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

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50.  The government did not take any prompt action to implement the Law Commission’s report, but in 1995 a Private Member’s Bill was introduced to effect some of the recommended changes. It was drafted after negotiations between bodies representing different commercial and financial interests, and represented something of a compromise. It was enacted as the Landlord and Tenant (Covenants) Act 1995 (“the Act”) and it came into force on 1 January 1996. Its effect was to abolish the doctrine of privity of covenant, subject to some exceptions and qualifications that are not material, for future leases (defined in the Act as new tenancies). It made much more limited changes as regards existing leases. These are in sections 17 to 20, and this appeal is concerned (on the first issue) with the correct construction and effect of section 17. Section 18 is concerned with restricting the liability of a former tenant (or his guarantor) when the terms of a lease are varied to the tenant’s disadvantage. Section 19 provides that where a former tenant is required to pay an amount under section 17, and pays it in full, the former tenant has the right to be granted an overriding lease as described in section 19(2)—that is, a lease of the reversion—to give him a measure of control over the current tenant (whose default has resulted in the former tenant’s liability as limited by section 17).

51.  The relevant provisions of section 17 (in the abbreviated form adopted in the judgment of Hart J) are set out in para 20 of the speech of my noble and learned friend Lord Scott of Foscote, and I need not repeat them.

52.  The appropriate forms of notice, form 1 and form 2, have been prescribed by the Landlord and Tenant (Covenants) Act 1995 (Notices) Regulations 1995, SI 1995/2964. These forms were discussed in some detail in the judgments below, but they cannot in my view give any useful help in construing the statute under which they were made.

53.  The first issue in this appeal turns mainly on the interaction between subsections (2) and (4) of section 17, and how any apparent inconsistency between them is to be resolved. But I would first draw attention to two points on subsection (6). First, its choice of “fixed charge” as the defining term is a little surprising, since property lawyers are accustomed to that expression being used in a quite different sense. “Liquidated liability” would have been a better term for property lawyers (though not, probably, for non-lawyers). Second, the three components of the definition (rent, service charge and liquidated sum payable in the event of a breach of covenant) are described quite generally, and are not (in the definition) related to any date or dates for payment. Rent will normally be payable quarterly (subject to complications on the occasions of rent reviews, which I am coming to); service charges are often collected (quarterly or annually) on a provisional basis, with a further balancing charge when necessary; liquidated sums payable for breach of covenant are in the nature of things unpredictable and irregular in their occurrence.

54.  Rent review clauses and service charges are now almost universal in long leases. Their form differs a good deal. Counsel agreed that in this appeal the provisions relating to rent review and service charges (the latter relating only to lifts) have a primitive simplicity unlikely to be found in many leases today (or indeed for many years before the Act came into force). The tendency is for the drafting of leases to become more and more complex. But in this case the rent review provisions consisted simply of—

  (a) in the reddendum the words “subject to review as hereinafter   appears” followed by a specified rent payable on the usual   quarter days in advance; and

  (b) a provision for upwards-only review at 14-year intervals to   "the amount which the respective Surveyors of the Lessors and   the Lessees shall within two months of the determination of the   said years respectively agree upon in writing as being the then   current market rental value of the letting of the premises as a   whole (excluding such part of the said rental value as is   applicable to the works of completing and fitting out the premises   carried out by the Lessees at their own expense) for such term as   shall be equal to the then unexpired residue of the term and   otherwise upon the terms of this Lease", followed by a provision,   in default of agreement, for ascertainment of the rent by a single   independent surveyor acting as an expert.

55.  In the case of the 1969 under-lease, agreement between the parties’ surveyors would have meant that the revised rent was known by the next quarter day. The same might not have been true of the 1967 under-lease, since there the 14-year periods were measured from the “completion date” as defined (which turned out to be 18 April 1967, that is more than two months before the mid-summer quarter day). In the event, however, the parties’ surveyors did not agree, and the revised rents were not fixed or agreed until 23 September 2000 in the case of the 1967 under-lease and February 2001 (formally recorded on 10 July 2001) in the case of the 1969 under-lease. Your Lordships were given no explanation of these extraordinary delays.

56.  It was common ground that the effect of the authorities (in particular United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, 934-935 and South Tottenham Land Securities Ltd v R & A Millett (Shops) Ltd [1984] 1 WLR 710) is that (at any rate under a relatively primitive form of rent review clause) the revised rent notionally falls due on the quarter day on which it is payable under the lease, but in practice only the old, unrevised rent (“the passing rent”) can be demanded until the new, revised rent has been ascertained; the balance then falls due on the first quarter day after its ascertainment. Hart J summarised the position in his first-instance judgment [2006] 4 All ER 524, para 24:

“Under a typical upwards only rent review provision such as obtained in the present case, the rent capable of being demanded by the landlord will be limited to the unreviewed rent so long as the review process has not been completed. Once, however, that process has been completed the reviewed rent will become payable retrospectively with effect from the review date and can be demanded by the landlord as from the rent day next following the completion of the review process.”

57.  Other rent review clauses, in more modern form, are more complex (and may provide for the payment of interest). Parliament must be supposed to have been aware that both rent review provisions and service charge provisions do now come in a variety of forms, but may also be supposed to have wanted to provide a reasonably simple and workable system, the operation of which would not depend on subtle points of construction of different forms of lease (compare, in relation to arbitration clauses, Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951, paras 11-12).

58.  After these preliminary points I come back to section 17, and in particular subsection (2) and (4). The general scheme and purpose of these provisions is reasonably clear: to give former tenants a limited measure of protection against unpleasant surprises by restricting a landlord’s right of recovery to liquidated liabilities of which notice is given to the former tenant, in proper form, within the time limits prescribed by the section. Moreover the landlord’s right of recovery is to be limited to the amount specified in the notice, except so far as subsection (4) relaxes that requirement. But the detail of how the provisions are meant to operate produces some difficulties.

59.  Hart J ([2006] 4 All ER 524) decided the first issue in favour of Mr Raguz (the defendant at first instance and the appellant in this House). The Court of Appeal ([2007] 2 All ER 871) dismissed the appeal and largely followed the judge’s reasoning (though Rix LJ, at para 69, differed as to the Act’s statutory purpose). At first instance the judge (at para 30) summarized the case put forward by Scottish & Newcastle (the claimant below and the respondent in this House) that in section 17(2) the expressions “when the charge becomes due” and “that the charge is now due” point to the liability being actually “demandable” (the word that he preferred to the “slipperiness” of “due” or “payable”). He then observed (para 31):

“If section 17(2) stood alone there would be much to be said for the claimant’s submissions. However section 17(4) assumes that there may be a case in which the amount of the fixed charge (which is ‘now due’ under section 17(2)) may subsequently be determined to be in a greater amount. The concept of the fixed charge being ‘now due’ under section 17(2) is thus distinct from the amount in respect of that fixed charge for which the original tenant is potentially liable. If a fixed charge can be ‘now due’ but in an amount which has not yet been determined, ‘now due’ cannot mean ‘demandable', but must mean ‘in respect of which a liability has now arisen'".

60.  Mr Fancourt QC (appearing in this House for Scottish & Newcastle) criticised that passage as an incorrect, or at any rate incomplete, analysis. The last sentence should, he said, have read, “if a fixed charge can be ‘now due’ but in an amount which has not yet been finally determined, ‘now due’ cannot mean ‘fully demandable'"; and if qualified in that way it does not lead to any conclusion helpful to Mr Raguz. I see some force in that criticism. The concept of a revised rent being notionally due (in its entirety) as from one quarter day, but not actually demandable (in full) on that day, because the review process has been delayed, is indeed a slippery one, and it is hard to make confident inferences as to how Parliament intended the language of section 17(2) to be read. Nevertheless section 17(4) shows that Parliament contemplated that a “fixed charge” (in the special statutory sense) might be due even though the liability “is subsequently determined to be for a greater amount.” It would give an improbably restricted meaning to section 17(4) to treat it as applicable only to cases where the rent review process had been completed, but was then being challenged in legal proceedings.

61.  The judge recognised that his preferred construction led to an “apparent oddity” where there is a protracted rent review going on, and the tenant pays the passing rent, with the balance of the full revised rent remaining unpaid (not because the tenant is insolvent, but simply because the review process has not yet been completed). Could a cautious landlord serve a section 17(2) notice in those circumstances? As the judge observed (para 33):

“On this scenario the landlord would not within the six-month period have any intention of claiming the demandable rent from the original tenant (because it had been paid). His section 17(2) notice would therefore have to specify ‘the amount’ which he attends to claim either as ‘nil’ or as ‘nothing at the moment, but wait and see'".

62.  The judge went on (para 34):

“I do not think that there is any way of resolving this difficulty. It does not appear to me that the solution can lie in construing section 17(2) and (4) differently depending on whether or not a section 17(2) notice has been served. Either the subsequently determined rent is ‘due’ at the date of its accrual as a liability or at the date of its demandability.”

In my opinion this way of putting it is open to the same criticism as para 31 of the judgment. There is a middle way, that is to see the balance of the increased rent as one component in the entire quarterly instalment of rent which becomes retrospectively due on the quarter day fixed for rent review, the other component of which was demandable and (in the example taken) duly paid on or about that quarter day. It might also be said that the facts of this appeal are themselves an oddity, on any view of the law, because of the extraordinary and unexplained delay (years rather than months) that occurred before the rent reviews were completed.

63.  Nevertheless the notion of a “nil” notice, served for no other purpose than to give the former tenant the warning set out in para 4 of the statutory form 1 (“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”) is to my mind a distinct oddity. It leads on to what has been described as Scottish & Newcastle’s fall-back position, that is that a section 17(2) notice cannot be served unless there has been an actual default in payment of a fixed charge that was demandable (in this case, a default in a quarterly payment of the passing rent). The judge rejected that construction, without spelling out his reasons at length, in para 34 of his judgment, quoted above. In the Court of Appeal Lloyd LJ (para 31) took the same view, commenting that the section could not be construed so as to apply differently depending on whether or not there was default as regards the passing rent.

64.  Rix LJ discussed this point most fully (para 68):

“As for the fall-back submission, this assumes that there is only one charge incorporating both original and reviewed rent, but seeks to distinguish between the situation where the current tenant is in default in respect of the original rent from the situation where he is not. The difficulty with such an approach, however, is that, even though both the language of subsection 17(2)(a) and (b) as well as the prescribed form of notice appear to assume and reflect the former situation, the tenant’s default is not made a condition of the application of section 17. It remains the case that without a section 17(2) notice, the former tenant is not liable to pay ‘any amount’ in respect of the fixed charge in question. It would be otherwise if section 17(1) provided, as an additional condition, that section 17 only applied where the former tenant was in default, or if a similar requirement were built in to section 17(2): but that is not the case. The situation of default is assumed but not required.”

65.  All these points have some force, but to my mind their force is considerably diminished because Parliament seems to have given no thought to this problem (as was observed by Lloyd LJ at para 29 and Rix LJ at para 69). Some violence, or at least robust treatment, must be meted out to some part of section 17 in order to make the section as a whole workable. I respectfully agree with Rix LJ’s observation (para 69) about the statutory purpose (“to enable the former tenant to know that the current tenant is in default and to act in response to that knowledge”). I would prefer to get closer to giving effect to that statutory purpose. I would treat section 17(2) as not merely assuming, but requiring, a default in all or some part of some liability which has become actually demandable. The words of the subsection, with its references to the charge being “now due", coupled with the reference to recovery from the former tenant, clearly contemplate (or assume) an actual default, and it is not much of a step to read it as a precondition for the application of the section. For my part I would take that step.

66.  That construction of section 17(2) would mean that in a case like the present, the landlord could not serve a “nil” notice while the rent review remains uncompleted, but could serve one (in form 1, not form 2) if, when the review is completed, the tenant defaults in paying the increase in rent. This involves treating the revised rent as a separate charge, which does (as Rix LJ pointed out in para 68) involve inconsistency. The same point is forcibly made by Mr Jourdan (appearing for Mr Raguz) in his written note on Scottish & Newcastle’s fall-back case (supplied in the course of argument). But again, giving effect to the statutory purpose seems to me to be the more important consideration. In this case I prefer, as Lord Millett once said, a tortuous path to a (moderately) sensible result rather than a direct route to a result that I do not regard as sensible.

67.  I would however accept Mr Jourdan’s own fall-back position, which is that if section 17(2) is to be robustly construed on the lines mentioned above, section 17(4) must also be read as limiting the landlord’s right of recovery to instalments of the balance of the revised rent which either—

  (a)  correspond to instalments of the passing rent as to which     there has been default, and a form 1 notice (with para 4     included) has been duly served; or

  (b)  correspond to instalments of the passing rent as to which     there was no default, but of which the landlord gave notice     (in form 1 with para 4 included) within due time after the     first default in payment of any instalment of the passing     rent.

In other words the omission of para 4 from a form 1 notice makes irrecoverable any instalments of the balance of the revised rent which have already notionally accrued. Any other reading would be inconsistent with the statutory purpose of protecting the former tenant from unpleasant surprises. But I would not hold the notices of 8 March 2001 (relating to the 1967 under-lease) and 20 July 2001 (relating to the 1969 under-lease) wholly invalid because they overstated the amount claimed. The effect of section 17(4) is to fix a ceiling for the recoverable amount.

68.  In this case both rent reviews were already long overdue when Hotel St James Limited defaulted in June 1999. The landlord’s first two pairs of notices (dated 11 November 1999 and 16 June 2000) deleted para 4. Only the notice of 3 August 2000 (relating to the rent payable under the 1967 under-lease on the midsummer 2000 quarter day) and those of 3 August 2000 and 8 March 2001 (relating to the rent payable under the 1969 lease on the last three quarter days in 2000) included para 4 in appropriate circumstances (para 4 was also included in the notice dated 20 July 2001 given under the 1969 under-lease, but so far as I can see that served no purpose). The additional rent recoverable was therefore limited, in my opinion, to that in respect of the midsummer 2000 quarter day (under the 1967 under-lease) and the last three quarters of 2000 (under the 1969 under-lease).

69.  On the first issue, therefore, I respectfully differ from the careful judgments below, but reach a result which is not, in financial terms, very different. I would add that this analysis may not be appropriate to rent review clauses in a more detailed, modern form. Although it is undesirable for landlords and their advisers to have to consider fine points of construction of a lease before giving effect to the Act, the form of section 17 seems to me to make that unavoidable.

The second issue (the original appeal)

70.  The second issue was argued at some length, with the citation of a good deal of authority. Mr Jourdan submitted on various grounds that if (as I would hold) Scottish & Newcastle was not legally liable to pay all the arrears of rent demanded by the landlord, Mr Raguz was not liable to reimburse Scottish & Newcastle for anything more than what it was legally liable to pay (together with reasonable costs and expenses).

71.  Your Lordships are concerned here with a common-form covenant which (until the passing of the Act) was read into hundreds of thousands of assignments by the effect of section 24(1)(b) of the Land Registration Act 1925:

“on the part of the transferee, a covenant with the transferor, that during the residue of the term the transferee and the persons deriving title under him will pay, perform and observe the rent, covenants, and conditions by and in the registered lease reserved and contained, and on the part of the lessee to be paid, performed, and observed, and will keep the transferor and the persons deriving title under him indemnified against all actions, expenses, and claims on account of the non-payment of the said rent or any part thereof, or the breach of the said covenants or conditions, or any of them.”

72.  This is a covenant for indemnity, not a form of guarantee or liability insurance. There is no reason to bend or stretch its natural meaning in favour of either the transferee or the transferor. Approaching it in that way, I respectfully agree with the views of Lloyd LJ (para 53):

“The scope of the indemnity is not limited to payments which the assignor is legally liable to make. Clearly it extends to payments which the assignor chooses to make, for example to its own lawyers or other advisers in considering, and perhaps defending, a claim by the landlord for the unpaid rent. I am prepared to assume that, notwithstanding the wide express terms of the covenant, there is a limitation on the scope of the indemnity to expense which is fairly and reasonably incurred, along the lines indicated in Smith v Howell (1851) 6 Exch 730. But I do not accept that, as regards payments to the landlord, the extent of the indemnity is limited to payments which the landlord could compel the claimant to make by legal proceedings. That seems to me to be particularly clearly so given the commercial strength of the landlord’s position, through its ability to decline to consent to an assignment unless all rent already due is paid.”

Hart J had made very careful findings of fact about the circumstances leading up to the eventual payment of arrears by Scottish & Newcastle, and drew the right legal conclusion from them. The Court of Appeal agreed with the judge, and so do I. Therefore I would partially allow Scottish & Newcastle’s cross-appeal on the first issue and I would dismiss the appeal of Mr Raguz on the second issue, so that Scottish & Newcastle remains the overall winner in the litigation.

LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,

73.  I have had the advantage of reading in draft the opinions of each of my noble and learned friends. One point only divides them: the question of what meaning and effect is to be given to section 17(4) of the Landlord and Tenant (Covenants) Act 1995. Having changed my view more than once on this undoubtedly problematic issue, I have finally come to prefer the conclusion reached by Lord Hoffmann and Lord Scott of Foscote. Essentially this is that subsection (4) cannot be allowed to distort the obviously sensible and intended construction of section 17(2), namely that no notice need ever be served unless a liquidated monetary charge is already outstanding and recoverable, nor can it be tortured into a construction which accommodates Scottish & Newcastle’s fall-back position (the via media as Lord Hoffmann calls it at para 11).

 
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