A former tenant or guarantor cannot be held liable for “fixed charges” owed by the current tenant of a lease unless, the landlord has served the former tenant or guarantor with a notice pursuant to section 17 of the Landlord and Tenant (Covenants) Act 1995 (“Act”) within six months of when the fixed charge became due.
If a landlord misses the deadline for serving a section 17 notice the former tenant/guarantor cannot be held liable for the fixed charges.
WHAT ARE FIXED CHARGES?
The Act defines “fixed charges” as including:
- service charges
- any amount payable under a tenant covenant of the tenancy providing for the payment of a liquidated sum in the event of a failure to comply with any such covenant.
WHO CAN A LANDLORD RECOVER FIXED CHARGES FROM?
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K/S HABRO-GATWICK V SCOTTISH & NEWCASTLE LTD  EWHC 2084 (CH)
This recent case highlighted the key provisions of the Act in which the landlord, K/S Habro-Gatwick, sought to recover fixed charges from a former tenant, Scottish & Newcastle Limited (“SNL”). SNL in turn sought an indemnity from GLH Hotels Ltd who was the guarantor of the first assignee of the lease.
SNL were granted two leases of The Chequers Hotel in Horley for a term of 99 years from 1968. The leases were both subsequently disclaimed by the liquidator to a successor to SNL, Menzies, in December 2013. The disclaimer however did not affect SNL’s liability as a former tenant under the leases.
SNL admitted liability for the rent and insurance rent, however they did not accept liability for the costs of securing the hotel or for business rates.
When Menzies’ lease was disclaimed the insurance cover which was in place terminated. The landlord, therefore took up insurance with Aviva. As the hotel was empty, Aviva imposed a number of conditions on the policy, including 24 hour security and a requirement that the electricity supply to the hotel should be turned off. The electricity supply was however, reinstated to enable the security team to operate effectively. The Landlord claimed the cost of the security and the electricity from SNL
The judge considered the lease (which provided that if the tenant failed to insure, the landlord was entitled to put insurance in place as he saw fit) and ruled that the landlord was able to recover the security costs as “expenses incurred” in insuring the hotel, as required by the lease.
The judge also overrode SNL’s arguments that the section 17 notices were not in the prescribed form (as required by the Act). The judge ruled that the landlord’s approach of attaching copies of the security company’s invoices to the notices meant that the notices met the requirements of the regulations (as they were substantially in the same form as those prescribed by the regulations).
The judge did however, disallow the landlord’s claim for the electricity costs as a “step too remote” for those requirements.
The landlord had been paying business rates and sought reimbursement from SNL. The landlord had not served SNL with section 17 notices relating to these charges. SNL claimed that they were therefore not liable for the business rates.
The judge disagreed and ruled that whilst the rates did not constitute a “fixed charge” under section 17(6) of the Act as they were not due under a tenant covenant, they were due as damages arising from SNL’s default of the tenant covenant to pay rates.
The court ruled that SNL were entitled to an indemnity from the party that had guaranteed Menzies obligations.
- Landlords need to be vigilant to ensure that they do not miss the opportunity to recover fixed charges from former tenants/guarantors – the six month rule!
- If you are serving a section 17 notice ensure that it is in the prescribed form – if it is not there is a risk that the notice may be invalid. Set out the charges in detail with an explanation of when the charges became due. Whilst attaching invoices to the section 17 notices in this case was sufficient, it may not be in every case.
- Former tenants/guarantors need to be aware that section 17 notices may not always be required and that they could therefore still be on the hook for sums due pursuant to a lease many years later.