The Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) introduced into the law of landlord and tenant some of the most fundamental changes for over 40 years. Undoubtedly, many practitioners experienced heart-sinking feelings in the weeks leading up to 1 January 1996, the date on which the provisions of the 1995 Act were brought into force.

The tenth anniversary of that date has now come and gone, almost without notice. Perhaps this is the appropriate moment to look at two of the measures introduced by the 1995 Act that were intended to give a degree of protection to those former tenants (and their guarantors) still facing contingent liability for arrears of rent and similar sums. These measures were also expected, at the time, to assuage some of the concern of those who had argued that the sections of the 1995 Act that had the effect of abolishing privity of contract in leases should have been given retrospective effect.

Section 17 of the 1995 Act

The provisions of s17 apply to both ‘old’ and ‘new’ tenancies, irrespective of when granted. They extend not only to business lettings but also to lettings of residential and agricultural property. Their effect is that whenever a landlord seeks to pursue a former tenant or a former guarantor for payment of what the 1995 Act refers to as a ‘fixed charge’, that landlord is obliged to serve on the person in question a notice setting out details of the claim. Section 17(2) relates to notices to be served on former tenants; s17(3) relates to those to be served on former guarantors.

These notices, commonly referred to now as ‘section 17 notices’, must be served within six months of the fixed charge becoming due. This is an absolute pre-condition to the liability of that third party. In this way, the 1995 Act restricts the period for recovering fixed charges to six months prior to the service of the notice, and accumulation of arrears is prevented.

To be effective, the notice must be in the form prescribed by the Landlord and Tenant (Covenants) Act 1995 (Notice) Regulations 1995, or in a form substantially to the same effect. (In fact, two forms are prescribed.) This requirement is set out in s27 of the 1995 Act, which also goes on to provide that s23 of the Landlord and Tenant Act 1927 (the 1927 Act) applies in relation to the service of a section 17 notice.

What is a fixed charge?

For the purposes of s17, a ‘fixed charge’ is expressed to mean rent, service charge – as defined in s18 of the Landlord and Tenant Act 1985 (the 1985 Act) – and any liquidated sum payable under the lease for failure to comply with a tenant covenant. ‘Rent’ is generally assumed to mean any money reserved in the lease as rent. In turn, s18 of the 1985 Act makes reference simply to ‘services, repairs, maintenance, insurance or the landlord’s costs of management’. It follows that many payments due under a lease will automatically qualify as ‘fixed charges’, but as a result of current drafting practices many of those that do not will be brought within the statutory definition by virtue of being reserved as rent in the lease.

Who benefits?

In the case of an ‘old’ tenancy, the original tenant who remains liable to the landlord by virtue of privity of contract is entitled to be served with a section 17 notice. So is any intermediate assignee of the term who has given a direct covenant to the landlord and who remains liable upon that covenant. Finally, a guarantor of either is similarly entitled.

In the case of a ‘new’ tenancy, entitlement lies with a former tenant who remains liable under an authorised guarantee agreement, and a former tenant who has entered into an excluded assignment and so has not achieved a release. Once more, a guarantor of either is similarly entitled.

What is sometimes overlooked is the fact that in the case of both ‘old’ and ‘new’ tenancies, there is no requirement to serve a section 17 notice on the contractual guarantor of the current tenant.

Section 19 of the 1995 Act

The provisions of s19 also apply to all ‘old’ and ‘new’ tenancies, irrespective of when granted. They entitle any former tenant or former guarantor who has paid in full the amount demanded by a section 17 notice (together with any interest due) to claim an overriding lease of the premises. On the grant of the overriding lease, the claimant becomes the immediate landlord of the defaulting tenant, and the tenant of the landlord. The occupational lease, referred to in s19 as ‘the relevant tenancy’, in this way becomes a sublease and the claimant enjoys the benefit of the tenant covenants in the relevant tenancy and of the right of re-entry. The grant of the overriding lease therefore gives the claimant a degree of control over the defaulting tenant. The ability to forfeit the relevant tenancy effectively gives the claimant recourse to the demised premises.

The claim to an overriding lease must be served in writing on the landlord when payment in full is made or within 12 months of that event. There is no prescribed form. (Where, however, the relevant tenancy has been determined there is no longer an entitlement to an overriding lease.) Provision is made in s19 for competing claims. It is also made clear that the provisions of s19 apply equally in the case of an overriding lease, so that there can at any given time be more than one overriding lease in existence. The landlord must grant the claimant an overriding lease within a reasonable time of the claim being made. The claimant is responsible for the landlord’s incidental costs, and must execute and deliver to the landlord a counterpart of the overriding lease.

Section 20 of the 1995 Act contains supplementary provisions. Where the landlord fails to comply with its obligation to grant the overriding lease, the tenant may issue proceedings in tort for breach of statutory duty. Until the tenant complies with its corresponding obligations, it is not entitled to exercise any rights under the overriding lease.

The section also provides that where the landlord’s interest is mortgaged, the grant of an overriding lease is deemed to be authorised by the mortgagee. However, the landlord is obliged to deliver the counterpart of the overriding lease to the mortgagee within one month of the execution of the overriding lease.

What is perhaps slightly surprising is that the 1995 Act makes no similar provision for the situation where the landlord is itself a tenant under a lease containing restrictions on the grant of subleases. It has been suggested that where there is a fully qualified covenant, it may be unreasonable in such circumstances for the superior landlord to withhold consent. Equally, the obligation on the landlord to grant the overriding lease may well provide a defence against a claim for forfeiture or damages for breach of covenant.

The overriding lease

The overriding lease must be granted for a term equal to the unexpired residue of the term of the relevant tenancy plus three days, or any lesser number of days where the landlord’s reversionary interest would otherwise be displaced. (This could occur where the landlord’s interest is itself a leasehold one.) It is unclear, however, how the length of the term is to be calculated when the relevant tenancy is in fact a continuation tenancy under s24(1) of the Landlord and Tenant Act 1954 (the 1954 Act). In such a case it is far from unusual to find that the liability of the former tenant or former guarantor subsists through the statutory extension. The 1995 Act makes no obvious provision for these circumstances.

Subject to any modifications agreed between the claimant and the landlord, the overriding lease is to contain the same covenants as the relevant tenancy (other than personal covenants) as they have effect immediately before the grant of the overriding lease. Where under the relevant tenancy any right, liability or other matter falls to be determined by reference to the commencement of the relevant tenancy, the corresponding provision of the overriding lease should also be made to operate by reference to that date. This is also the effect of s19. What that section does not specify, however, is the commencement date of the term of the overriding lease. On general principles, this might be assumed to be the date of grant.

Section 20 also provides that an overriding lease shall be a ‘new’ tenancy for the purposes of the 1995 Act only if the relevant tenancy is. The overriding lease must state that it is a lease granted under s19, and whether or not it is a ‘new’ tenancy.

Some reported cases

In Cheverell Estates Ltd v Harris [1998] the issue for the High Court was whether service of a section 17 notice on an original tenant under an ‘old’ tenancy was a pre-condition of any claim against the original tenant’s guarantors. The contention of the guarantors was that their liability was secondary liability only, and that there had to be primary liability on the original tenant before the claim against them could succeed. There could be no such liability on the original tenant until a section 17 notice was served upon it. This flowed from the wording of s17(2) which provides that: ‘The former tenant shall not be liable… unless the landlord serves… a notice.’

The deputy judge accepted that this was a possible reading of s17, but considered that the section had to be construed taking the 1995 Act as a whole. He concluded that Parliament had intended to set out a procedural code for landlords to follow. Had Parliament intended such a pre-condition to apply, the 1995 Act would have said so. Accordingly, the guarantors were liable, notwithstanding the fact that no section 17 notice had been served on the original tenant.

The main issue for the High Court in Commercial Union Life Assurance Co Ltd v Moustafa [1999] was whether a section 17 notice was validly served if it was sent by recorded delivery post to a former tenant addressed to him at his last known place of abode, despite the fact that it was never received by him. Smedley J held that it was because that was the effect of s23(1) of the 1927 Act (as amended). He also went on to hold, on the wording of the 1995 Act, that an error contained in the section 17 notice in question (as to the way in which interest on rent arrears was to be calculated under the lease) did not invalidate the notice.

Finally, in MW Kellogg Ltd v Tobin [1999] the claimant had assigned its lease to the defendant, who in turn had assigned the lease on to a third party. Subsequently, the third party failed to pay rent due under the lease and the landlord demanded the sums in question from the claimant. Having met the demands, the claimant then sought to recover the sums from the defendant, relying upon the indemnity given by the defendant at the time of the assignment.

In the High Court it was contended that the indemnity covenant was a ‘tenant covenant of the tenancy’ and that the sums amounted to a ‘fixed charge’. Accordingly, the claimant was only entitled to recover the sums under the indemnity if it had served a section 17 notice on the defendant. This argument was not accepted by the deputy judge, who held that no section 17 notice was required. He also held that the only sums that were recoverable from the defendant under the indemnity were those paid by the claimant in response to a section 17 notice. Any other payments were ‘premature’ and not recoverable.

Conclusion

According to anecdotal evidence, overriding leases are commonly granted – often following negotiation over the terms between the landlord and the claimant. (It can be in the interest of both parties to reconsider in particular the provisions relating to alienation and rent review.) Where an overriding lease has been granted, the situation of the former tenant or former guarantor that has been required to discharge arrears of rent etc is then much more satisfactory, in terms of control and recourse, than it ever was under the pre-1 January 1996 law.

Issues for landlords

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