Where tenants are in arrears with rent, head landlords can divert rent payable by undertenants by serving a notice under section 6 of the Law of Distress Amendment Act 1908. As a result, the tenant’s right to receive and recover rent from the undertenant and to discharge the undertenant from its liability to pay such rent is transferred to the head landlord.
The remedy is popular with landlords, especially because some believe that it remains available to them even when a tenant has been placed into administration. However, it appears that, until BNY Trust & Depositary Co Ltd v Bourne End One Ltd [2009] PLSCS 309, the courts never had to decide whether a section 6 notice operates as a standing instruction to undertenants to pay rent to the head landlord until instructed otherwise or whether head landlords must serve further notices on undertenants in respect of each rental payment that falls into arrears.
A section 6 notice must specify the amount of the arrears. Consequently, the judge decided that undertenants are liable up to the limit of the sum specified in the notice, which therefore operates only until such sum is paid. This means that fresh notices must be served as arrears accrue.
The undertenant argued that the point was academic and that its liability to pay the rent reserved by the underlease had ended because the tenant’s liquidator had accepted a surrender of the underlease. The head landlord disagreed. It argued that the liquidator had not been in a position to accept a surrender because the transfer of the right to receive rent effected by section 6 operated as a statutory assignment of the reversion. The head landlord went further. The liquidator disclaimed the tenant’s lease after accepting the surrender. The head landlord argued that the disclaimer operated to terminate the tenant’s liabilities under the lease but not the lease: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 EGLR 94; [1996] 15 EG 103. Consequently, the disclaimer did not affect the undertenant, whose lease would continue (because the head landlord was unwilling to accept a surrender) until it expired.
The judge ruled that this would be remarkable. It was fanciful to suppose that legislation that dealt with distraint was intended to give landlords the right to interfere with the freedom of contract of undertenants and to prevent them from dealing with their underleases as they chose. The right transferred to head landlords is the right to recover rent due under an undertenant’s lease, but such rent ceases to be payable if the underlease ends.
None the less, section 6 notices remain extremely useful, although they will not always result in the complete payment of all arrears. An undertenant is liable under its underlease; it is not liable for rent due under the headlease. Consequently, premises must be sublet at a rent that makes service of a notice worthwhile. In addition, if an undertenant is up to date with its rent, the head landlord will have to wait until the next rent payment date for payment by the undertenant.
Allyson Colby is a property law consultant
