Rent Review update

The recent Court of Appeal decision in Scottish & Newcastle Plc - v - Raguz (No 2) [2007] has highlighted the need for landlords to take care where a rent review is outstanding and the current tenant is not the original tenant under the terms of a tenancy.

The Landlord and Tenant (Covenants) Act 1995 (‘the Act’) abolished privity of estate in tenancies. Prior to the Act, an original tenant and its assignees continued to be liable for the tenant’s covenants in a lease even after they had assigned their interest in the lease. Now, with any tenancy entered into after 1 January 1996, the original tenant and any assignees cease to be liable on assignment unless they have entered into an ‘authorised guarantee agreement’ (‘AGA’).

It is important that where there is an outstanding rent review or where there is any other situation where a sum due could increase, the landlord considers serving section 17 notices...

Where, however, a fixed sum (e.g. rent or service charge) is due from a tenant, even with pre-1996 leases, a landlord has to follow the procedure set out in section 17 of the Act if it wants to be able to claim that fixed sum from any former tenant/guarantor. Section 17 states that, with a pre-1996 tenancy or where there is an AGA, a landlord must serve notice on any former tenants or guarantors within six months ‘beginning with the date when the charge becomes due’.

If a notice is not served within that period, the landlord will not be entitled to recover that rent from the former tenant. Nor will it be able to recover any more than the sum specified in the notice unless it has indicated in the notice that the total ultimately payable may be more.

It was clearly envisaged by the legislators that this would cover the situation where there was an outstanding rent review or service charge reconciliation and if there are rent or service charge arrears in that situation, a landlord would undoubtedly include the paragraph in the notice indicating that the amount may increase. If, however, there are no arrears, but there is a possibility that a sum will become due

e.g. by way of a rent review, should a landlord serve a notice? This was one of the questions dealt with by the Court of Appeal. The simple answer is yes.Where a rent review clause is retrospective in its effect, the date from which the increased rent runs is the relevant date on which it becomes due for the purposes of the Act and a notice must be served on any former tenants within six months of that date.That means that if there is an outstanding rent review, even if there is no arrears of rent, and a landlord wants to maintain the ability to claim the reviewed rent from former tenants, the landlord must serve a section 17 notice within six months of every date on which the reviewed rent will be due. If it does not do so and the current tenant fails to pay backdated rent after the outcome of the rent review, the landlord will have no comeback against former tenants.A landlord should serve a notice at that time and follow up with a further notice within three months of the determination of the greater amount due.

Conclusion

Landlords: It is important that where there is an outstanding rent review or where there is any other situation where a sum due could increase, the landlord considers serving section 17 notices even if there are no current arrears. It may be that the landlord is confident that the current tenant will be able to pay any excess that arises. In that situation, the landlord may therefore decide not to serve any section 17 notice.That will however be the landlord’s decision on the facts and, if in any doubt, it is better to serve the notice.

Tenants: If a former tenant receives a demand from its former landlord for unpaid rent, it is worth checking that all of the rent is current and does not relate in any part to reviewed rent that became due more than six months previously. If there is reviewed rent, it may be that the total amount payable is less than that being demanded. ¦

Daniel Levy
Head of Real Estate Dispute Resolution
daniel.levy@mishcon.com

Property Matters! 04