By way of explanation, when a former tenant remains liable to pay rent, notwithstanding an assignment, the landlord can only recover rent if a default notice is served on the former tenant within six months of the rent becoming due, in accordance with the provisions of Section 17 of Landlord and Tenant (Covenants) Act 1995. If the liability may subsequently be determined for a greater amount than specified in the notice, then the notice must refer to the possibility of such greater liability and within three months of the determination, a further notice must be served of the landlord’s intention to recover the greater amount.
In the case of Scottish & Newcastle plc v. Raguz , the Court of Appeal has decided that these provisions apply in respect of a pending rent review. In this particular case, the current tenant went into receivership in 1999, at which time there was a rent review outstanding from 1995. On completion of the rent review in 2000, the original tenant was held not to be liable to pay backdated arrears, no Section 17 notices having previously been served. In this particular case, the former tenant had in fact paid the arrears and was seeking an indemnity from a subsequent assignee. The Court of Appeal held that the original tenant was entitled to the indemnity, notwithstanding the fact that there was no legal liability to pay the arrears, the expense having been fairly and reasonably incurred.
The Court of Appeal has confirmed that it is necessary for a landlord to serve a Section 17 notice on a former tenant for the rent each quarter while a rent review is pending, in order to retain the right to collect backdated rent from a former tenant once the review has been completed. This is notwithstanding the fact that there may be no actual rent arrears due at the date that the notice is served.
The decision imposes a considerable administrative burden on landlords (and their managing agents) to ensure that rights against former tenants are preserved to recover backdated rent accruing pending a rent review. Service of a Section 17 notice is required after each quarter day while the review is pending, just in case the arrears cannot subsequently be recovered from the current tenant, once the review has been concluded. Bizarrely, there may well be no unpaid rent at the date that the notice is served and the amount of the rent outstanding to be entered in the notice will be nil.