entitlement to pursue a former tenant or guarantor for any backdated uplift in rent following a rent review, irrespective of whether the current tenant was in default.
To the relief of many, the House of Lords ruling has eliminated this administrative burden on landlords.
Background
The facts of the case can be summarised fairly simply. Scottish & Newcastle were the original tenants of hotel premises and assigned their lease to Mr Raguz. The lease pre-dated the Landlord and Tenant (Covenants) Act 1995 (the “1995 Act”) and an on-going liability therefore remained with Scottish & Newcastle as the original tenant after it had assigned its lease.
Ten years or so after assigning the lease to Mr Raguz, Scottish & Newcastle received default notices from the landlord and paid rent arrears which amounted to over £500,000. Scottish & Newcastle then sued Mr Raguz for reimbursement under an indemnity covenant he gave when the lease had been assigned to him.
Section 17 Notices
The Raguz case considered in detail the application of section 17 notices in relation to sums due under a backdated rent review following crystallisation of any uplift. Section 17 of the 1995 Act stipulates that a landlord cannot recover arrears from a former tenant or its guarantor in respect of any “fixed charge” (ie rent, service charge, insurance premiums or any liquidated sums under a lease), unless it has first served on the former tenant or guarantor a notice in the prescribed form.
Crucially, this notice must be served within six months of the date on which the relevant sum becomes “due”.
Court of Appeal
Raguz argued that the landlord failed to serve the section 17 notice within the statutory time period and, therefore, Scottish & Newcastle should not have paid the money to the landlord. The Court of Appeal agreed with the High Court that, in the context of outstanding rent reviews (and, indeed, other unascertained sums such as balancing service charge payments), becomes “due” is the review date itself, not the date on which the review is determined by the parties.
In the context of rent reviews, the Court of Appeal confirmed that for section 17 purposes, the reviewed rent became “due” when liability for it accrued, namely on each rent payment date following the review date.
As the High Court and Court of Appeal acknowledged, this could give a rather odd result where the rent review process is delayed. The landlord would only be entitled to claim the backdated increase in rent from a former tenant if it had served section 17 notices every six months throughout the period starting with the rent review date, notwithstanding there was no default in the payment of rent by the current tenant at the time of service.
In effect, section 17 notices were “wait and see” notices, putting the former tenant on notice that there may be a future liability to pay as and when the rent review process has been concluded.
Sense prevails
Following the House of Lords ruling, landlords no longer have to bear the risk of having to provide “wait and see” notices periodically to former tenants in respect of outstanding rent reviews or unbalanced service charge payments.
Landlords are now required to serve a section 17 notice on a former tenant or guarantor only if the current tenant fails to pay the ascertained sum whether the payment is for backdated rent or a service charge payment. The notice must still be served within the statutory time period of six months following the date the sum becomes due.
This is a timely decision by the House of Lords in light of the current economic downturn and the anticipated increase in tenant default. Landlords keen to preserve all possible rights against former tenants and guarantors will be pleased by the outcome.
For further information on the House of Lords decision and its implications, please contact Gurpreet Hayer at gurpreet.hayer@blplaw.com.