11 October 2016 #Commercial Real Estate
It was possible during the recession of the late 1980s and early 1990’s to sue original tenants and previous assignees on covenants given in leases when the party to whom the lease had been assigned became insolvent. In some cases, many years had passed since the assignment and many original tenants would have forgotten about any continuing liability.
On 1 January 1996 the Landlord and Tenant Covenants Act 1995 came into force. This new Act substantially changed the previous law in respect of the enforceability of landlord and tenant covenants contained in the majority of leases granted on or after 1 January 1996.
The most significant change effected by the 1995 Act was the automatic termination of a former tenant’s liability once it had assigned the lease. Original tenant liability may be extended by requiring the original tenant or assignee to enter into an Authorised Guarantee Agreement as a condition of the landlord granting consent to an assignment. Most landlords will insist on an Authorised Guarantee Agreement being entered into by the previous tenant and any guarantor when application is made for licence to assign.
A second major change to the law of landlord and tenant was the introduction on the obligation on a landlord to notify a former tenant (or former guarantor) promptly if the landlord wants to be able to recover from them the unpaid sums due under the lease.
Importantly, Section 17 of the 1995 Act provides that a former tenant (or former guarantor) will not be liable to pay rent, service charge and certain other sums due from the current tenant and for which the former tenant or former guarantor is liable under an Authorised Guarantee Agreement unless the landlord has served that former tenant or former guarantor with a Section 17 Notice within six months of the date that the arrears first became due.
In addition, the former tenant or former guarantor will not be liable for any amount in excess of the sum specified in the Section 17 Notice except where all of the following statements apply:
If the landlord does not serve the Section 17 Notice by the end of the six month period, the former tenant or former guarantor is not liable even if they have entered into an Authorised Guarantee Agreement.
The question of Section 17 Notices and rent reviews was discussed by the House of Lords in the 2008 case of Scottish & Newcastle v Raguz where it was held that for the purpose of recovering sums from former tenants (or former guarantors) the date that the additional rent payable under a rent review becomes due is the date when the increase has been agreed or determined, not when the rent review comes into effect.
A party receiving a Section 17 Notice who makes payment in full is entitled to call on the landlord to grant it an overriding lease. If the landlord has served a Section 17 Notice on more than one former tenant or former guarantor, the first party to pay the full rent under the Section 17 Notice will be entitled to call for an overriding lease. So, before serving a Section 17 Notice the landlord should carefully consider whether he is happy with the covenant strength of all the parties on whom it intends to service the Section 17 Notice should one decide to call for an overriding lease.
There are various formalities to be satisfied when serving a Section 17 Notice and we are happy to assist with any queries on this. For further information please contact firstname.lastname@example.org