UK: Landlords Beware! - Recovering Arrears From Former Tenants/Guarantors Just Got Harder

Last Updated: 28 March 2007
Article by Alicia Foo

‘I regard…the service of multiple notices merely saying the rent review is still ongoing as being an uncommercial burden for landlords, without any real compensating benefit to former tenants.At best they can serve as a reminder to the former tenant that arrears of rent may (or may not) be in the process of being accumulated as the rent review continues to drag on.At worst they will appear…to intimidate the former tenant unnecessarily’

So, with apparent reluctance, concluded the Court of Appeal judges who affirmed the High Court decision in Scottish & Newcastle plc v Raguz (Raguz) earlier this week. This led to the surprising and unwelcome approval of the administrative burden on landlords and their managing agents of having to serve multiple section 17 Notices to preserve their ability to recover unpaid sums from a former tenant/guarantor.

Example taken from Raguz:

A rent review falls due on 17 April 1995. The rent is paid quarterly at the ‘old’ rate of £24,200 per annum by the current tenant until the quarter day in March 1999 when it hit financial difficulties. The review is not concluded until 2001 leading to an increase in the rent to £68,000 per annum and the landlord serves a section 17 Notice within 6 months of the settlement date of the review upon the original tenant seeking the back rent up to and including 28 September 2000 of £279,849.

However, as a result of the Raguz decision, the section 17 Notice will be invalid and the sums irrecoverable because the landlord has not protected its position by serving section 17 Notices seeking the additional rent within 6 months of each quarter day from the review date even if the sum is unascertained or not claimable until the review is settled.

The example above is merely indicative; it applies equally to any unascertained sums such as balancing service charge.

What is section 17 all about?

The Landlord and Tenant (Covenants) Act 1995 introduced provisions, where a landlord seeking to recover arrears from a former tenant/guarantor is required to serve a Notice on him under section 17 informing the former tenant/guarantor, that the sum is due and that the landlord intends to recover from him the amount specified in the Notice. The Notice must be served within six months of the sum - whether rent, service charge or another sum specified under the lease - becoming due.

However, where the rent is undergoing review or there is a balancing service charge with the final amount undetermined, an exact amount cannot be demanded. In such cases, past practice dictated the service of a section 17 Notice that:

  • Claimed the ‘known’ level due; and
  • Reserved the right to claim for the higher ‘unknown’ amount once determined by serving a further Notice within three months of its determination e.g. when the review is settled or the balancing service charge amount determined.

This practice is unsafe in the light of the Raguz decision (see ‘what to do’ box below)

Raguz - the facts

The current tenant was in administrative receivership, and the landlord had served a number of section 17 Notices on the original tenant, Scottish & Newcastle plc (S&N). These claimed rent arrears and a substantial amount of back rent once the rent reviews had been determined. S&N paid the sums sought then claimed under an indemnity against its assignee Mr Raguz.

Mr Raguz argued that S&N had not actually been liable to pay the additional sums awarded on rent review because the landlord's section 17 Notices had not reserved its rights to claim these higher ‘unknown’ sums. The High Court agreed and went further. For higher ‘unascertained’ sums to be recoverable, it was necessary to serve protective section 17 Notices at an early stage and even when the current tenant is not in default, in order to preserve the right to the ‘unascertained’ amount.

The Court of Appeal, with considerable reservations confirmed the decision as correct as it was the policy of the Act to give a former tenant/guarantor advance notice of a potential future liability. Despite this, Raguz was found liable on the indemnity.

What to do

Landlord/Landlord’s managing agents

  • Ascertained Amounts - if the current tenant defaults in payment of rent, serve a section 17 Notice on a former tenant/guarantor within six months of the day on which the rent became due, or face non-recovery.
  • Unascertained Amounts - (where the sum, whether rent or service charge, due is not yet determined) even if you have no reason to suspect the current tenant is not good for the increase, consider:
  1. serving a section 17 Notice on the former tenant/guarantor within six months of the due date. The Notice should specifically reserve the right to claim the higher undetermined amount. Put procedures in place to keep serving such notices within six months of each due date. The Notices should specify that nothing is payable now but that a review/audit is ongoing and that it is possible that an uplift will be claimed should the current tenant default.
  2. serving a further Notice within 3 months once the final amount is known.

This is a potentially onerous and costly obligation given section 17 Notices have to be served every 6 months. Consider carefully whether it is appropriate in all circumstances e.g.

(a) does the potential increase/uplift justify the expenditure and management time?

(b) does the former tenant/guarantor have the strength of covenant to warrant being served with such Notices? Remember, the paying person can call for an overriding lease. Don't end up with a worthless covenant!

(c) Can the former tenant/guarantor be found/served easily?

  1. Is there is a real likelihood that the current tenant will default? This is a commercial decision but remember if it does and the section 17 Notices have not been served you will not be able to recover the uplift from the former tenant/guarantor.
  • Investment Acquisitions - are there any outstanding rent reviews and/or balancing service charge payments?. Your advisers need to check that the requisite section 17 Notices have been served to protect your position and/or insert the necessary safeguards in the contract to provide for service of such Notices.

Former tenant or guarantor/or act for one or either of them

  • Don't be surprised if you receive/have already received a flurry of section 17 Notices which refer on the face of it to ‘a sum owing in the attached Schedule’ then to find that the Schedule says ‘the amount currently recoverable is NIL’ or words to that effect. These protective Notices will have been served in response to this decision. It may be worthwhile checking the tenant's financial position and if it is weak, be prepared for the landlord to come looking to you to pay up.
  • Do not pay anything in response to a section 17 Notice seeking the determined amount (e.g. following a rent review or audited service charge balancing payments) without checking if the earlier protective section 17 Notices have been served.

If you have paid out in response to a section 17 Notice consider, after seeking advice, whether to protect your position by calling for an overriding lease. What to do

Landlord/Landlord’s managing agents

  • Ascertained Amounts - if the current tenant defaults in payment of rent, serve a section 17 Notice on a former tenant/guarantor within six months of the day on which the rent became due, or face non-recovery.
  • Unascertained Amounts - (where the sum, whether rent or service charge, due is not yet determined) even if you have no reason to suspect the current tenant is not good for the increase, consider:
  1. serving a section 17 Notice on the former tenant/guarantor within six months of the due date. The Notice should specifically reserve the right to claim the higher undetermined amount. Put procedures in place to keep serving such notices within six months of each due date. The Notices should specify that nothing is payable now but that a review/audit is ongoing and that it is possible that an uplift will be claimed should the current tenant default.
  2. serving a further Notice within 3 months once the final amount is known.
  3. This is a potentially onerous and costly obligation given section 17 Notices have to be served every 6 months. Consider carefully whether it is appropriate in all circumstances e.g.

    (a) does the potential increase/uplift justify the expenditure and management time?

    (b) does the former tenant/guarantor have the strength of covenant to warrant being served with such Notices? Remember, the paying person can call for an overriding lease. Don't end up with a worthless covenant!

    (c) Can the former tenant/guarantor be found/served easily?

  4. Is there is a real likelihood that the current tenant will default? This is a commercial decision but remember if it does and the section 17 Notices have not been served you will not be able to recover the uplift from the former tenant/guarantor.
  • Investment Acquisitions - are there any outstanding rent reviews and/or balancing service charge payments?. Your advisers need to check that the requisite section 17 Notices have been served to protect your position and/or insert the necessary safeguards in the contract to provide for service of such Notices.

Former tenant or guarantor/or act for one or either of them

  • Don't be surprised if you receive/have already received a flurry of section 17 Notices which refer on the face of it to ‘a sum owing in the attached Schedule’ then to find that the Schedule says ‘the amount currently recoverable is NIL’ or words to that effect. These protective Notices will have been served in response to this decision. It may be worthwhile checking the tenant's financial position and if it is weak, be prepared for the landlord to come looking to you to pay up.
  • Do not pay anything in response to a section 17 Notice seeking the determined amount (e.g. following a rent review or audited service charge balancing payments) without checking if the earlier protective section 17 Notices have been served.
  • If you have paid out in response to a section 17 Notice consider, after seeking advice, whether to protect your position by calling for an overriding lease.

www.pinsentmasons.com

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.