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14th September 2020

Recovery of rent arrears from former tenants

Property Litigation partner Michael Tatters explains how now is the time for landlords who are seeking to recover rental arrears for the first quarter of 2020 from former tenants and their guarantors to take action – as long as they have served a formal section 17 notice.

The next quarter day in England will fall on 29 September, meaning any rent for the first quarter of 2020 not paid by a tenant to their landlord will soon be more than six months old.

Property landlords looking to recover rent arrears from former tenants and guarantors for the March period – which coincided with the coronavirus lockdown – will be able to do so if they entered into an Authorised Guarantee Agreement (AGA) at the time of the assignment 

A landlord is able to recover rent arrears due under the lease from former tenants and their guarantors. However, landlords must be aware of the strict timescales on the use of this remedy imposed by the Landlord and Tenant (Covenants) Act 1995 (L&TCA).

If the lease is an ‘old lease’ – i.e. one which was granted prior to 1 January 1996 – a landlord can recover arrears from the original tenant, or any former tenant who has given a direct covenant to be liable for the remainder of the term, or their respective guarantors.

If the lease is a ‘new lease’ – i.e. one which was granted on or after 1 January 1996 – a landlord can recover arrears from the former tenant, if that former tenant had entered into an AGA, or from a guarantor who has guaranteed the performance of a former tenant under a Guarantor’s Authorised Guarantee Agreement (GAGA).

In order to pursue a former tenant, or their guarantor under either an old or new lease, it is important to note that the L&TCA requires a landlord to first serve the former tenant, and/or their guarantor, with a section 17 notice, in a prescribed form, within six months of a ‘fixed charge’ falling due.

A ‘fixed charge’ includes rent, service charges and any other liquidated sums due under a lease and interest due on those fixed charges. A failure to serve a valid section 17 notice within that six-month period will result in the landlord losing its right to pursue a former tenant (or their guarantor who would otherwise have retained liability for any breaches of covenants to pay fixed charges by the current tenant).

A former tenant or guarantor that receives a valid section 17 notice will be required to pay the arrears and any interest that has accrued which was set out in that notice.

Before serving a section 17 notice, a landlord should be aware that a former tenant or guarantor who pays all the sums set out in the notice has a right under section 19 of L&TCA to call for the landlord to grant them an “overriding lease”.

This new lease is inserted between the interests of the landlord and the existing tenant, converting the existing tenant into a subtenant. This allows the former tenant or guarantor to pursue the existing tenant for the debt. A landlord should therefore only serve a section 17 notice on someone it would be prepared to have as a direct tenant going forwards under an overriding lease.

The Government legislation introduced in response to the coronavirus pandemic does not prevent a landlord from serving of a section 17 notice.

The September quarter day is fast approaching, and with the prospect of any unpaid March quarter’s rent soon to be more than six months old, now is the time for landlords with the ability to recover Covid rent arrears from former tenants and guarantors to do so.

To find out more about anything covered in this article, please contact Michael Tatters or another member of Thrings’ Property Litigation team.

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