Note to Landlords with Arrears: Are there any Guarantors? If so, act now!

As we fast approach the June quarter when there is likely to be further tenant default on rental payments, landlords should check whether they are entitled to recover any sums due to them from former tenants/their guarantors under the terms of an authorised guarantee agreement. There is a strict process and timescale to bear in mind.

Key points to note:-

The restrictions/deadline below only apply to leases granted on or after 1 January 1996;
The landlord must serve a formal notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 (“section 17 notice”) within 6 months of a “fixed charge” falling due under the lease. A fixed charge includes rent, service charge, interest, costs and other liquidated (fixed) sums;
Failure to serve a valid section 17 notice within 6 months of the fixed charge falling due will result in the landlord losing the right to pursue a former tenant/guarantor for those fixed charges;
But beware that a former tenant/guarantor who pays all sums due under a section 17 notice can require the landlord to grant it an “overriding lease” sitting between the landlord’s interest and that of the current lessee resulting in the current lessee becoming a sub-tenant;
The former tenant/guarantor could pursue the current lessee for arrears and would be entitled to forfeit the current lease.
Act now given that the right to serve a section 17 notice on a former tenant/guarantor in respect of the March quarter’s rent will expire in mid-September 2020;
The landlord’s remedies against a former tenant/guarantor for non-compliance with a section 17 notice will be restricted by the current Government restrictions imposed by the pandemic.

Existing Guarantors/Sub-tenants

Check carefully the terms of any current guarantee including the process and time limit for calling on the guarantor;
It may be possible under the terms of the lease for the landlord to require the guarantor to take a new lease of the property;
Alternatively, a landlord can serve a statutory prescribed notice on a sub-tenant requiring it to pay the sub-rent directly to it in payment of the current arrears. Under the current emergency COVID-19 legislation, such notice cannot be served until the head rent is overdue by at least 189 days. This restriction is in force until 30 September 2020 (unless extended).

Please contact Meera Patel for further information.

The contents of this email are intended for general information only and do not constitute legal advice. Wallace LLP cannot accept responsibility for any loss arising from the use of the content in this email. This information was prepared on 23 June 2020.