UK: Scottish & Newcastle v Raguz – Landlords Beware!

Last Updated: 5 February 2008
Article by Tim Foley

The Court of Appeal in Scottish & Newcastle v Raguz has confirmed that there are restrictions on a landlord's right of recourse against former tenants or guarantors.

Section 17 Landlord & Tenant (Covenants) Act 1995

Section 17 provides that a former tenant/guarantor is not liable to pay a 'fixed charge' under a Lease (ie rent, insurance rent, service charges etc) unless, within six months of the date when the charge becomes due, the landlord serves a notice on the former tenant/guarantor stating that he intends to recover the fixed charge from him.

In addition, the amount stated in the s.17 notice cannot be exceeded unless it is subsequently determined to be greater and the notice states that the amount might increase at a later date. If the amount does increase later on, the landlord must serve a further notice within three months of the higher amount being determined, specifying the amount due.

The Facts

In 1982, Scottish & Newcastle Plc (S&N), as original tenant, assigned its two underleases to Mr Raguz. Mr Raguz gave S&N an indemnity covenant for the performance of the tenant's obligations in the Lease (the Indemnity). The underleases were then subject to a series of further assignments. The current tenant defaulted and the landlord sought to recover the arrears from S&N. At the time of default, there was an outstanding rent review. The landlord served s.17 notices on S&N in respect of the passing rent but the notices did not refer to any uplift in rent that may be achieved following determination of the rent review. S&N paid the outstanding rent and claimed under the Indemnity for the sums it had paid out. Mr Raguz resisted S&N's claim.

Mr Raguz' Section 17 Point

Mr Raguz argued that the landlord could not recover the increases in rent arising out of the rent reviews. He said that the uplifted rent became due on each quarter day and therefore the landlord needed to serve a series of s.17 notices. As the landlord had not done so, the back rent was irrecoverable as against S&N and Mr Raguz was not liable under the Indemnity for those amounts. The High Court and Court of Appeal agreed with Mr Raguz.

The decision turned on the meaning of the word 'due' in s.17. The Court concluded that 'due' meant the time when the liability arose rather than the time the landlord could demand satisfaction of the liability. Although the landlord could only demand the back rent once the rent review had been settled, the tenant remained liable on each quarter day following the review date for the entire reviewed rent for that quarter. In the court's opinion, the fixed charge (the increase in rent following a review) became due on each quarter day.

Effect Of The Decision – Landlords

In consequence of this decision, landlords should note:

  • Where there is an ongoing rent review, ensure that former tenants and guarantors receive within six months of each quarter day (or payment day specified in the lease) a s.17 notice in respect of the accrued (but not yet demandable) back rent. This applies even where the existing tenant is up to date on the payment of the rent.
  • Following the settlement of the rent review, landlords must serve a further s.17 notice stating that the amount of the back rent has now been determined and will be recovered from the former tenant or guarantor.
  • Remember that any former tenant or guarantor that pays up upon receipt of a s.17 notice is entitled to call for an overriding lease. Also, service of a s.17 notice may amount to a waiver of the right to forfeit for 'once and for all' breaches. These points should be considered before serving s.17 notices.
  • The Raguz decision is not confined to the rent review arena. It is of equal application where a balancing charge arises following the calculation of a service charge.
  • Upon acquisition, landlords should ensure that pre-contract enquiries concerning s.17 notices are raised.
  • If the tenant is not in breach when the s.17 notice is served, the costs of the notice will not be recoverable under the costs indemnity in the Lease (those indemnities usually require a breach by the tenant).
  • A differently worded lease may produce a different result. Where a lease provides that liability for back rent only arises upon demand following conclusion of the rent review, a s.17 notice would only need to be served within six months of such a demand.

Effect Of The Decision – Former Tenants And Guarantors

  • When served with a s.17 notice following settlement of a rent review or calculation of a service charge giving rise to a balancing charge, tenants should check that the s.17 notice was received within six months of each quarter day/payment day. Payment should not be made unless appropriate notices have been received.

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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