A recent decision from the Court of Appeal has clarified the procedure to be followed by landlords wishing to recover rent arrears from former tenants. The decision enforces the notice procedure introduced by the Landlord and Tenant (Covenants) Act 1995, which was introduced to alter the common law position where a tenant remains liable for the rent under a lease after it has transferred its interest in the lease to a third party.
In Scottish & Newcastle plc v Raguz, the court held that a landlord, who wishes to protect its right to claim from a former tenant, must serve a statutory notice reserving its right to do so. This applies even where the current tenant has not yet breached any of its lease obligations and where the landlord has no reason to believe the current tenant will default. The other issue covered by the case is the extent to which a former tenant is entitled to be indemnified by an assignee who is not the current tenant.
Landlord looks to the Original Tenant on Successor Tenant's default
# Scottish & Newcastle (S&N) was the tenant under two leases of properties in Leicester.
# In 1983, S&N assigned its interest under the leases to Mr Raguz, who reassigned his interest to Hotel St James Limited the following year. Hotel St James Limited went into administration and ceased paying rent in 1999.
# The leases provided for the rent to be reviewed in 1995 and 1996 and the reviews were concluded in 2000 and 2001 respectively. NCP Car Parks Limited (NCP) was the current landlord.
# NCP served a series of notices under the 1995 Act on S&N between 1999 and 2007. The notices specified the amount of passing rent outstanding, but did not warn S&N that this sum might be increased following the rent reviews outstanding. The rent reviews were determined and NCP served notices under the same section of the Act demanding payment of the arrears of the reviewed rent backdated to the rent review dates under the leases.
# S&N paid the sums requested in order to proceed with an assignment. S&N subsequently sought to recover from Mr Raguz, who was obliged by the terms of the Land Registration Act 1925 to indemnify S&N in respect of any claims from a landlord related to non-payment of rent.
# The main issues for the Court of Appeal were that Mr Raguz argued that S&N should not have paid the rent arrears in respect of the backdated rent following the review, because NCP had not validly served the correct sequence of notices. He argued that it therefore followed that he should not have been liable under the indemnity. In addition where the original tenant prompted the landlord to demand rent, the original tenant should not be entitled to claim under the indemnity.
Notice must be served
The Court of Appeal agreed with the trial judge's decision. The policy behind the 1995 Act is to ensure that former tenants are given prior notice that the landlord intends to recover from them rent under a lease that they have assigned. The Act prescribes that within six months of the date the payment becomes due, notice must be served on the former tenants advising them that a charge is due and is to be recovered from them.
In the case of a rent review outstanding as at the date of such notice, the notice must also highlight that the amount may alter. The obligation to issue a notice would apply at the time of every rent payment date until the review is determined. It would also apply if the landlord intended to protect its right to recover rent following a review that a current tenant may fail to pay, even if the current tenant was not in arrears with payment of the passing rent.
In addition, within three months of the date of determination of a rent review, a further notice must be issued to the former tenant, stating the final amount recoverable.
NCP did not follow such a notice procedure and accordingly, it was held that they had not properly sued for arrears.
In the circumstances - Proper and Reasonable to pay
However, S&N did pay the requisite amounts in order to facilitate the assignment of the remaining term of the leases. The court regarded the payments as proper and reasonable in the circumstances and accordingly S&N were entitled to recover them from Raguz under the indemnity.
Strict adherence required - so is it worthwhile?
The decision makes it clear that the 1995 Act will be upheld in relation to recovery from former tenants. The hardship for a former tenant who is given short notice of liability for rent under a lease that has been assigned, is much greater than the hardship encountered by a landlord who has additional administrative burdens. The courts appear to be willing to impose strict adherence with the procedures set out for landlords.
The regular service of notice may be intimidating to some tenants. However it is generally believed that the process is necessary, to provide protection against the impact of a sudden demand for payments in some cases many years after an assignment of a lease.
The wording of the provisions of the Act was discussed at length in the case and was found to be unambiguous in its intention. The procedure for issuing notices must be strictly adhered to if the landlord wishes to preserve its rights of recovery against former tenants.
In deciding whether to serve a protective notice, a landlord must balance the monetary and administrative costs – which may be significant for landlords of multiple properties – against the losses it may suffer if left without a right to recover rent arrears from a former tenant. The need for protective notices is less urgent where the current tenant is of good financial standing and the landlord believes it will be able to continue to honour its lease obligations in future. The availability and financial viability of the former tenant is also another factor to consider.
Indemnity not available following 1995 Act - check the dates
In this case, the lease pre-dated the 1995 Act and accordingly the indemnity under the Land Registration Act 1925 available to original tenants against successive assignees was available. The 1995 Act has removed this provision in relation to leases after the commencement of the 1995 Act and accordingly, in many circumstances, the original tenant may not be able to recover the costs from successive assignees. Former tenants of commercial property should be aware that unless a landlord has adequately served all relevant protective notices within the specified timescales, the former tenant would not be required to pay rent arrears. Any former tenant who opts to pay the arrears without having received a prior notice may risk losing the ability to recover from its assignee.