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.

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