UK: Dear Naushin

Last Updated: 27 July 2015
Article by Naushin Malik

Perplexed by property law? Relax, Associate Naushin Malik is here to answer your most pressing questions...

Q  My tenant is in arrears of the yearly rent, insurance rent and service charge rent.  It is now making efforts to pay these sums off (which I am in agreement with) and has recently made a payment towards the service charge rent.  However, for cash flow reasons, I would rather apply the monies towards the insurance rent or the yearly rent.  Can I do that? 

A  Where several instalments of rent are due from a tenant, a tenant is entitled to "appropriate" the rent to a particular instalment under the general law relating to appropriation of debts.  A landlord cannot deprive a tenant of its rights by unilaterally denying that the appropriation is valid or effective.   This principle has been established in a case from 1814 which stated that a debtor can "apply the payment to which account it pleases".  It is essential that an appropriation by the tenant should take the form of a communication, express or implied, to the landlord of the tenant's intention to appropriate the payment to a specific debt.  In the absence of such a communication and the tenant not making an appropriation, a landlord is entitled to make the appropriation.  A landlord may exercise this option at any time " up to the very last momentor until something happens which makes it inequitable for it to exercise the choice.

Where a landlord has demanded rent by an invoice with a specific reference number, and the tenant has paid the sum demanded citing the relevant invoice number, the courts have decided that by necessary implication a tenant has appropriated the payment to that particular demand.  However, it is not essential that the tenant should expressly specify at the time of payment which debt or account it intended the payment to be applied to.  Its intention may be inferred from other circumstances showing that it intended at the time of the payment to appropriate to a specific debt or account. 

In your circumstances, if it is clear that the monies paid by your tenant relate to the service charge rent and in particular, if this payment is backed up by the tenant referencing the invoice number on the payment made, then, if you do accept the monies, you will have no choice but to apply the funds to that particular debt, regardless of whether you would like to do so or not.  If, on the other hand, it is unclear what the payment is for considering all the circumstances in full, then there is an argument that you would be entitled to apply the monies to any of the debts due by the tenant.

I would also point out that any landlord will need to carefully consider the commercial advantage of accepting monies from a tenant which is in breach of its lease.  The danger is that in accepting payment, the landlord may inadvertently waive the right to forfeit the lease for breach of covenant.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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