The In-House Lawyer

Original tenant liability

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It is well known that, until 1996, an original tenant or guarantor remained liable on the tenant covenants under a lease until the end of the lease term. The same was true of assignees, provided that there was a licence to assign containing appropriate covenants from the assignee. 


Landlord and Tenant (Covenants) Act 1995


All this changed on 1 January 1996 when the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) came into force, s5(2) of which provides that if a tenant assigns the lease with the landlord’s consent then the tenant is automatically released from their covenants from completion of the assignment. While the automatic release only applies to leases granted on or after 1 January 1996, the other protective measures for tenants introduced by the 1995 Act apply equally to ‘old’ and ‘new’ leases. 


Apart from the limitations on original tenant liability referred to above, the main protection for former tenants and guarantors is contained in ss17 and 19 of the 1995 Act. Section 17 limits the circumstances in which a landlord can recover fixed charges, such as rent or service charges, from a former tenant, and s19 enables the former tenant or guarantor to regain control of the property by way of an overriding lease if it pays the sums demanded under the s17 notice in full.


A recent example


These provisions have recently been put under the microscope in Scottish & Newcastle Plc v Raguz, which reached the House of Lords in July 2008. Judgment was handed down by the House of Lords on 29 October 2008, bringing to an end the potentially expensive and confusing situation that has existed for the past couple of years since this case first came before the courts. The judgment is therefore to be welcomed as something of a victory for common sense.


Facts


The facts of the case are relatively straightforward, in that Scottish & Newcastle was the original tenant of premises in Abbey Street, Leicester, under two leases granted in 1967 and 1968. Both were long leases with fairly basic rent review provisions operable every 14 years. Scottish & Newcastle had assigned the leases to Mr Raguz in September 1982, and Mr Raguz had eventually assigned the leases on. The current tenant failed to pay the rent due in June 1999 and administrative receivers were appointed in October 1999. At that date the 1995 rent review under each lease had yet to be completed.


The landlord looked to Scottish & Newcastle as the original tenant to recover the rent arrears, and served notices pursuant to s17(2) requesting payment of the outstanding rent arrears. The original notices served under s17(2) were served within six months of the rent falling due, but made no reference to the fact that the 1995 rent review was outstanding, or that any increased rent might be payable when it was finally concluded. Scottish & Newcastle paid the sums claimed under the section 17(2) notices. 


Rent reviews


The 1995 rent reviews were eventually completed and, having calculated the additional rent that was payable, the landlord served a further section 17(2) notice on Scottish & Newcastle for that additional sum. Scottish & Newcastle paid this money, as it was eager to limit its ongoing exposure by finding a new tenant for the premises and securing the landlord’s consent to an assignment of the leases.


Scottish & Newcastle then looked to Mr Raguz to recover the sums that it had paid pursuant to the various section 17 notices. Mr Raguz refused to pay, his principal argument being that the increased rent due under the 1995 rent review had actually fallen ‘due’ on each of the quarter days following the rent review date, even though it was not of course payable until it had been ascertained. In those circumstances, s17(2), read in conjunction with s17(4), meant that the landlord should in fact have served section 17 notices on Scottish & Newcastle within six months of each quarter date following the 1995 rent review date, stating that the amount due on that date was nil, but that in the light of the outstanding rent review a further amount might fall due. A further section 17(4) notice should then have been served on Scottish & Newcastle within three months of the increased rent having been ascertained on completion of the 1995 rent review. As this had not been done, Mr Raguz argued that Scottish & Newcastle had not in fact been legally obliged to pay all of the rent arrears claimed to the landlord, and that accordingly he was not obliged to reimburse Scottish & Newcastle under the terms of his indemnity. The High Court and Court of Appeal accepted this interpretation of the 1995 Act (although Mr Raguz did not escape liability for other reasons) and this was one of the questions that came before the House of Lords to reconsider. 


House of Lords judgment


The leading judgment was given by Lord Scott, who found that, when looking at s17 as a whole, it was impossible to read that section otherwise than on the basis that it was contemplating the recovery of a sum that had become payable, but was unpaid, on the date when the section 17 notice was served. While he accepted that the wording of s17(4), and in particular the notes to the prescribed forms, was inconsistent, he was nevertheless prepared to reach the conclusion that the drafter responsible for 
the wording of the prescribed forms had not in fact thought through the implications of their assumption, such that, in Lord Scott’s opinion, the ‘fixed charge’ that fell due on each payment date was the rent at the pre-rent review date level. The additional rent over the period from the rent review date until determination of the revised rent was therefore a new and separate fixed charge that only became ‘due’ for s17(2) purposes on the date of the determination.

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This view was not adopted unanimously by the House of Lords. Nevertheless, the decision does mean that there is no longer any need for a landlord of premises where the rent review has not yet been concluded to consider serving section 17 notices on the former tenant/guarantor within six months of each rent payment date, even though no rent arrears then exist, solely to ensure that they protect themselves against the risk that the current tenant may not be in a position to pay the additional back rent due on completion of the rent review by preserving their right to recover those sums from a former tenant or guarantor. 



By Alan Walker, partner, Cobbetts LLP.
E-mail: alan.walker@cobbetts.com.
 

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