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One of the most disturbing decisions of last year was the High Court case
in which it was held that L could not recover rent review increases from a
former T (or guarantor) unless formal notices had been served under the
complex provisions of s17 Landlord and Tenant (Covenants) Act 1995.
This
decision required Ls to serve protective notices on former Ts (and
guarantors) in case the current T defaults – thus, notices have to be served,
even though there are no arrears (and often, no real suggestion that there
ever will be arrears). As such, the decision created an administrative burden
for Ls, and procedural trap for the unwary.
It had been widely anticipated that the CA would overrule that decision.
Unfortunately, and to the consternation of many, the CA has now
decided that the High Court was correct in its approach. It is a topic we
have dwelt on several times in recent months, and in particular refer to
our September issue (p19) for how the rules work.
Illustration: rent review falls due on 17 April 1995. The rent is paid
quarterly at the ‘old’ rate of £2,200pa by current T until March 1990,
when it hits financial trouble. The 1995 review is not concluded until
2001, but leads to an increase of rent to £68,000pa. L serves an s17
notice within six months of the settlement date of the rent review on
original T, seeking the back rent up to September 2000 of £280,000.
But, the s17 notice is invalid and the money is not recoverable. This is
because L did not protect its position by serving an s17 notice seeking
the additional rent within six months of each quarter day from the
review date (even though the sums were not ascertained and not even
claimable until the rent review was finally settled in 2001).
What should be the correct procedure? For L, if the amount due is
unascertained (eg the rent review has not been completed, or the
service charge not finalised) then consider:
1 Serving an s17 notice on the former T (guarantor) within six months
of the due date. The notice should specifically reserve the right to
claim the higher undetermined amount. But you must also make sure
you keep serving notices within six months of each due date. Those
notices will say that nothing is payable now but that a review (or audit)
is ongoing and that it is possible that an uplift will be claimed should
the current T default.
2 Serving a further notice within three months once the final amount is
calculated.
In summary, you have to keep serving notices every six months, and
then you have to serve a final notice within three months. It is an
onerous, costly, and cumbersome procedure. No doubt some Ls will
decide it simply is not worth it (eg if the current T seems credit worthy).
If you are acting on investment acquisitions, then do consider whether
there are any outstanding rent reviews (or service charge calculations).
If there are, then check whether the assignor has served the necessary
protective s17 notices (if he has, insert a provision in the contract
requiring him to continue serving such notices before completion).
As should be clear from the above, this convoluted procedure is not
confined to old, unascertained, rent reviews. It also applies to service
charges which have not been finalised, and that could make it far more
widespread in importance than many have anticipated. Scottish &
Newcastle v Raguz [2007] EWCA Civ 150. Source: Pinsent Masons.
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