Erroneously paying arrears
It is usual for outgoing tenants under commercial leases to remain liable for the default of the incoming tenant to whom they assign the lease, but the recent case of Lee v Sommer serves as a timely reminder to former tenants to fully assess their liability (and take professional advice) before settling any demands received from their former landlord.
Section 17 of the Landlord and Tenant (Covenants) Act 1995 (LTCA95) outlines the necessary components required for a cause of action by the landlord to recover a fixed charge from a former tenant or guarantor who remains liable through an Authorised Guarantee Agreement (AGA), following an assignment of a lease.
One element is that the landlord must serve notice on the former tenant or guarantor within six months from the date that the arrears become due, known as a ‘section 17 notice’. If no notice is served then this provides the former tenant or guarantor with a complete defence releasing them from any liability, as confirmed by the Court of Appeal in Bloomfield v Williams (1999).
The case of Lee v Sommer provides an exception to this rule. The High Court upheld the validity of a consent order to settle the litigation in relation to outstanding arrears, despite the landlord not serving a section 17 notice.
Sommer granted two leases of a restaurant and a yard to Lee. Lee later sold his business and assigned the leases to DRWY Limited. Lee entered into an AGA with Sommer, guaranteeing DRWY’s obligations under the leases.
DRWY was later dissolved with rent arrears amounting to over £38,000. The leases were subsequently disclaimed. As a result of DRWY’s failure to pay rents due, Sommer sought to recover the unpaid rent from Lee under the AGA.
Sommer failed to serve Lee with a section 17 notice. This failure would have provided Lee with a complete defence to Sommer’s claim, however it was not raised.
The parties entered into a consent order under which Lee would pay the outstanding arrears. The order was later approved by the Court.
Lee later instructed new solicitors, who discovered the absence of a section 17 notice. Consequently, Lee brought proceeding against Sommer alleging the consent order was void as no notice had been served. The Recorder refused to set aside the consent order, so Lee appealed to the High Court on two grounds:
- The court has no jurisdiction to enter judgment in the absence of a section 17 notice;
- The consent order related to a tenancy, so that the wide-ranging anti-avoidance provisions in section 25 of the LTCA95 applied. Consequently, the order was void because it sought to contract out of section 17.
Lee submitted that the section 17 notice was a jurisdictional requirement and not merely a component of a cause of action. Therefore, the court did not have the power to approve the consent order.
In the absence of any relevant authority, the court looked at the wording of the Act. Nothing in the Act prevented the parties from reaching a genuine agreement to settle the litigation or deprives the court of the power to approve such agreement. As a result of this, the High Court confirmed that the section 17 notice was a component in the cause of action and not a precondition to the court’s jurisdiction.
Accordingly, the court had validly approved the consent order as it was a genuine agreement.
Lee secondly submitted that the consent order was void as it was an “agreement relating to a tenancy” having the effect of undermining the operation of the Act and in particular the protection it affords to former tenants or guarantors. Under section 25, such agreements are void.
As the consent order had no purpose other than to bring the litigation between the parties to an end, the High Court concluded that the consent order did not relate to a tenancy and so did not have the effect of contracting out of section 17.
This case highlights the importance of section 17 and also reaffirms the interpretation of the section.
It is a reminder for landlords and their professional advisers to always ensure that a section 17 notice has been served, to keep former tenants or guarantors on the hook.
However, and perhaps even more importantly, it is also a reminder for former tenants or guarantors and their professional advisers to check before settling a former landlord’s claim whether a section 17 notice has been served, as the landlord’s claim may be unenforceable.
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