Landlords seeking backdated rent review increases should take note of a recent High Court ruling to avoid uncertainty over who is liable to pay.

Two rent reviews were deferred for six and five years respectively until 2001. The current tenant could not afford to pay the backdated uplift, so the landlord pursued the original tenant which, like all original tenants under leases granted before 1 January, 1996, was bound to perform the lease covenants up to lease expiry, regardless of whether or not it had assigned the lease in the meantime.

The original tenant paid the sums due and then sought repayment from the tenant which it assigned the lease to. The assignee argued that the original tenant had not actually been liable to pay the uplift (because the landlord had not served notices under section 17(2) of the Landlord and Tenant (Covenants) Act 1995, every six months between 1995 and 2001) and, in those circumstances, the original tenant's indemnity against the assignee was not enforceable.

These were the facts in the recent decision in Scottish & Newcastle plc v Zeljko Stephen Raguz [2006] in which the High Court decided in favour of the original tenant. It is widely expected that the unsuccessful assignee will appeal. Regardless of the outcome of the appeal, one aspect of the High Court case will remain unaffected, which concerns the recoverability of rent review increases from former tenants and guarantors.

Under the Landlord and Tenant (Covenants) Act 1995, a landlord cannot recover any fixed charge (such as rent arrears) from a former tenant or guarantor unless it has first served a notice under section 17(2) of the 1995 Act within six months of the charge becoming due.

So, if a section 17 notice is served more than six months after unpaid rent became payable, the landlord is prevented from pursuing an earlier tenant or guarantor. In Scottish & Newcastle, the landlord did not serve section 17 notices on the original tenant until after the rent reviews were determined in 2001. Since the uplifts were backdated to 1995 and 1996, the court agreed that the section 17 notices were ineffective because they were served more than six months after the rent review dates.

The unenforceability of the section 17 notice by the landlord against the original tenant did not affect the assignee's liability in this case. The current tenant was looking to assign the lease, the landlord made it a condition of assignment that the arrears were paid and the original tenant paid the arrears, because the assignment would limit its own exposure. There is, however, a point of general application.

Where determinations of rent reviews are delayed beyond rent review dates, as they invariably are, there is a risk that a current tenant will be unable to pay the uplift and the landlord may have to look to payment by a former tenant or guarantor, a landlord must serve a section 17 notice every six months after the rent review date.

A section 17 notice must specify the amount of a fixed charge, which is impossible if the reviewed rent has not yet been determined. In these circumstances, even though the arrears cannot be quantified, it will be enough to state in the section 17 notice that there will be arrears to be determined in due course.

Service of those notices will be a judgment call by the landlord. First, it will have to assess whether there is a risk that the current tenant will default. Second, it will have to assess whether that risk is so great that a notice should be served.

That is because service of a notice may trigger the statutory right of an earlier tenant or guarantor which meets a demand made in a section 17 notice to call for the landlord to grant an overriding lease, making the earlier tenant or guarantor the landlord's immediate tenant.

It would be sensible for the six-month deadline set by the Landlord and Tenant (Covenants) Act 1995 to run from when the rent review is determined. Until the law moves in that direction, however, cautious landlords will be serving section 17 notices wherever possible, just for the avoidance of doubt.

Costs-conscious landlords should be aware that, unless standard lease provisions are adjusted, the costs of preparing and serving these effectively on account section 17 notices will not be recoverable, because there has been no default. Once the rent review is determined and the arrears can be quantified, a further section 17 notice should be served, and the costs of preparing and serving that should be recoverable.

Finally, if service of an on account section 17 notice is overlooked, a landlord can still extract payment of rent review-linked arrears from a former tenant or guarantor as a condition of consenting to a lease assignment.

Michael Metliss is a partner at SJ Berwin.