Scottish & Newcastle Plc v Raguz

The House of Lords considered the meaning of "the date when the charge becomes due" in section 17(2) of the Landlord and Tenant (Covenants) Act 1995 where a rent review has not yet been finally determined. The court held that those words refer to the date when the landlord would be entitled to sue for the sum (ie when the amount is payable or demandable), not a deemed retrospective accrual of an unquantified uplift pending determination. Consequently, a landlord need not (and should not be required to) serve periodic section 17(2) notices during an ongoing rent review in respect of unquantified increases; the additional rent becomes a separate fixed charge for section 17 purposes when the revised amount is determined. The court also confirmed that the statutory indemnity implied by section 24(1)(b) of the Land Registration Act 1925 can cover expenses and payments fairly and reasonably incurred by the assignor in meeting claims for unpaid rent, so that, had it been necessary, the claimant would have been entitled to recover under that indemnity.

Background and parties:

Scottish & Newcastle plc (S & N), as original tenant under two long underleases, faced potential liability for arrears of rent charged by the reversioner (NCP) after the current tenant (Hotel St James Ltd) defaulted. S & N had assigned the leases in 1982 to Mr Raguz; statutory indemnities were implied on the assignments under section 24(1)(b) of the Land Registration Act 1925. After protracted rent reviews produced substantial retrospective increases, NCP served notices under the Landlord and Tenant (Covenants) Act 1995 (section 17) in various forms and S & N paid large sums to procure an assignment and to protect the reversion.

Nature of the claim and relief sought:

• Claim: S & N sought reimbursement from Mr Raguz under the implied indemnity in section 24(1)(b) for sums it had paid to NCP arising from the current tenant's defaults, including amounts attributable to rent review increases.
• Issues framed: (i) whether, for the purposes of section 17(2) of the 1995 Act, rent review increases are to be treated as "becoming due" retrospectively from the review date (thus triggering the six-month notice period), and (ii) the scope of the indemnity implied by section 24(1)(b) of the 1925 Act and whether it covers sums paid by the assignor for commercial reasons beyond strict legal liability.

Court’s reasoning and conclusions:

• On section 17(2) and (4) the majority concluded that "the date when the charge becomes due" should be read as the date when the landlord could properly sue for the amount, meaning that where a rent review remains undetermined the landlord is not required to serve repeated Form 1 notices warning of a future unquantified liability. The additional sums arising from a rent review constitute a separate fixed charge which becomes "due" for section 17 purposes when the amount is determined. The consequence is that the intended operation of section 17(4) in many rent-review cases was misconceived and the explanatory Note 4 to the prescribed Form 1 was a mistake.
• On the section 24 indemnity the court (though not necessary to decide the main point for all Lords) accepted that the implied covenant in section 24(1)(b) can cover payments and expenses that are fairly and reasonably incurred in meeting claims for unpaid rent, and thus indemnity could apply to commercially sensible payments made to secure assignment consent.

The House of Lords allowed Scottish & Newcastle's cross-appeal and dismissed Mr Raguz's appeal. The court held that under section 17(2) of the Landlord and Tenant (Covenants) Act 1995 a rent increase determined by a rent review does not "become due" for the purposes of the six-month notice requirement until the amount has been agreed or determined (when the landlord could sue); accordingly the landlord's notices preserved recovery of the review increases. It followed that S & N could recover from Mr Raguz under the section 24(1)(b) indemnity (a point some speeches treated as unnecessary to decide but which they would have upheld).

First instance: Hart J (trial) [2006] 4 All ER 524. Court of Appeal: [2007] EWCA Civ 150 (appeal from Hart J). Final appeal to House of Lords: [2008] UKHL 65.