The Landlord and Tenant (Covenants) Act 1995 legislation applies to landlords, tenants, and guarantors when a tenancy is transferred to another party.
Why was it introduced?
Back in the 1980s, when the UK was in the grips of recession, large numbers of tenants found themselves being sued (on the basis of privity of contract) in relation to covenants and promises that they had made in leases many years before because the current tenants got into financial difficulties. In many instances, 20 years or more had passed since the tenant had transferred their lease to a new party, and landlords were adding substantial interest claims to the claims for unpaid rent and service charges.
In the late 1980s, the Law Commission therefore recommended that the principle of privity of contract concerning leases be reformed, and on 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 came into force. The 1995 Act fundamentally altered the previous law concerning the enforceability of landlord and tenant covenants contained in leases that were granted on or after 1 January 1996. The law remained unchanged for leases that were granted prior to the 1 January 1996.
What was the most significant change for a former tenant?
The most significant change effected by the 1995 Act was the automatic release of a tenant from its contractual liability on assignment of its commercial property lease. If a tenant transferred their lease to a new tenant, they were no longer liable for the covenants in the original lease except if they entered into an authorised guarantee agreement as a condition of the landlord granting consent to the lease transfer.
This remedied the problem in the late 1980s and meant that once the lease had been transferred to the new tenant, particularly if the original tenant had not given an authorised guarantee agreement, the original tenant had no ongoing liability.
The other major change was that the 1995 Act introduced an obligation on the landlord to promptly notify a former tenant or former guarantor if arrears were accruing and a landlord was looking to recover those from the former tenant or guarantor.
This obligation to notify the former tenant or guarantor was enshrined in section 17 of the 1995 Act.
What is a Section 17 notice?
Essentially, a Section 17 notice provides that a former tenant or a former guarantor will not be liable to pay any sums due under the lease from the current tenant unless the landlord has served that former tenant or former guarantor with a Section 17 notice within six months beginning on the date when the arrears first become due. Section 17 of the 1995 Act applies to both old and new tenancies, i.e. tenancies granted before and after 1 January 1996.
Why are section 17 notices helpful to landlords?
Section 17 allows the landlord to potentially recover sums from a former tenant or guarantor which are defined as a fixed charge. If a current tenant is not paying rent, a landlord may be able to look back to a former tenant or guarantor and ask them to pay. Section 17 defines a fixed charge as rent, service charge or any amount payable under the lease or a liquidated amount. This precludes a landlord from asking a former tenant or guarantor to pay sums due under the lease which have not yet been quantified.
From whom can a landlord recover arrears?
The 1995 Act allows the landlord to recover sums which are defined as a fixed charge from the following:
- In relation to old leases (granted prior to 1 January 1996)
- The original tenant
- Any previous tenants who have given a covenant to the landlord when they were assigning their lease and on which they remain liable.
- The guarantor of any former tenant.
- In relation to new leases:
- A former tenant who remains liable under an AGA.
- A former tenant who has not been released because the assignment was an excluded assignment (i.e. one that was done without landlord’s consent).
- Or a guarantor of either of the above who has not been released.
Is there a prescribed form for a section 17 Notice?
There are prescribed forms of Section 17 notice that should be used. A Section 17 notice is not necessary to serve on a current tenant or the current tenant’s guarantor.
The landlord has to serve its section 17 notice within six months of the fixed charge becoming due. For example, if rent fell due on 25 December, then the section 17 notice has to be served by 25 June the following year. If there is any late service of the section 17 notice, then this may mean that the landlord is not able to recover the arrears set out within the notice. Special rules apply if there is a pending rent review under the lease and the new rent level is not known when the Section 17 notice is being served.
What happens if the old tenant pays the sums demanded by the section 17 notice?
If a tenant receives a section 17 notice and pays the arrears in full, they are entitled to call on the landlord to grant them an overriding lease. This would mean that the tenant would then become the landlord to the current defaulting tenant and would allow the paying party to potentially take steps to terminate that lease.
Can a landlord serve a Section 17 notice on more than one former tenant?
Yes. The landlord might adopt a scattergun approach and serve section 17 notices on several former tenants or former guarantors. However, the landlord should bear in mind that the first party to pay the full amount will be entitled to call for an overriding lease. A landlord should, therefore, take care to consider whether they are happy with the covenant strength of all parties on whom they are serving a section 17 notice before proceeding.
If landlords wish to rely on Section 17 notices, they should seek legal advice from specialist landlord and tenant solicitors to ensure that the necessary notices are served and proceedings are issued on time.
