In times of economic downturn, landlords have to consider every option they have to protect their rental income without terminating a lease.
During economically buoyant days, when tenants run into financial difficulty landlords can forfeit the lease by peaceable re-entry being confident that the premises could be easily re-let. For many landlords now the objective is to keep the existing lease to avoid having to make any payments in respect of the premises whilst trying to maintain the rental income. As a result former tenants and guarantors have become the focus of landlords’ attention.
A landlord who wants to pursue the former tenant or guarantor in respect of payments due under a lease must serve a notice pursuant to Section 17 of the Landlord and Tenant (Covenants) Act 1995 (the “Act”). The Act was introduced during the recession in the early 1990s to balance a landlord’s right to recover monies due under leases from former tenants and guarantors whilst at the same time providing safeguards to former tenants and guarantors so that they were not hit with potential liability stretching back many years.
The range of possible targets for a landlord faced with arrears vary according to whether the lease was granted before 1st January 1996 or on or after that date. A lease granted before 1st January 1996 is classified by the Act as an “old lease” and after, as a “new lease”.
Under an old lease the landlord can pursue the following parties:
- the original tenant unless it has been specifically released;
- any former assignee that has entered into a direct contract with the landlord and who has not been specifically released; and
- guarantors of the original tenant or former assignee depending upon the terms of their guarantee.
Under a new lease the landlord’s options are restricted to the former tenant who has entered into the most recent authorised guarantee agreement.
The Act sets out strict guidelines with regard to the service of S17 Notices and if these are not followed, a landlord risks facing claims of invalidity preventing it from pursuing the former tenant in respect of the outstanding sums.
In order to avoid claims of invalidity all landlords should ensure that the S17 Notice is:
- Served on the correct party
If a landlord is in the fortunate position of having a number of potential targets, it is important to consider the financial covenant strength of each former tenant before serving the S17 Notice as the party who pays the monies due under a S17 Notice will be entitled to call for an overriding lease of the premises so allowing the former tenant who paid the arrears to have control of the lease of the premises and the defaulting tenant. It can then chose to forfeit the lease held by the defaulting tenantand relet to a tenant of better covenant strength. If the section 17 notice has been served on a number of former tenants it is possible that a tenant with a weaker covenant strength may pay the arrears and demand an overriding lease of the premises which would not be in the landlord’s best interests.
- At the correct address
It is important to check whether any agreement had been reached with a former tenant or guarantor as to the address for service of notices under the lease. If there is any such agreement these must be strictly followed. If there is no such agreement and it is a company, then a landlord can use the registered office details lodged at Companies House. With an individual, it may be advisable to instruct an agent to investigate whether their last known address is still current before serving the notice.
- In the prescribed form and containing the correct information
The prescribed form of S17 Notice that should be used setting out the correct amount due plus any interest and the basis on which it is calculated. If the sums claimed are likely to increase the landlord’s must forewarn the former tenant or guarantor of this in the notice.
- Most crucially, within the 6 month deadline from the date on which the sum became due.
The Act is unclear as to whether the S17 Notice has to be served before the sixth month anniversary or whether it can be served on the anniversary itself. There is currently no case law guidance on this issue. The safest course of action is therefore not to wait until the sixth month anniversary.
A former tenant or guarantor who is on the receiving end of a S17 Notice needs to act quickly and seek advice on the validity of the Notice. If it is valid, the former tenant or guarantor needs to consider whether it is advantageous to make the payment and seek an overriding lease of the property to gain control of the situation. If it is invalid, the former tenant or guarantor has the option not to acknowledge the validity of the notice within the 6 month period and then set out the case regarding invalidity. However, this option may not be suitable to all tenants and guarantors especially if subsequent further arrears fall due.
In conclusion, S17 Notices can be a great asset for landlords wanting to protect the rental income, but only if acted upon quickly upon arrears falling due and in accordance with the strict guidelines of the Act.