Considering all the options

Rachel Watkin outlines the legal paths available in the case of tenant default, when a landlord wishes to recover rent money owed to them in the case of a tenant going out of business or becoming insolvent

Tenant default is one of the main symptoms of the recession. As tenants begin to face financial difficulties and perhaps even go into administration or liquidation, one of the most useful and often forgotten tools available to a landlord is the ability to recover any amounts due as a result of any breach of covenant (whether it is non-payments of rent or any other breach providing the amount due it in respect of a fixed charge) from either a former tenant or their guarantor.

This is a point that Landlords need to consider sooner rather than later as Section 17 of the Landlord and Tenant (Covenants) Act 1995 states that neither the former tenant nor his guarantor shall be liable under the agreement or covenant to pay any amount in respect of any fixed charge payable unless: “within the period of six months beginning with the date when the charge becomes due, the landlord serves on the former tenant a notice informing him: a) that the charge is now due; and b) that in respect of the charge the Landlord intends to recover from the former tenant/guarantor such amount as is specified in the notice and (where payable) interest calculated on such basis as is so specified”.

It is currently less likely that a landlord would be satisfied with forfeiting and regaining possession. It is no longer the case that the landlord can quickly re-let at a higher rent as not only are tenants not as readily available but a new Lease is less likely to attract the same rent. Also, threatening insolvency proceedings no longer acts as the deterrent it used to and may backfire and result in the premises being disclaimed, again leaving the Landlord with vacant premises.

Thus, where possible, a landlord of premises where the lease has been assigned and where either the original tenant had entered into an authorised guarantee agreement (where the lease post-dates 1 January 1996) or where the lease predates 1 January 1996 (unless the tenant has been released), may benefit from serving a s.17 notice. It may then be possible for rent, service charges or other fixed charges to be recovered from the previous tenant, the assignee, or his guarantor.

This is, however, providing the notice is served correctly and in time. A s.17 notice must be served within six months of the amount falling due and a new notice has to be served within six months of each additional payment falling due. So, where there are continuing arrears, a Landlord may need to serve a notice every six months to cover payments in the preceding period.

A s.17 notice must be in a prescribed form and must state the correct amount due together with interest and the basis upon which interest is calculated. If the amount specified is less than the amount actually due, the Landlord will only be able to recover the amount shown on the notice.

The only exception to this is that allowed for is s.17(4) which states that the notice could contain a warning stating that the fixed charge may later be determined to be a greater amount than that claimed. However, it is understood that this proviso is intended only where a fixed charge has yet to be determined and is only estimated in the notice but is later determined to be a greater sum.

In the past this has led to confusion, particularly in the area of rent reviews as the rent often falls due before the rent review has been carried out. This point was clarified in October 2008 when the House of Lords found, in the case of Scottish & Newcastle Plc v Zeljko Stephen Raguz, that an increase under a rent review is to be treated as having become due when the increase is agreed
or determined and not when the rent review period commenced.

This case involved an appeal against a decision that certain rent review increases were not recoverable as the landlord had failed to serve notices under the act at the appropriate time. The s.17 notices were only served after the rent review had been determined and the rent increased. It was argued that as they were served over six months after the original rent payment had become due that they were served too late. Although the Court of Appeal held that the notices should have been served within six months of the original rent falling due, the House of Lords overturned this and held that the pre-review rent was due on the relevant quarter day, but the additional rent resulting from the increase was only “due” once it was actually payable and that it can only have become payable after it had been determined.

Service of a s.17 notice is simply another potential method of recovery that needs to be considered when a tenant defaults. Depending on the circumstances, a landlord may also wish to give consideration to the other options available but where
the tenant is insolvent, use of s.17 can often be the only possible way of recovering outstanding rent or other fixed amounts.  
Landlords do however need to bear in mind the potential for any former tenants to claim an overriding lease under s.19 of the Act within the period of 12 months providing the tenancy has not been determined. Although a landlord needs to be advised of this possibility, he may not consider this to be a bad thing in the present financial climate.
 
Where a landlord chooses to exercise his right to serve a s.17 notice and the former tenant or guarantor accepts the position the procedure can be extremely effective. However, where it is necessary for proceedings to be issued, those proceedings will relate only to fixed amounts that have fallen due and for which s.17 Notices have been served. Thus, even where it is known future rent is unlikely to be paid, it cannot be claimed within proceedings until it has fallen due and s.17 notices have been served.  However, once the s.17 notices have been served, a landlord has the usual six years within which to issue proceedings and, therefore, could issue in respect of the initial amount and delay any decision as to further proceedings in respect of later amounts until such time as the outcome of the initial proceedings is known.

For more information: Rachel Watkin is a partner in Property Solutions at Halliwells LLP. Email: rachel.watkin@halliwells.com