The House of Lords has overturned the Court of Appeal's ruling in Scottish & Newcastle Plc v Raguz, commenting that the decision of the High Court and the Court of Appeal produced "some remarkably silly consequences".
Where there is an outstanding rent review, landlords no longer need serve section 17 notices on former tenants each quarter to protect their right to recover arrears once the rent review is agreed or determined.
Where a tenant falls into arrears, landlords may look to recover the outstanding sums from former tenants who are still liable. This may be because the lease is an "old" lease (within the meaning of the Landlord and Tenant (Covenants) Act 1995) with the result that the original tenant is liable for the duration of the term, or the lease is a "new" lease, but the former tenant has entered into an Authorised Guarantee Agreement.
Whether the lease is old or new, the effect of s17 of the 1995 Act is to require a landlord to notify a former tenant promptly, in order for the entitlement to pursue that former tenant for outstanding sums to arise. Section 17(2) provides that a former tenant is not liable to pay any amount in respect of rent, service charge or other liquidated sums unless the landlord serves a notice on the former tenant within 6 months of the date on which the sum became due. The former tenant's liability is limited to the sum specified in the section 17 notice unless:
- the sum for which the former tenant is liable is subsequently determined to be for a greater amount;
- the section 17 notice informs the former tenant of the possibility that its liability might be greater; and
- a further notice is served when the liability is determined, informing the former tenant that the landlord intends to recover the greater amount.
The further notice must be served within 3 months of the date on which the greater amount is actually determined.
Under a typical upwards only rent review provision, such as in the leases in Scottish & Newcastle Plc v Zeljko Stephens Raguz , a landlord can demand only the existing rent until such time as the review process has been completed (when the revised rent is agreed or determined). Once that process has been completed, the reviewed rent will become payable retrospectively from the review date, and the tenant will be liable to pay the shortfall.
The High Court and the Court of Appeal in Raguz decided that the effect of such rent review provisions was that the uplift in rent was "due" on the original rent payment dates for the purposes of section 17. This meant that landlords were required to protect themselves on an outstanding rent review against the possibility of a current tenant being unable to meet its liabilities, by serving s17 notices on former tenants (and, where applicable, former guarantors) within 6 months of each rent quarter day. A further notice then needed to be served within 3 months of the rent review being determined.
This was the conclusion reached by the courts even though, at the time the s17 notices had to be served, there would be no actual arrears and the s17 notices would have to specify the amount outstanding as "nil" or as "nothing at the moment, but wait and see".
The decision of the High Court and Court of Appeal was controversial, since it placed an onerous burden on landlords and was confusing for former tenants.
The House of Lords has now overturned the decision of the Court of Appeal, concluding that the outcome of the decisions of the lower courts cannot have been the intention of Parliament when enacting the 1995 Act.
The House of Lords noted that when a rent review clause provides that the rent is to be reviewed from a specified date, but the amount of the increase is not agreed or determined until a later date, the increase for some purposes (but not others) is treated as having accrued due retrospectively from the rent review date. For example, it is treated as having been due retrospectively for the purpose of calculating interest on unpaid rent. On the other hand, it is not due for the purposes of bringing proceedings for arrears of rent, or forfeiture, until the amount of the increase has been agreed or determined.
The question was therefore whether, for the purposes of s17(2), an increase under a rent review is to be treated retrospectively as having become due from the rent review date, thereby triggering the 6 month period during which the landlord must serve a notice on the former tenant.
Lord Scott of Foscote commented that
"How can "nil" be an amount that "is now due" and how can "nil" be an amount that the landlord intends to "recover" from the tenant? The obvious and common sense answer to these questions, as it seems to me, is that the statutory reference to rent that "is now due" is a reference to a sum of rent that is currently – "now" – payable and cannot be read as a reference to an unquantified sum of rent that at some unknown date in the future will become quantified and, accordingly, payable."
The House of Lords decided by a majority that the words "the date when the [rent or other relevant sum] becomes due" in s17(2) means the date when the landlord would have been entitled to bring recovery action against the current tenant (i.e. sue for the money). Accordingly, the additional sums payable under a rent review do not "become due" until the increase has been agreed or determined, albeit that the increases are then treated as having accrued due at an earlier date.
Actions to take
Following the High Court and Court of Appeal decisions in Raguz many landlords took a decision to serve s17(2) notices on former tenants (and guarantors) where there was a high value ongoing rent review and a risk that the current tenant may be unable to meet its liabilities.
The House of Lords has confirmed that this is no longer necessary. Accordingly, landlords now only need serve a s17(2) notice within 6 months of the rent review being agreed or determined so as to preserve the ability to claim from former tenants if the current tenant fails to pay the backdated increase in rent.