Property Matters March 2007

This means war: arrears, reviews and notices

A WAR STORY

A landlord client was owed arrears of rent amounting to some £20,000. The current tenant was unable to pay, and so it was a matter of investigating which of the former tenants and guarantors might be good for the money.

The lease was an unusual one: granted some 180 years previously for a 200-year term, with rent reviews every ten years.

As might be expected, over the preceding 180 years there had been a long list of previous tenants and guarantors, mostly individuals who had died or become untraceable, and companies which no longer existed.

Only one party remained traceable and solvent and that was the original tenant.

This company must have been one of the earliest to be incorporated under Companies Acts, but was still trading profitably.

They had had nothing to do with the property since assigning the lease 160 years previously, and one can only imagine the reaction when they opened a letter asking them for £20,000.

They paid, however, and without having to be sued.

THE BAD OLD DAYS?

That episode (which actually happened, back in the late 1980s) is as clear a demonstration as any of how the old privity of contract rule could mean injustice. Under that rule:

• A former tenant would remain at risk until the end of the lease, and at the mercy of whatever rent increases might have resulted from intervening rent reviews.
• Under Limitation Acts, a landlord could sue to recover rent over as much as six years, without giving the former tenant any warning.
• There was no mechanism by which the former tenant could ensure a re-letting of the property so as to limit its exposure.

BRAVE NEW WORLD?

The position was substantially changed by the Landlord and Tenant (Covenants) Act 1995. It is still possible to claim against some former tenants and guarantors, but not all; and those who are still at risk now have a degree of procedural protection:

• Under s.17, if the landlord is to claim against a former tenant or guarantor, he must give them a notice alerting them to the claim within six months of each sum falling due.
• If he doesn’t, he loses the ability to claim that sum from them.
• He can still recover up to six years’ arrears, but only if he has served appropriate s.17 notices throughout that period, in each case within the six-month time limit. · If a former tenant or guarantor pays arrears in response to a s.17 notice, they are entitled to be granted a new lease of the property, effectively converting the existing one into a sub-lease. This enables them to recover possession and market the property.

AN UNINTENDED ANOMALY?

We have commented previously on the case of Scottish & Newcastle plc v Raguz, which concerned how these s.17 procedures interact with lease provisions in relation to a backdated rent review settlement.

That decision has now been confirmed by the Court of Appeal, although at least one member of the Court regarded the result as an “unintended anomaly of the legislation”.

Since the outcome has surprised many practitioners, and applies to a very commonplace situation, it is worth revisiting.