Scottish & Newcastle Plc v Raguz

Where rent under a lease is subject to retrospective review, it remains one fixed charge for the purposes of section 17 of the Landlord and Tenant (Covenants) Act 1995. A landlord preserving a former tenant’s liability must serve a protective notice within six months of each relevant rent day and follow the statutory procedure when the reviewed amount is determined.

An indemnity covenant implied by section 24(1)(b) of the Land Registration Act 1925 is not limited to sums which the former tenant was legally compelled to pay. Reasonable commercial payments made because of the current tenant’s default may be recovered, including payments required to facilitate an assignment.

The claimant was the original tenant under two long leases. It assigned them to the defendant, who assigned them onwards. A later assignee defaulted on rent, including rent retrospectively increased following rent reviews. The claimant paid sums demanded by the landlord and sought an indemnity from the defendant.

Hart J gave judgment for the claimant after trial: [2006] EWHC 821 (Ch). The appeal concerned whether the landlord needed to serve section 17 notices before completion of the rent reviews, whether the indemnity covered payments which the claimant was not legally compelled to make, and whether recovery was barred because the claimant prompted the landlord to serve some notices.

1. Disposition. Lord Justice Lloyd dismissed the appeal and the Respondent’s Notice. Lord Justices Rix and Mummery agreed.
2. Section 17 notices. Under section 17 of the Landlord and Tenant (Covenants) Act 1995, the rent attributable to each quarter remained one fixed charge, although the amount could not be finally known until a rent review was completed. The increased rent operated retrospectively from the review date, while becoming payable on the next relevant quarter day. The landlord therefore had to serve a section 17(2) notice within six months after each rent day, even where the unreviewed rent had been paid. The notice could specify nil while warning of a possible greater liability, followed by the further notice required by section 17(4) after determination.
3. The alternative construction, which treated the retrospectively increased rent as a separate later charge or made current default a condition of the notice regime, was rejected. The statutory language, prescribed form and operation of section 17(4) pointed to the two-stage approach. Lord Justice Rix considered the result an unintended anomaly and an uncommercial burden, but agreed that the language required it. Policy objections did not justify a different construction.
4. Indemnity. The covenant implied by section 24(1)(b) of the Land Registration Act 1925 was not confined to payments which the claimant could have been compelled to make by legal proceedings. It covered payments made because of the current tenant’s non-payment where they were fairly and reasonably incurred. The claimant’s commercial decision to pay arrears to secure a solvent assignee and avoid continuing exposure was reasonable, notwithstanding the available section 17 defence.
5. The indemnity remained subject to the exclusion of unreasonable, unnecessary or superfluous expenditure. Prompting the landlord to serve the 2003 notices did not defeat recovery because the payments would in any event have been needed to secure the assignment and were not unreasonable or unfair.

1. Court of Appeal (Civil Division). In the present appeal, the court dismissed the appeal and the Respondent’s Notice: [2007] EWCA Civ 150.
2. High Court, Chancery Division. Hart J gave judgment for the claimant after trial and awarded an indemnity for the sums claimed: [2006] EWHC 821 (Ch).
3. Earlier Court of Appeal. An earlier appeal against Part 24 judgment concerning part of the claim was dismissed: [2003] EWCA Civ 1070.