Since the decision of the Court of Appeal in Scottish & Newcastle v Raguz  EWCA Civ 150, in order to preserve the entitlement to recover “catch up” rent from any previous tenants in the case of a rent review likely to be determined more than six months after the review date, well advised landlords have had to jump through the hoop of serving a succession of notices on those previous tenants pursuant to section 17 of the Landlord & Tenant (Covenants) Act 1995.
The House of Lords has very recently put an end to this nonsense ( UKHL 65). The decision is a welcome one for landlords, particularly in the present economic climate.
The background and some law
In the last recession, it was possible for the landlord of an insolvent tenant to pursue previous tenants, their guarantors and intermediate assignees, for unpaid sums due under the lease. The original tenant had to pay – even though he may have long since assigned the lease and forgotten all about it – because when he first entered into the lease, he covenanted to pay the rent and observe the covenants for its whole length. His guarantor was liable for the same reason. Intermediate assignees and their guarantors were liable because they had usually entered into direct covenants with the landlord upon assignment to them.
In the early ‘90s then, if a landlord was having difficulty obtaining payment from his tenant, there was often a whole array of other individuals or companies that he could sue and the usual practice was to select the one with the most money! The Landlord & Tenant (Covenants) Act 1995 (the Act), which came into force on 1 January 1996, put paid to that.
The position in relation to leases granted after that date is that when a tenant assigns a lease, he is released for the future from the covenants, including the covenant to pay sums due under the lease. However, it is possible – and usual – for a landlord to require, as a condition of granting permission to assign the lease, that the assignor enters into an authorised guarantee agreement (an AGA), guaranteeing the future liabilities of the assignee. Such an agreement lasts only so long as the assignee remains the tenant, with the assignor being released automatically on a subsequent assignment, when the first assignee will enter into an AGA in relation to the liabilities of the second, and so on.
The effect, therefore, is that where sums are outstanding under a lease granted after 1 January 1996, at any one time the landlord only has a claim against the current tenant, any guarantor that he might have, and the immediately preceding tenant, where an AGA is in place.
The leases with which the House of Lords was concerned in the present case were granted before the coming into force of the Act, in March 1967 and March 1969 respectively. Scottish & Newcastle (S&N) was the original tenant. The leases were for terms expiring in March 2062, with rent reviews every 14 years. S&N assigned the leases to Mr Raguz in 1982. He assigned them on and by 1992 both lease were vested in Hotel St James Ltd (HSJ). By 1999, the landlord in respect of both leases was National Car Parks Ltd (NCP).
Some more law
Section 17 of the Act introduced restrictions on the liability of former tenants for arrears of rent and service charge, not only where that liability arises under AGAs but also in relation to leases granted before 1 January 1996. There are similar restrictions on claims against the guarantors of former tenants.
In particular, a former tenant who has assigned a lease is not liable to pay any amount in respect of a “fixed charge” (defined to include rent, service charge and any other liquidated sums due under the lease) unless, within a period of six months beginning with the date when the charge becomes due, the landlord serves on him a notice in a prescribed form. The notice must inform the former tenant that the charge is due and that the landlord intends to recover from him such amount as is specified in the notice and interest.
The Act goes on to provide that where a landlord has served such a notice on a former tenant or guarantor, the amount which that party is liable to pay shall not exceed the amount specified in the notice unless:
- his liability in respect of the charge is subsequently determined to be for a greater amount: and
- the notice informed him of the possibility that that liability would be so determined; and
- within the period of three months beginning with the date of any such determination, the landlord serves a further notice informing him that the landlord intends to recover that greater amount from him.
As Scottish & Newcastle v Raguz illustrates, landlords have found it difficult to interpret section 17 in cases where a rent review is outstanding under a lease, the current tenant is not paying the rent and the landlord wants to claim the amount of backdated or “catch up” rent, once the review is determined, from previous tenants/guarantors.
Some more facts about the case
HSJ failed to pay the rent due under the leases on the June 1999 quarter day and its mortgagees appointed administrative receivers. Rent reviews were outstanding under both leases. On 23 September 2000, an independent expert fixed the revised rent payable from 18 April 1995 under the 1967 lease. In February 2001, the revised rent payable from 25 December 1996 under the 1969 lease was agreed.
NCP chose to serve various section 17 Notices on S&N, as the original tenant, from November 1999 to February 2003. The earlier notices, served prior to the determination of the reviewed rents, related only to the rent at the pre-review rates which had not been paid by HSJ. There was no mention that the amounts in question might increase and no reference was made to the outstanding reviews or to the future liability accruing thereunder. Once the outstanding review under the 1967 lease had been completed, a notice was served specifying about £279,849.00 as the catch up rent payable pursuant to the completed rent review.
All sums demanded by NCP, including the catch up rent under the 1967 lease were paid by S&N in July 2001. When the revised rent under the 1969 lease was agreed, NCP served a further notice on S&N specifying £53,998.61 as being the catch up rent pursuant to the rent review.
In order to procure NCP’s consent to the assignment of the leases to a party able to pay the rent, S&N paid all remaining amounts outstanding to NCP, including all the catch up rent and the leases were then assigned.
As part of the proceeedings brought by S&N to recover the monies it had paid out from its assignee, Mr Raguz, the validity or otherwise of the section 17 notices had to be determined.
The judge at first instance and the Court of Appeal held that even though NCP did not know what the reviewed rent was going to be, in order to recover the catch up rent from S&N it should nevertheless have served a section 17 notice upon S&N within six months of each quarter day from the review dates onwards until the dates on which the reviewed rents were determined. It should also have served a further notice within three months of those dates, specifying the sums due.
In the lower courts’ view the catch up rent “became due” on the review date. The consequence of their decision was that if a landlord wanted to protect his right to recover rent at the reviewed rate from a previous tenant/guarantor where there was a risk that the current tenant may not pay the catch up rent once determined, he had to serve a protective notice within six months of each quarter day following the review date. This was so, even though the landlord was unable to specify the amount due on each quarter day and even if the current tenant was solvent and up to date with the ongoing rental payments.
The House of Lords overturned the Court of Appeal decision and held that the reviewed rent only becomes due for the purposes of the Act, when it is agreed or determined. Consequently, a section 17 notice in respect of the reviewed rent need only be served if the catch up rent following review is not paid within six months of the date on which the reviewed rent is determined.
This decision is to be welcomed as a sensible commercial solution to a legal problem and means that in future, in order to protect their rights to recover sums outstanding under leases from former tenants and guarantors, landlords will only have to concern themselves with serving notices when sums are actually outstanding.