Commercial Law Services

RENT REVIEWS - LANDLORDS BEWARE SECTION 17 NOTICES

It is common in commercial leases for a landlord to require one or more individuals to guarantee the obligations of the tenant under a lease.

It is also common practice on an assignment of a lease of commercial premises for the landlord to require his assignor to enter into an authorised guarantee agreement to guarantee performance of the tenant's obligations under the lease by the assignee.

Section 17 of the Landlord and Tenant (Covenants) Act 1995 gives some protection to such guarantors (or sureties as they are sometimes called). In particular a landlord is only able to pursue a former tenant or guarantor or rent arrears and certain other liquidated sums if the landlord serves a notice on the prior tenant or guarantor within six months of the charge becoming due.

Consider then a rent review date of the 25th March. The rent, as is often the case may take several months to be agreed or determined. Upon the new rent being agreed in, say, the following November, the first quarter's shortfall (between the previous rent and the new rent) became due on the 25th March. If the tenant fails to pay it, the landlord will not be able to pursue the guarantor or former tenant (under an authorised guarantee agreement) unless the landlord had served notice on such party by no later than the 24th September following the review date.

It does not matter that the landlord does not know, at the time the notice has to be served, what sum it claims against the guarantor or former tenant. In the above example the notice still has to be served and should state that the amount due (at that time) is nil but may subsequently increase. Then, once the rent has been determined the landlord must serve a further notice on the guarantor or former tenant within 3 months of the relevant determination setting out the sum which is then due.

Worse still, for the landlord, this applies to every quarter's rent. So that if a rent review due on the 25th March 2008 were finally agreed or determined on the 2nd January 2009 the landlord will (if he wishes to be able to pursue them in the case of tenant default) have to have served a default notice on any former tenant and guarantor by the 24th September 2008 (for the shortfall that would be come due on the 25th March 2008), a further default notice by the 23rd December 2008 (for the shortfall which would become due on the 24th June 2008).

A further notice would need to be served, after determination of the rent on the 2nd January 2009, (a) giving notice of the actual amount which has become due on the 25th March 2008 and 24th June 2008. A further default notice should also be served at that time in respect of the shortfall (which will now be a determined sum) becoming due on the 29thth September 2008 and 25th December 2008.

It was felt by the judges in the case that this potential multiplicity of notices was probably an accidental/unforeseen effect of Section 17 of the 1995 Act, but nevertheless the Court of Appeal held (in Scottish and Newcastle Plc - v - Zeljko Stephen Raguz (2007)) that this was indeed the legal position.

Whether you are a landlord or tenant dgb has the expertise to advise you on what are often complex legal issues affecting business property leases.

For more information please contact Ian Pentecost (direct dial 01634 304013).