Where there is an outstanding rent review or service charge reconciliation, the House of Lords has just ruled that a landlord does not need to serve a notice under s17 of the Landlord and Tenant (Covenants) Act 1995 (the Act) to protect its right of recovery from former tenants until those sums are determined. This reverses the Court of Appeal decision on which we reported in our July 2006 Property Update.

The Act: s17

Where a tenant assigns its lease and remains bound by a covenant to pay a “fixed charge” (for example, rent or service charge), the former tenant is not liable to pay any amounts unless, within six months of the charge becoming due, the landlord serves a notice on the former tenant informing him that the charge is now due and that the landlord intends to recover the amount specified in the notice from the former tenant.

The case: Scottish & Newcastle plc v Raguz

Scottish & Newcastle (SN) was the original tenant of two 1960s leases which it assigned. As the original tenant, SN remained liable to the landlord for the rent. The rent reviews due under both leases were not agreed for some five years after the review date but, in the meantime, the current tenant failed to pay the rent and their lenders subsequently appointed administrative receivers. The landlord protected its rights against its former tenant, SN, by serving a s17(2) notice against it relating to the unpaid rent due under both leases. The notices did not refer to the uncompleted rent reviews or to SN’s future liability in relation to these. SN paid the arrears to the landlord. The main issue for the House of Lords was whether, for the purposes of s17(2), an increase under a rent review is to be treated either retrospectively as having become due from the start of the rent review period or as having become due when it was agreed or determined. The Court of Appeal’s decision that the increase in rent was to be treated retrospectively meant that any s17 notice had to be served within six months of the review date (even if the reviewed rent had not been determined), otherwise the landlord would lose its right to claim against the former tenant.

Decision

Contrary to the Court of Appeal’s findings, the House of Lords held that an increase under a rent review was to be treated as having become due when the increase was agreed or determined and not when the rent review period began. The landlord had therefore properly complied with the requirements of s17 and had served the notices necessary to preserve its rights against SN in respect of all the unpaid rent, including the rent that accrued during the interval between the rent review dates under the leases and the dates on which the revised rents were payable.

The judgment makes it clear that a landlord is not required to specify in the notice that the rent may increase in order to recover the higher reviewed rent. This is because every original tenant can be expected to know that the lease provides for periodic rent reviews and will know that there will almost inevitably be an interval between the review date and the date the revised rent is determined.

Conclusion

This decision will be a huge relief for landlords. They are now spared the administrative nightmare of having to serve a s17 notice on every quarter day from the rent review date until the date the rent is agreed or determined, even if the current tenant is not in default. But a landlord who wants to protect its rights against a former tenant must serve a s17 notice within six months of the determination of the rent review.