Judgments - Scottish & Newcastle Plc (Original Respondents and Cross-Appellants) V Raguz (Original Appellant and Cross-respondent)

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23.  S & N assigned the underleases to Mr Raguz on 29 September 1982. Mr Raguz subsequently assigned the underleases to a company called Villafield Ltd and by 1992 both underleases had become vested in Hotel St James Ltd (“HSJ”). Both on the assignments by S & N to Mr Raguz and on the assignments by Mr Raguz to Villafield Ltd implied covenants for indemnity, pursuant to section 24 of the Land Registration Act 1925, were given by the assignees to the assignors. More of section 24 later.

24.  By 1999 the reversion to the underleases had become vested in National Car Parks Ltd (“NCP”). It is common ground that S & N, as original tenants under the 1967 and 1969 underleases, retained a potential liability to NCP on the tenant’s covenants in the underleases (see s.141(1) Law of Property Act 1925 and para.5 of Hart J’s judgment).

25.  18 April 1995 was a rent review date for the purposes of the 1967 Lease. The then current rent was £24,200 per annum (£6,050 per quarter). But it was not until 23 September 2000 that the revised rent was fixed by an independent expert at £68,000 per annum (£17,000 per quarter). The increase of £43,800 per annum had been accruing since the June 1995 quarter day. The revised rent under the 1969 lease payable with effect from the December 1996 quarter day was not fixed until agreed by correspondence in February 2001. The previous rent had been £6325 per annum (£1581 odd per quarter). The revised rent was £16,000 per annum (£4000 per quarter). The increase of £9675 per annum had been accruing since 25 December 1996.

26.  HSJ failed to pay the rent due under the underleases on the June 1999 quarter day and in October 1999 HSJ’s mortgagees appointed administrative receivers. It was they who, on HSJ’s behalf, agreed the revised rent in respect of the 1969 lease. HSJ’s default, and, no doubt, the appointment of the receivers, led NCP to protect their rights against S & N by serving section 17(2) notices.

The section 17(2) notices

27.  Section 27 of the 1995 Act contains provisions regarding the notices to be served for the purposes, inter alia, of section 17. Subsection (1) says that the form of any such notice “shall be prescribed by regulations made by the Lord Chancellor” and subsection (3) says that the regulations “shall require” any section 17 notice to include “an explanation of the significance of the notice". Subsection (4) says that a notice not in the prescribed form “shall not be effective …".

28.  The requisite regulations, made by the Lord Chancellor, came into effect on 1 January 1996 and said that a section 17(2) notice was to be in Form 1 and a section 17(4) notice in Form 2, “or in each case a form substantially to the like effect.” Paragraph 3 of Form 1, the form for a section 17(2) notice, says that

“I/we as landlord hereby give you notice that the fixed charge(s) of which details are set out in the attached Schedule is/are now due and unpaid, and that I/we intend to recover from you the amount(s) specified in the Schedule. …”

It seems to me plain that the draftsman of paragraph 3 took the view that the reference in section 17(2)(a) to a fixed charge that “is now due” was a reference to a charge that was currently payable but had not been paid. Paragraph 4 of Form 1 says that

“There is a possibility that your liability in respect of the fixed charge(s) detailed in the Schedule will subsequently be determined to be for a greater amount”

and a footnote to paragraph 4 says “Delete this paragraph if not applicable". The explanatory Notes to Form 1 are pertinent to the main issue in this appeal. Note 2 says this:

“The landlord is required to give this notice [i.e. a section 17(2) notice] within six months of the date on which the charge or charges in question became due … If the notice has been given late, it is not valid and the amount in the notice cannot be recovered from you…”

And Note 4 says this :

“Apart from interest, the landlord is not entitled to recover an amount which is more than he has specified in the notice, with one exception. This is where the amount cannot be finally determined within six months after it is due (for example, if there is dispute concerning an outstanding rent review or if the charge is a service charge collected on account and adjusted following final determination). In such a case, if the amount due is determined to be more than originally notified, the landlord may claim the larger amount if and only if he completes the paragraph giving notice of the possibility that the amount may change, and gives a further notice [i.e. a section 17(4) notice] specifying the larger amount within three months of the final determination.”

In reading these notes, and in reading the regulations themselves, it must be borne in mind that they cannot add to or detract from section 17 correctly construed. They were, however, made in November 1995, more or less at the same time as the Act, and can, in my opinion, form part of the contextual background against which section 17 should be construed (see Bennion’s Statutory Interpretation 5th Ed. p.706).

29.  NCP served two section 17(2) notices on S & N, both dated 11 November 1999, one relating to unpaid rent due under the 1967 lease, the other to unpaid rent due under the 1969 lease. The unpaid rent was the rent (including maintenance and insurance charges), at the pre-rent review date level, due on the June and September 1999 quarter days. In each notice paragraph 4 had been struck out, that is to say, no notice was being given that the rent due on the quarter days in question might increase. No reference was made to the still uncompleted rent reviews or to the future liability accruing thereunder. Two further section 17(2) notices, both dated 16 June 2000, were served on S & N. These specified an unpaid balance of the December 1999 quarter day’s rent and the whole of the unpaid March 2000 quarter day’s rent. In both notices paragraph 4 had been struck out. However, in the next batch of section 17(2) notices, dated 3 August 2000 and relating to the June 2000 quarter day’s unpaid rent, paragraph 4 was left standing. But no explanation was given of the “possibility” referred to in the paragraph. There was no reference to the still outstanding rent reviews.

30.  The next set of notices were dated 8 March 2001. By this time the outstanding rent review relating to the 1967 lease had been completed (it was completed on 23 September 2000) and two section 17(2) notices relating to the revised rent were served by NCP on S & N. In one notice the sum of £19,975 was specified as the unpaid rent that had become due on the September 2000 quarter day and £279,849 odd was specified as “Additional rent for the period 18 April 1995 to 28 September 2000” payable pursuant to the completed rent review. The notice went on to explain that “This additional rent is a further fixed charge that became due for payment on 29 September 2000", i.e. on the September quarter day. The other notice simply specified £19,975 as the unpaid rent that had become due on the December 2000 quarter day. Paragraph 4 of the notices was, of course, struck out. The 8 March 2001 section 17(2) notice served in respect of the 1969 lease specified unpaid rent due on the December 2000 quarter day and calculated at the old rate, the rent review under that lease being still uncompleted. Paragraph 4 was left standing.

31.  On 13 June 2001 NCP served statutory demands on S & N for sums totalling £346,313 claimed to be due in respect of rent under the 1967 underlease. This sum included the £279,849.75 additional rent consequent upon the completion of the rent review. On 5 July 2001 S & N paid the sums claimed.

32.  The rent review in respect of the 1969 lease was completed by the agreement in February 2001 between NCP and HSJ’s receivers (see para 25 above). A section 17(2) notice dated 20 July 2001 was served by NCP on S & N. This notice specified £1857.97 as being unpaid rent due on the March 2001 and June 2001 quarter days. £1857.97 was the quarterly rent due prior to the rent review and it is not clear why the new revised quarterly rent of £4700 was not specified as the unpaid rent. Be that as it may, the notice went on to specify £53,998.61 as “Additional rent for the period 25 December 1996 to 28 September 2001” pursuant to the rent review.

33.  Thereafter section 17(2) notices were served on 4 March 2002, 3 September 2002 and 27 February 2003. These notices related to the unpaid rent that had become due on the September and December 2001 quarter days, the March and June 2002 quarter days and the September and December 2002 quarter days. In each of these notices the unpaid rent specified in relation to each quarter day was £19,975 in the case of the 1967 lease and £4700 in the case of the 1969 lease.

The assignment of the underleases by HSJ

34.  S & N was understandably anxious that the underleases should as soon as possible be assigned by the insolvent HSJ to an assignee likely to be able to pay the rents under the two leases as they fell due. Negotiations with that in mind took place and an apparently satisfactory potential assignee was identified. NCP, however, were not willing to consent to the assignment otherwise than on the footing that all arrears of rent under the two underleases would be paid as well as certain other related charges for which HSJ was liable but S & N was not. In order to bring about completion of the assignment, and an end to the continuing defaults by HSJ to pay the rents under the two underleases as they fell due, defaults which NCP was entitled, subject to the service of the requisite section 17 notices, to call upon S & N to remedy, S & N agreed to pay these additional charges as well as the unpaid rent due under the two underleases, and did so. Completion of the assignment took place on 28 February 2003 when S & N paid to NCP £306,771.99, which included the £53,998.61 additional rent payable by HSJ under the 1969 lease in respect of the period 25 December 1996 to 28 December 2001 pursuant to the rent review.

S & N’s claims against Mr Raguz

35.  S & N’s claim against Mr Raguz was a claim pursuant to section 24 of the Land Registration Act 1925 to be reimbursed the sums that S & N had paid to NCP in consequence of HSJ’s breaches of its obligation to pay the rents falling due under the underleases. The claim was commenced on 17 September 2001, at which time the sum sought from Mr Raguz was the £346,313 paid by S & N to NCP on 5 July 2001 (see para 31 above). But by means of a consensual amendment made on the first day of the trial before Hart J, 30 January 2006, S & N expanded its claim so as to include also all sums in respect of unpaid rent payable by S & N to NCP up to the assignment of the underleases, 28 February 2003. This added the sum of £245,714.55 to the amount of the claim. Interest on these payments from the date of payment to NCP was also claimed.

36.  Section 24(1)(b) of the Land Registration Act 1925 provides for a statutory indemnity covenant to be implied into an assignment of a leasehold interest in land. The parties to the assignment can contract out but it is common ground that the statutory covenant is to be implied into the assignment by S & N to Mr Raguz. The terms of the implied covenant, as set out in section 24(1)(b) (but omitting the parts not relevant to this case), are that

“… during the residue of the term the transferee and the persons deriving title under him will pay … the rent … by and in the registered lease reserved and contained, and on the part of the lessee to be paid … and will keep the transferor … indemnified against all actions, expenses, and claims on account of the non-payment of the said rent or any part thereof …”

The relief sought by S & N includes a claim for a declaration that S & N is entitled to an indemnity from Mr Raguz “in respect of those sums properly sought from it by NCP, or its successors in title …” pursuant to the terms of the two underleases.

Mr Raguz’s defence

37.  Mr Raguz put forward, besides some incidental points which were dealt with in the courts below and have not been revived before your Lordships, two points of principle of some importance. First, a point regarding section 17 of the 1995 Act is taken. It is a point that I have already foreshadowed. It is submitted that, in a case where a lease says, as both these underleases say, that the rent payable after a rent review date is the revised rent, the rent that, for the purposes of section 17(2)(a), is “due” during the interval between the review date and the date on which the amount of the revised rent is finally determined is not simply the quantified amount of the pre review date rent but includes also the as yet unquantifiable amount of the difference between that rent and the eventual revised rent. It is submitted that, until the amount of the revised rent has been ascertained, it is necessary, in order to comply with the mandatory requirements of section 17(2), for a section 17(2) notice to be served, leaving paragraph 4 standing so as to place the recipient on notice that the amount of the rent for which he is liable may increase. The section 17(2) notices served by NCP in respect of unpaid rent after the rent review date but while the rent review was still uncompleted ought all, it is submitted, to have left paragraph 4 in place and to have followed up the section 17(2) notice with a section 17(4) notice served within three months after the date of determination of the revised rent. The two section 17(2) notices dated 3 August 2000 had left paragraph 4 standing but the notices of 8 March 2001 (the 1967 lease) and of 20 July 2001 (the 1969 lease) were not in a form appropriate to constitute section 17(4) notices. They purported to be section 17(2) notices served in respect of new fixed charges, namely, the amount of the additional rent that had become due. Accordingly, Mr Raguz submits that he cannot be made liable for the additional rent attributable to the period between the rent review date and the final determination of the revised rent. NCP, he says, in failing to serve the section 17 notices required by the 1995 Act, had failed to preserve their rights against S & N in respect of this additional rent. Since S & N were not liable to pay NCP this additional rent, their payment of the amount to NCP cannot, he submits, be recovered from him under section 24 of the 1925 Act.

38.  Mr Raguz’s second point is that S & N paid the £306,771.92 (see para 34 above) to NCP in order to persuade NCP to give their consent to the assignment of the underleases to the financially respectable proposed assignee, an assignment the purpose of which, from S & N’s point of view, was to get them off the hook of, in effect, having to underwrite the payment of the rent by an insolvent current tenant. That, says Mr Raguz, may have been commercially sensible but, if and to the extent that the payment included sums that S & N had no legal liability to pay to NCP, cannot be brought within the scope of section 24.

39.  Hart J held that NCP’s section 17(2) notices dated 8 March 2001 (in respect of the 1967 lease) and 20 July 2001 (in respect of the 1969 lease) did not comply with section 17. He held that “due” in section 17(2)(1)(b) meant due, even if not yet quantified and therefore not yet payable. He said that, in order to retain their rights against S & N, NCP, in order to comply with section 17(2), should have served a succession of Form 1 notices within six months of each successive quarter day specifying the amount due as “nil” or “nothing for the moment but wait and see” and then, within three months of the revised rent being determined, should have served a Form 2 notice so as to comply with section 17(4). But the judge also held that although S & N would have had a good defence if sued by NCP for the additional rent, i.e. the rent that had accrued between the review date and the determination date, S & N was entitled under section 24 to an indemnity from Mr Raguz. The payment of the additional rent, he held, constituted an “expense” or a “claim” which was “on account of the non-payment of the said rent” within the meaning of those words in section 24.

40.  Mr Raguz appealed but the Court of Appeal agreed with Hart J on both points. Both points have been argued before your Lordships. S & N is the appellant on the section 17 point, Mr Raguz on the section 24 point.

The section 17 point

41.   The point is a short one of construction. “Fixed charge” is defined in section 17(6) as meaning “rent", “any service charge” and any “liquidated sum” payable for breach of covenant. Section 17(2) speaks of liability “to pay any amount in respect of any fixed charge” and of “the date when the charge becomes due". It requires the service on the former tenant of a notice “informing him … that the charge is now due". My Lords, I find it impossible to read this section otherwise than on the footing that it is contemplating a sum that has become payable but is unpaid, a sum, that is to say, for the recovery of which an action could be brought against the current tenant. Form 1 in the schedule to the 1995 Regulations, made pursuant to section 27 of the Act, contains provisions which support that construction but also, it must be said, provisions that seem inconsistent with it. Paragraph 3 of Form 1 refers to “notice that the fixed charge(s) … is/are now due and unpaid". The addition of the words “and unpaid” suggests that the words in section 17(2)(b) “is now due” should be read as meaning “is now due and payable". But, on the other hand, paragraph 4 of the Notes to Form 1 indicates the draftsman’s apparent opinion that where there is an uncompleted rent review, paragraph 4 of the Form should not be deleted and that a section 17(4) Form (Form 2), claiming an additional sum, should be served after the completion of the rent review.

42.  If it were not for Note 4 to Form 1 I would have no hesitation in holding that where, and so long as, there is an uncompleted rent review the rent that becomes due and payable on each payment day is the pre-review rent and that it is that pre-review rent that is the “fixed charge” and is “now due” for section 17(2) purposes. The alternative, namely that the “fixed charge” and the rent that is “now due” is an amalgam of the quantified pre-review rent and the unquantifiable amount by which the revised rent will exceed the pre-review rent, would lead to the situation, contended for by Mr Raguz, in which during the currency of a rent review, sometimes, as in this case, a matter of years, the landlord who wishes to preserve his rights against an original tenant would be obliged, whether or not there was any default by the current tenant in paying rent at the pre-review rate, to serve a section 17(2) notice within six months of every payment date leaving paragraph 4 of each such notice undeleted and specifying the amount “now due and unpaid” as “nil". This seems to me such a ridiculous conclusion that I find myself quite unable to attribute to Parliament the intention that that is what landlords must do in order to keep alive their rights against the original tenants, or against any others with whom they are in privity of contract.

43.  I prefer the conclusion that the draftsman responsible for paragraph 4 of Form 1 had not thought through the implications of his assumption that the additional rent accruing after a rent review date and pending the determination of the revised rent would, together with the rent at the pre review date level, be part of the “fixed charge” due on each payment date. Nor do I believe that Parliament, when it approved the regulations, could have appreciated those implications. In my opinion, the “fixed charge” that becomes due on each payment date is the rent at the pre rent review date level; the additional rent over the period from the rent review date until the determination of the revised rent is a new and separate fixed charge that becomes “due” for section 17(2) purposes on the date of the determination.

44.  I am not deflected from this conclusion by the argument that the absence of earlier notice to the original tenant of his accruing potential liability in respect of the additional rent would fail to give the original tenant the protection that the 1995 Act intended. Every original tenant can be expected to know from the contents of the lease that he entered into that the lease contains provision for periodic rent reviews and will know that there will almost invariably be an interval before the revised rent is determined. An original tenant would expect to be put on notice of any default by the current tenant in paying the rent as it falls due for payment and of the amount of the default but would not, surely, expect to be given notice of what is contained in the lease and available for anyone to read. The original tenant would surely not expect to be given notice of a process under which nothing is yet due and in respect of which there is no default on the part of the current tenant.

45.  It follows, in my opinion, that NCP had properly complied with the requirements of section 17 and had served on S & N the notices necessary to preserve their rights against S & N in respect of all the rent unpaid by HSJ, including the rent that accrued over the interval between the respective rent review dates under the underleases and the dates on which the revised rents were payable. In paying NCP the amount of that unpaid rent S & N were, in my opinion, discharging an obligation that they were legally bound to discharge. I would allow S & N’s appeal on this point.

46.  This conclusion makes it unnecessary for me to deal with S & N’s so called “fallback” contention regarding section 17. Their fallback contention was that where a rent review is incomplete the amount “now due” for section 17(2) purposes is, if there is some amount of the pre-review rent that is unpaid, not simply that amount but also the unquantifiable amount by which the revised rent when determined will exceed the pre-review rent. My Lords, I regard this fallback position as a highly uncomfortable one, with more spikes than cushions. My objection to the construction for which Mr Raguz contends is that it treats as “now due and unpaid” and as part of a “fixed charge” an unquantifiable sum that the current tenant has no current obligation to pay. This objection applies just as strongly to the fallback position. And to make the identification of a currently unquantifiable sum as part of a fixed charge dependent on whether there is some, maybe relatively negligible, amount of pre-review rent unpaid, seems to me, with respect, untenable. Either Parliament intended rent “now due” to mean rent now payable but unpaid, or it did not. If Parliament did mean that, as I think it did, the fallback position fails. If it does not mean that, the fallback position is unnecessary because, in that event, Mr Raguz’s submissions would have to be accepted.

47.  Finally, there is the section 24 point. This, too, does not arise if your Lordships agree with my conclusion on the section 17 point. It is plain, and I do not think Mr Raguz has submitted the contrary, that if S & N were, as I have concluded, legally obliged to pay NCP the whole amount of the rent under the two underleases that was unpaid by HSJ, there can be no answer to their right to recover the amount from Mr Raguz pursuant to section 24. The question whether, if some part of the rent paid by S & N to NCP could not have been legally demanded by NCP but was paid by S & N for sensible commercial reasons, that part could be recovered by S & N from Mr Raguz pursuant to section 24 is more difficult. The point has been fully argued but I am reluctant to express a final opinion on a point that does not now arise. I will confine myself to saying that I am highly dubious about the proposition that the section 24 implied indemnity could cover sums that S & N had paid to NCP but had been under no legal liability to pay.

48.  For the reasons I have given, however, and for the reasons contained in the opinion prepared by my noble and learned friend Lord Hoffmann which I have had the opportunity of reading in draft, I would allow S & N’s cross-appeal and dismiss Mr Raguz’s appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

The first issue (the cross-appeal)

49.  For hundreds of years the doctrine of privity of covenant imposed on an original tenant (that is, the tenant who had originally taken a lease from the landlord and entered into tenant’s covenants with the landlord) indefinite liability for any breach of the tenant’s covenants, even if the original tenant had assigned the lease many years before and was not personally culpable for the breach. In its report Privity of Contract and Estate (Law Com no. 174, 1988) the Law Commission, after a consultation that evoked a wide response (see paras 3.5 to 3.23) conceded that the law ought to be reformed, not by complete abrogation of the doctrine, but by measures which excluded it in most cases (the details are summarised at para 4.8). These reforms would have applied to existing as well as future leases, but only in relation to future assignments.

 
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