When tenants get into financial difficulties resulting in missed rental or other payments due under their lease, landlords will naturally look to recover losses from other parties who are still on the hook for tenant liabilities.  If the lease is an “old lease” i.e. granted prior to 1996, then landlords could consider making a claim against the original tenant; if the lease is a “new lease” i.e. granted in 1996 onwards, then there may be a guarantor under an authorised guarantee agreement. Recovering arrears from a former tenant or guarantor can be tricky, so it is worth recapping the practical steps a landlord needs to take to make a claim for unpaid amounts, which was clarified in a House of Lords case.

The Landlord and Tenant (Covenants) Act 1995 (“LTCA”) introduced a framework within which landlords can seek to recover sums outstanding under a lease from a former tenant or guarantor, but which prevents them from allowing historic arrears to rack up over a long period of time and issuing a surprise claim. Under section 17 LTCA, landlords must notify the former tenant or guarantor of its intention to recover within six months of the sums becoming due. If the notice is not served within this six-month window, the non-paying party’s liability to the landlord ends.

The notice must state the amount to be recovered, and must be in the form prescribed by section 27 LTCA. This requires the notice to include an explanation of its significance, along with a statement that any objection to it must be served on the landlord within four weeks of the day on which the original notice was served. A template notice is available in the Schedule to Statutory Instrument 1995/2964.

It is worth adding wording to the notice to the effect that the amount due could be greater than that stated in the notice. This is because the amount which can be recovered by the landlord is limited to that specified in the notice, unless such wording is included and the liability is subsequently determined to be greater. In these circumstances, the landlord must also serve a second notice stating that it intends to recover the revised amount.

Not all outstanding sums can be recovered by the landlord, however. Section 17 dictates that only “fixed charges” may be recovered. Sums that fall within the definition of fixed charges are: rent; service charge; and liquidated sums payable for breach of tenant covenants contained in the relevant lease.

But when are the fixed charges deemed to be ‘due’ for the purposes of section 17? This question was a key issue in dispute in the case of Scottish & Newcastle plc v Raguz [2008] UKHL 65. Scottish & Newcastle were the original tenants of two underleases which they had assigned to Mr. Raguz.  By 1999 the underleases had been assigned twice more when the tenant became insolvent and defaulted on its rent payments. A rent review had been due in 1995, but the revised rent was not determined until late 2000.

The landlord served a series of section 17 notices on Scottish & Newcastle as the original tenant, seeking to recover the rent arrears plus back rent, once the rent reviews had been determined. Some of the notices stated that Mr. Raguz’s liability could subsequently be determined to be greater than the amount stated, but some did not. Scottish & Newcastle begrudgingly paid in full, before making a claim for the whole amount against Mr. Raguz under an indemnity the latter had given on assignment.

In court, Mr. Raguz raised the defence that Scottish & Newcastle had not been liable to pay the reviewed rent to the landlord because the landlord had failed properly to reserve its right to claim the undetermined amounts of rent in its section 17 notices.  The issue for the court to resolve was therefore when the amounts specified in the notices were ‘due’ under the LCTA.

Reversing a previous ruling, the House of Lords found that for the purposes of section 17(2), an increase under a rent review should be treated as having become due at the time the increase was agreed or determined, not when the rent review period commenced. In paying the full sum to the landlord, Scottish & Newcastle were therefore deemed to have discharged their legal obligation, and Mr. Raguz was liable to reimburse them fully under the indemnity. The court’s conclusion means that in general, a section 17 notice must only be served once the reviewed rent is determined, and a default in payment has occurred.

This decision is important because it clarifies that landlords only need to serve a section 17 notice on a former tenant if the current tenant has not paid a sum which has already been ascertained. Prior to the decision of the House of Lords, the High Court and Court of Appeal had ruled that landlords would have to serve a section 17 notice every six months whilst a rent review was ongoing in order to reserve the right to claim unknown sums. The decision of the House of Lords therefore removed a significant bureaucratic burden on landlords, and also did away with a potentially thorny due diligence measure to be taken by those looking to purchase tenanted buildings.