UK: Recovery Of Rent Arrears - Scottish & Newcastle Plc -v- Raguz [2008] UKHL 65

Last Updated: 26 January 2009
Article by Andrew Nicklinson

In the recent House of Lords case, Scottish & Newcastle plc -v- Raguz, the decision of the Court of Appeal was overturned in a judgement to be welcomed by landlords.

The case involved two underleases originating in 1967 and 1969, under which Scottish & Newcastle were the original tenants. Following a number of assignments the tenant in 1999 ran into financial difficulties and defaulted on rental payments, leading to the appointment of an administrative receiver. The rent review date was due in 1995, however the revised rent was not fixed until September 2000.

Under Section 17 Landlord and Tenant (Covenants) Act 1995 a Landlord can require a former tenant to pay any fixed charge (including rental payments) provided notice is served on the former tenant within 6 months of the charge becoming due (section 17(2)). If the amount payable is not known the notice must state that the former tenant's liability may be greater than is set out in the notice, and a further notice stipulating the amount due 3 months after the amount being determined (section 17(4)).

Over a series of successive quarter days when rental payments were due, the landlord served S.17 notices on Scottish & Newcastle in respect of the arrears of rent and a substantial amount of back rent, once the rent reviews had been determined. Scottish & Newcastle duly paid the amounts set out in the notices. Following this the company sought to recover these payments from Mr Raguz, who was its assignee, under an indemnity agreement.

Mr Raguz claimed that Scottish & Newcastle had not been liable to pay the sums to the landlord under the rent reviews because the landlord failed to reserve its right to claim the unknown sums in the notices – in this case the further amounts payable upon the determination of the rent reviews.

First Instance and Court of Appeal

The crucial question was whether in this case the amounts set out in the notices sent to Scottish & Newcastle by the landlord were 'due'. At first instance the judge decided that the date upon which the amount becomes due is the rent review date. The Court of Appeal dismissed an appeal, stating that the 'due' date is the date when liability is accrued, not when the exact amount of liability is determined. Therefore the amounts become 'due' on the rent payment date rather than the date of the determination of the rent review.

This decision left landlords in an inconvenient position when a rent review process is delayed. A landlord would have to serve section 17 notices every 6 months whilst the rent review is being determined in order to protect their ability to recover the backdated increase from a former tenant – even when the current tenant is not in default of payment.

House of Lords

Upon further appeal the House of Lords interpreted section 17(2) differently. In the Lordship's view, where there is an incomplete rent review the rent which is due on each payment day is the pre-rent review rent. The additional back rent upon determination of the rent review does not become 'due' until the actual amount was been ascertained. The majority held that Parliament's intention when drafting this section was not to require landlords to serve protective s.17 notices every 6 months in the event of a delayed rent review.

Landlords now need only serve a section 17 notice on a former tenant only if the current tenant has failed to pay an ascertained sum. This decision has been welcomed by the property industry, especially in light of the current economic downturn and rise in the number of tenants in default.

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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