Scottish & Newcastle plc (Original Respondents and Cross-appellants) v Raguz (Original Appellant and Cross-respondent)

For the purposes of section 17(2) of the Landlord and Tenant (Covenants) Act 1995, a fixed charge becomes due when it is quantified, payable and recoverable by action. An additional sum arising from a rent review therefore becomes due when the revised rent is agreed or determined. It does not become due retrospectively on each earlier rent day merely because the lease treats it as notionally accruing from the review date.

A landlord need not serve notices stating that nothing is presently owed merely to preserve a possible claim against a former tenant. Section 17(4) cannot distort the natural and workable meaning of section 17(2), even though that construction leaves section 17(4) with limited practical application.

Scottish & Newcastle plc was the original tenant under two long underleases which it assigned to Mr Raguz. Later assignees defaulted after lengthy rent reviews had increased the rent retrospectively. The landlord served notices under section 17 of the Landlord and Tenant (Covenants) Act 1995, and Scottish & Newcastle paid the arrears before seeking indemnification from Mr Raguz under section 24(1)(b) of the Land Registration Act 1925.

Hart J, [2006] 4 All ER 524, held that the landlord had failed to preserve its claim for the retrospectively accrued increases, but that the payments were nevertheless covered by the statutory indemnity. The Court of Appeal affirmed that decision, [2007] EWCA Civ 150; [2007] 2 All ER 871.

The central issues were when reviewed rent “becomes due” for section 17 purposes and, if Scottish & Newcastle had paid sums for which it was not legally liable, whether those sums fell within the statutory indemnity.

1. Scottish & Newcastle's cross-appeal was allowed by a majority. Lord Hoffmann, Lord Scott of Foscote and Lord Brown held that, under section 17(2) of the Landlord and Tenant (Covenants) Act 1995, a fixed charge becomes due when it is quantified, payable and capable of recovery by action. Lord Hope and Lord Walker agreed that the decisions below could not stand in full, but would have limited recovery of some previously accrued instalments.

2. Per Lord Hoffmann and Lord Scott, the passing rent was the fixed charge due while each rent review remained incomplete. The additional rent became a new and separate fixed charge when the revised rent was agreed or determined. Its treatment for other purposes as notionally accruing from the review date did not trigger the six-month notice period on the earlier quarter days.

3. Section 17 is intended to warn a former tenant promptly of an actual default and prevent arrears from accumulating without notice. It does not require a landlord to serve repeated notices specifying nil as the amount due merely because a future rent-review increase may arise. The statutory language could not bear an intermediate construction under which retrospective accrual depended on whether the current tenant had defaulted in paying the passing rent.

4. Per Lord Hoffmann, Lord Scott and Lord Brown, section 17(4) could not distort the natural construction of section 17(2). Parliament had not fully reconciled the two subsections. Section 17(4) consequently had limited practical operation, and the indication in Note 4 to the prescribed notice that it applied to an outstanding rent review was mistaken. The landlord's notices preserved its rights against Scottish & Newcastle for the reviewed rent.

5. The conclusion on section 17 made Mr Raguz's appeal under section 24(1)(b) of the Land Registration Act 1925 unnecessary. Nevertheless, Lord Hoffmann, Lord Hope, Lord Walker and Lord Brown would have held that the indemnity was not confined to payments legally enforceable by the landlord. It extended to expenses fairly and reasonably incurred in response to non-payment, including commercially reasonable payments made to secure consent to an assignment. Lord Scott expressed serious doubt about that conclusion.

6. Mr Raguz's appeal was dismissed. Scottish & Newcastle remained entitled to recover the unpaid rent from him under the statutory indemnity because, on the majority's construction of section 17, its payments discharged a legal obligation.

1. House of Lords: By [2008] UKHL 65, allowed Scottish & Newcastle's cross-appeal and dismissed Mr Raguz's appeal.
2. Court of Appeal: By [2007] EWCA Civ 150; [2007] 2 All ER 871, affirmed Hart J on both the section 17 notice issue and the scope of the statutory indemnity.
3. High Court: Hart J, [2006] 4 All ER 524, held that the section 17 notices did not preserve liability for the retrospectively accrued rent increases, but that Scottish & Newcastle could recover its reasonably incurred payments under section 24(1)(b) of the Land Registration Act 1925.