In the legal regime of tenancy in UK has been one of the oldest and possibly most disputed areas in the country. Legal duties and responsibilities have been imposed to both landlords and tenants in legislation and in common law. In the context of common law, both parties have to contend with fulfilling both their contractual duties as well as to avert any act liable of tort against the other. However, the area governing the relationship of landlord and tenants is considerably vast and complex that the law making bodies have to establish certain legislation to address the specific areas of this relationship. In this paper, the discussions will focus on the legal duties of both the landlord and tenant indicated in The Landlord and Tenant (Covenants) Act 1995. Specifically, the discussions will be focusing its attention on the developments and changes made in the said regime brought about by the recent verdict in the Scottish & Newcastle plc v Raguz case.[1] To clearly establish these implications, the paper will have to cover the actual development of the case within the judiciary. In looking into the variations on the interpretations of judges as seen in their opinions in the case, a level of understanding will be achieved with regards to the kinds of legal principles and legislations used in the interpretations of the courts. For introductory purposes, the legislations directly implicated in the case will be described in the subsequent parts of this paper.
A. The Landlord and Tenant (Covenants) Act 1995This piece of legislature has been ratified and implemented over a decade ago to introduce a new regime which highly favours the tenant. Specifically, this said Act was seen initially as radical a decade ago because it was responsible for ending the liability of the tenant to the landlord for what is left of the lease. The implementation of such a provision proved to be rather far-reaching for the industry but eventually the major players tend to adapt to the said stipulations. However, the spectacle surrounding this piece of legislation has yet to dry up its verve. A recent case in the High courts, which took several years to finalise, asked the legal soundness of a part of the Act particularly with regards to the capability of the landlord to recover unpaid charges in rent. This case is the Scottish & Newcastle plc v Raguz case which has been earlier mentioned. The facts and other details of the case will be provided on the latter part of this paper. However, it is imperative that a description of the section involved in the case is provided before continuing with the analysis of the Scottish & Newcastle plc v Raguz case and its implications in the industry. At any rate, the said case has provided a solid precedent regarding the rent recovery, or any sums liquidated, of landlords.
B. Significance of s17 of the 1995 ActThis section of the Landlord and Tenant (Covenants) Act 1995 is in effect in situations where the landlord intends to track down some of his/her former tenants and guarantors to collect the fixed charge on the property. Basically, this section is said to be applicable to current and former tenancies regardless on the date of the granting of the tenancy. In the same regard, the section in not limited to those in commercial transactions. Properties that are let for residential and agricultural purposes are also covered by this section.
For starters, s17 of the Act places another duty on the landlord which particularly points out at the recovery of rent. Specifically, the law requires the landlord to provide a notice regarding the intention to acquire the fixed charge that the former tenants (as stated in s17(2) of the Act) and guarantors (as stated in s17(3) of the Act) incurred. Normally, this type of notice is touted as a “section 17 notice.”
Basically, the notice is required to be served by the landlord within six moths after the due date of the fixed charge has passed. However, issues pertaining to the actual definition of a fixed charge lingers. In s17 of the Act, these fixed charges are used to refer rent, service charges, or any liquidated sum indicated in the lease because of some failure to fulfil the stipulations of the tenant covenant. This means that the landlord is able to acquire everything that falls within the definition of fixed charges, which is basically every payment indicated in the lease. The notice should include the schedule indicating the fixed amount that the land lord is claiming along with a clause serving as a word of warning to the former tenants and guarantors that the amount indicated in the notice could increase. In cases where there is an actual increase in the charges, s17(4) of the Act claims that the landlord should forward another notice indicating the increase. Moreover, it states that it should be given to the former tenants and guarantors within three months of their determination of the increase. The failure of the landlord to serve a notice will revoke their right to recover these indicated arrears.
Seeing plainly, the tenants and guarantors do have a lot to pay for given the stipulations in s17. Thus, the requirement of a notice has given these people some room to breathe and even find a way to satisfy these payables. However, the idea of the former tenants and guarantors to pay for these unpaid fixed charges would be overly naive. Realistically speaking, there is a reason why these former tenants and former guarantors are not able to pay the fixed charges. These issues are considered in the Scottish & Newcastle plc v Raguz case.
II. Facts of the CaseScottish & Newcastle acquired the ownership of a hotel after a couple of underleases in the later part of the 1960s. These underleases were assigned to Raguz in 1982. Indicated in this assignment is a covenant that both Scottish & Newcastle and Raguz are required to comply with the conditions and constantly pay the required rents stated in the underlease. This places indemnity on the part of Scottish & Newcastle in the instance that Raguz incurred a breach.
In 1983, Raguz assigned the underlease to Hotel St. James Ltd. The former acquired an administrative receivership role in 1999 when NCP Car Parks Ltd has acquired the position of landlord. This means that Hotel St. James unfortunately, started defaulting on its rent. It was then when NCP Car Parks Ltd looked to Scottish & New Castle, being the original tenant, for payment of the overdue rents.
The moment that NCP Car Parks Ltd has served their s17 notices in 2001, Scottish & New Castle was due to pay over three hundred thousand pounds worth of rent arrears. In the same regard, an additional amount of two hundred forty-five thousand pounds is given to Scottish & New Castle in 2003.
As with any sane company, Scottish & Newcastle sought to recover the amount that they have paid to NCP Car Parks Ltd from Raguz. The claim was based on the indemnity claim that they have obtained from the assignment of the underlease to Raguz. However, Raguz similarly took legal action to test the supposed liability charged of him pertaining to the indemnity clause. The foundation of Raguz’s claim is the timing flaws that NCP Car Parks Ltd has incurred in serving the s17 notices to Scottish & Newcastle.
Seeing these facts of the case, there is a couple of issues that are highlighted in this case. One of the legal issues is whether the landlord at the time, NCP Car Parks Ltd, was able to carry out the proper procedure pointed out by the Act. Specifically, the question was whether the landlord was able to serve Form 1 and Form 2 properly in their acquisition of rent arrears. The second question points to the claim of Scottish & New Castle against Raguz. Specifically, the issues pertaining to the indemnity clause indicated in the assignment of the underleases is under question.
III. In Court of First InstanceThe issues mentioned above were considered in the lower courts. In the said hearings, the judge indicated that the procedure done by NCP Car Parks Ltd were rather inappropriate and further indicated that they should have served the notices in the duration of the review, using Form 1 of the prescribed form of the Act, and within the prescribed period of six months. Then the could indicated that Form 2 should have been forwarded within the allotted three months, instead of two years subsequent to the issuance of the first notice. Thus, the lower courts held that Scottish & New Castle was not legally responsible to pay the increase pointed out by NCP Car Parks Ltd in their notice.
Regarding the second legal issue, the lower courts considered s24(1b) of Land Registration Act 1925. Specifically, the courts pointed out that Raguz is still liable to pay for the amount paid by Scottish & New Castle to NCP Car Parks Ltd as these are still covered by the covenant that indemnified Scottish & New Castle. According to the verdict, the said payment of the rent arrears to NCP Car Parks Ltd was still considered claims and expenses that were incurred because of the default of the rents by the tenants.
This was the start of the long and tedious legal process that ended recently upon the decision of the higher courts in UK. The case was appealed by Raguz on which the court considered the decisions made by the lower courts. The details of the appeal are discussed in the subsequent section.
IV. The Case in AppealEssentially, the judgement of the lower courts was upheld by the Court of Appeal despite the fervent arguments forwarded by Raguz. Lloyd LJ’s opinion was one of the major prime movers in the development of the principles of this case. The Court of Appeal claimed that the provisions in the Act was to be held strictly, especially s17(4). They noted that the situation of NCP Car Parks Ltd, where a imminent rent review was about to take place, provided an obvious indication that an increase in the charged amount is about to happen. However, the provision in s17(4) clearly indicates that the tenant or guarantor liable of the rent arrears should not pay more than that indicated in the notice.
In any case, the opinion provided for by the Court of Appeal reinforced the principle on which the landlords are still able to recover from the original tenant. In the same regard, the prescribed process is also required by the law. Basically, in cases similar to the case where the landlord is expecting a rent review, the section 17 notices should be given to the tenant every after rent day in the next six months.
In the second legal issue involving Raguz, the Court of Appeal once again upheld the claims of the lower courts indicating that Scottish & New Castle are able to have an indemnity claim. In the same manner, the court also agreed that regardless of the absence of the legal liability of Scottish & New Castle to pay for the claims of NCP Car Parks Ltd, the payment that the former made to the latter are still covered by the covenant.
V. Reflections on the CaseThe discussions above have presented the facts of the case. The following parts will be providing an analysis of the basic legal principles affected by the case. Specifically, the analysis will be covering issues like the indemnity in the case, the formalities, the increases in the rent arrears, and the implications of these changes on the Landlord Tenant regime in UK.
A. Indemnity in the RegimeOne of the major principles stated in the case is the implied indemnity present on the part of Scottish & New Castle. The discussions above pointed to an earlier land registration law. This argument is similarly found in the legislative language in Land Registration Act 2002. In this context, the instant a registered lease is transferred or assigned to another lessee, the one transferring or assigning the lease gives the transferor some implied protection from any legal liability because of any default or any failure to pay for the rent.
At this point, it only is fair that the original holder of the lease would be the one legally responsible for the payment of the unpaid rent by virtue of the principle of privity of contract. This means that the legal liability in a situation where a breach is incurred, the landlord could only take legal action against the one he/she has entered in a contractual relationship with, in this case, the original tenant. This principle thus highlights the implied indemnity applied in the case above.
B. Formalities of the ActThe processes involved in the acquisition of the rent arrears also played a significant role in the analysis of the case. Basically, the failure of the landlord to follow the legally prescribed procedure in acquiring rent arrears particularly in the issuing notices of their intention to collect. In this regard, the legislation basically protects both the landlord and the former guarantor or tenant. As it has been indicated in the earlier part of this paper, there is a reason why the tenant or the guarantor is not able to pay for the rent in time, and normally because they lack the necessary amount to pay for it. In emphasising the importance of the giving notices as well as the timeliness of the service, both landlord and tenant benefit. On the part of the landlord, following the process provides him/her the comfort that he/she will be backed up by law in acquiring rent arrears given that he/she has not resorted to anything illegal or inappropriate. On the part of the tenant, the notice could provide them the information they need regarding the payables they have to satisfy. Moreover, they are given time to accumulate the amount stated in the notice and in the same time they could use it as a recourse once any anomaly or harassment is carried out by the landlord. At the most, the tenant is given six months to come up with the money and an additional eighteen weeks to address any additional charges brought about by an increase in the initial charges indicated in the s17 notice.
C. Backdated Increase
D. Implications to the Tenancy Regime
E. Parties who will Benefit on the Decision
F. Recovery Rights of the Property Owner
VI. Conclusion
VII. Recommendations for Landlords, Guarantors, and Tenants
VIII. References
[1] (N0. 3) [2006] EWHC 821 (Ch)
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