Landlords should use the section 17 procedure – though there are limited exceptions
In this article we look at the importance of landlords using the section 17 procedure to preserve their cause of action against former tenants and guarantors. In addition former tenants and guarantors should investigate any claim made against them as they may be able to avoid liability altogether.
Service of a notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 remains fundamental to the success of a landlord’s cause of action for the recovery of liquidated sums due under a lease from a former tenant who remains liable in a lease. However, a court may validly uphold a consent order under which such a tenant agrees to pay rent arrears, even though the absence of a section 17 notice, and it follows no cause of action.
In Lee v Sommer  EWHC 3889 (Ch), Sommer granted leases of a restaurant and an adjacent yard to Mr Lee. Later, Mr Lee sold the business and assigned the leases to DRWY Limited. Mr Lee entered an authorised guarantee agreement with Sommer, guaranteeing DRWY’s obligations under the leases.
After a while, DRWY could no longer fulfil its obligations under the leases. Rent arrears of over £38,000 built up. DRWY was soon dissolved and the Treasury Solicitor, on behalf of the Crown, disclaimed the leases. Sommer sought to recover the unpaid rent by issuing a claim against Mr Lee but failed to serve Mr Lee with a section 17 notice. This failure would have given the original tenant a complete defence to the claim but it failed to raise this point.
The parties then entered into a consent order under which Mr Lee agreed to pay the outstanding arrears (along with interest and the landlord’s costs), which was approved by the court.
When Mr Lee instructed new solicitors he became aware of the absence of a section 17 notice and brought proceedings against Sommer alleging that the consent order was void. He argued that:
- the court did not have authority to enter judgment and uphold the consent order in the absence of a valid section 17 notice given the lack of any cause of action;
- and the consent order was invalidated by section 25 of the 1995 Act which provides that any “agreement relating to a tenancy” having the effect of undermining the operation of that Act and in particular the protection it affords to former tenants, will be void.
The trial judge ruled in favour of Sommer, upholding the consent order:
- The obligation to prove service of a section 17 notice was required for the landlord to have any cause of action but the court still had jurisdiction to dispense with proceedings by consent order agreed between the parties – even if there was no basis for those proceedings.
- The order was not void under section 25 of the 1995 Act because it was not “an agreement relating to a tenancy” having the effect of undermining the operation of that Act. The consent order was a genuine compromise between the parties to settle the claim (even though it had no basis) and as such, was too far removed from the tenancy.
Mr Lee appealed, submitting that the service of a section 17 notice was not merely “an element” of Sommer’s cause of action but instead, a jurisdictional requirement and the consent order clearly sought to contract out of section 17 of the 1995 Act and should therefore be void. However, the High Court was not impressed by these arguments and ruled once more in favour of Sommer. It concluded that section 17 did not refer to the court’s jurisdiction but rather to Mr Lee’s liability upon receiving notice under that section.
The court ruled that whilst a section 17 notice was still necessary for Sommer’s action to succeed, this alone did not mean such a notice was also required before the court could uphold an agreement aimed at settling a dispute relating to it. In other words nothing in the 1995 Act deprived the parties of the ability to reach a genuine compromise of their liabilities under the AGA and, as such, the court was not deprived of jurisdiction to uphold such an agreement by a mere failure to comply with section 17.