Pursuing arrears: watch out for the 6 month time limit!

The June quarter day is fast approaching and, with tenants struggling, protecting a rental income is becoming an increasingly challenging task for landlords.

It is therefore essential that landlords do not miss the opportunity to pursue a claim against former tenants or their guarantors.

But there are strict time limits that apply when making such claims.

If you have a tenant who is not an original tenant under a lease, you should be considering whether to make a claim now.

Not all tenants or their guarantors who have assigned a lease will still be liable for rent.

This liability will ultimately depend on whether the lease is an 'old lease' or a 'new lease'.

The lease is an 'old lease' if it was granted prior to 1 January 1996. Under an ‘old lease’ a landlord can recover rent from the original tenant or any former tenant or guarantor who has given a direct covenant to be liable for the remainder of the term.

A lease is a 'new lease' if it was granted on or after 1 January 1996. Under a ‘new lease’ a landlord can recover arrears from the former tenant only if that former tenant has given an Authorised Guarantee Agreement.

The first step is to investigate who, as well as your current tenant and their guarantor (if any), may still be liable. Are you able to pursue a former tenant or guarantor?

The six month time limit

Landlords must not delay taking action against former tenants to recover unpaid rent - there are strict deadlines.

A landlord must serve a notice, known as a Section 17 Notice, within 6 months of the debt falling due if they wish to recover the unpaid rent from a former tenant or guarantor.

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 is set out in that notice.

It is important for the landlord to be aware that if a Section 17 Notice is not served on the former tenant or guarantor within the 6 month deadline, the former tenant or guarantor will no longer be liable for the debt.

What are the consequences of serving a Section 17 Notice?

Serving a section 17 Notice does not mean the landlord is obliged to pursue the claim.

However, a landlord should be aware that if a former tenant or guarantor receives a Section 17 Notice and then makes payment in full, they have a right to call for an 'overriding lease' - in effect becoming the landlord's direct tenant.

The Coronavirus Act 2020 has imposed a suspension on forfeiture for non-payment of rent, which may be an issue for landlords wanting to remove a defaulting tenant.

The recent changes introduced in response to the coronavirus pandemic do not prevent the service of a Section 17 Notice. However, if a former tenant or guarantor fails to comply with those notices, a landlord’s ability to pursue other remedies will be limited due the coronavirus restrictions.

What should a landlord be doing now?

If it is the March quarter's rent that is outstanding, any Section 17 Notice will need to be served on the former tenant or guarantor by the middle of September.

Landlords do have the option of serving a Section 17 Notice before the June quarter day in order to put pressure on former tenants and their guarantors.

Alternatively, notice can be served after the June quarter day and include both quarters' rent in the same notice.

If you require any advice in relation to the enforcement of covenants, please contact the litigation department on 01242 586 841 or at aet@hughes-paddison.co.uk.