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Section 17 rent arrears notices: An interesting case

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21/01/2016

Arrears claim and settlement

In a recent unreported case [1] the High Court considered a procedural point which will be of interest to landlords, tenants and property practitioners.

The landlord had granted leases, which were “new tenancies” for the purposes of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act), of two commercial premises. When the tenant sold its business, it assigned the leases to the purchaser and the outgoing tenant and the purchaser gave an authorised guarantee agreement (AGA), under section 16 (2) of the 1995 Act, to guarantee the purchaser’s obligation to pay rent. The purchaser was later dissolved with rent owing and the landlord issued an arrears claim against the former tenant.

The landlord had not served a notice pursuant to section 17 of the 1995 Act before issuing its claim. A section 17 notice warns a tenant of its liabilities and provides that a landlord’s claim must be brought within six months to be valid. Failure by a landlord to serve a section 17 notice can provide a tenant with a complete defence to a rent arrears claim. However, the tenant did not raise the section 17 defence and instead entered into a consent order which settled the claim on the basis that the tenant would pay the outstanding rent, interest and landlord’s costs.

Subsequently, having instructed new solicitors, the tenant learned of the section 17 point. It issued proceedings claiming that the settlement was void because (a) the court had no jurisdiction to enter judgment (i.e. the consent order) where there had been no section 17 notice; and (b) the order unlawfully sought to avoid operation of section 17 of the 1995 Act [2].

Decision and practical point

Both at first instance and on appeal to the High Court, the tenant’s claim was dismissed. The High Court confirmed that service of a section 17 notice is a necessary element of a landlord’s cause of action in a rent arrears claim such as this; but that is different to the court’s jurisdiction to dispense with proceedings by consent, which is not dependant upon a section 17 notice. The court noted that there are powerful policy reasons for not restricting the court’s ability to approve agreements to settle disputes and that there was nothing in the 1995 Act to contradict this approach, or to prevent parties from compromising AGA liabilities. Furthermore, the consent order in this case was merely an agreement to settle rent arrears – it was not an agreement relating to a tenancy within the meaning of the anti-avoidance provisions within section 25 of the 1995 Act – and so it was not void.

This case highlights a subtle but important distinction between the court’s jurisdiction as regards the validity of landlord’s rent arrears claim against a former tenant where a section 17 notice (which is an essential element of that claim) is missing; and the court’s jurisdiction to simply approve an agreement by consent of any such claim.

Former tenant liability cases are rarely straightforward. Landlords should take urgent specialist advice as soon as any rent arrears and/or occupier insolvencies become apparent – to make sure that any necessary notices are served; that any court proceedings are issued on time; and that any other procedural issues are properly complied with. Similarly, tenants should not settle any such claims without first absolutely ascertaining their validity.

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[1] Lee v Sommer 19 November 2015 Ch D (unreported)
[2] Section 25 of the 1995 Act provides that any agreement relating to a tenancy is void to the extent that it restricts the operation of section 17.

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