Chapter 9: Covenants in leases Flashcards
- Lease anatomy
Assuming the essential requirements of a lease are present, we will now consider the traditional basic ‘anatomy’ of a lease. No two leases are the same, but as a rough guide the traditional basic ‘anatomy’ of a lease is as
follows.
1.1 Parties, date, definitions, interpretation provisions
Most leases usually start with the date of the lease and the names of the landlord and tenant and their addresses. As with any well drafted legal agreement, there will be a section giving guidelines on interpretation and definitions such as ‘premises’, ‘insured risks’ or ‘common parts’ of a building.
1.2 Demise and rents
These are the operative provisions of the lease where the landlord demises or grants the lease of
the premises to the tenant for a specified term in consideration of the rent paid and the covenants
entered into.
1.3 Tenant covenants
The basic rule is that a tenant may do all things that an owner of an estate can do unless the lease prohibits such actions. Leases are therefore drafted in a prohibitory or negative manner setting out what the tenant cannot do by way of a number of tenant covenants.
This section may either be in the main part of the lease or in a schedule to the lease, but will cover
issues such as the obligation to pay the rent, what the tenant can use the premises for, whether the tenant can make any alterations to the premises and whether the tenant will be permitted to assign or underlet the premises. If there is no mention of an action in a lease, the tenant is free to do it.
1.4 Landlord covenants
Again this section can often be in a schedule to the lease, though there tends to be far fewer covenants given than those by the tenant. If the lease is a lease of part of a building (eg a floor in an office block or unit on an estate) the
landlord may covenant to provide services, maintain common areas and to insure the building.
The most common is the covenant for quiet enjoyment. Quiet enjoyment is a landlord’s covenant
not to interfere with the tenant’s possession or enjoyment of the property during the term of the
lease. It covers the acts of the landlord and the lawful acts of anyone claiming under them.
Example: Breaches of the covenant for quiet enjoyment
These include:
* The erection of scaffolding hindering access to the property (Owen v Gadd [1956] 2 QB 99)
* Persistent intimidation of the tenant to induce him to leave (Kenny v Preen [1963] 1 QB 499)
1.5 Guarantor’s covenants
An individual or company guarantor may also be a party to the lease and will covenant to
guarantee payments that must be made under the lease and the performance of any other
obligations so that if the tenant defaults in payment, the landlord is able to call upon the guarantor.
1.6 Provisos, agreements and declarations
This section of the lease is a kind of miscellaneous section dealing with a number of matters. For example:
* Forfeiture
* What happens in the event of damage and destruction by insured risks
* Clauses dealing with the exclusion of security of tenure provisions in the Landlord and Tenant
Act 1954
Forfeiture
Forfeiture is the right of the landlord to bring the lease to an early end in the event of tenant breach.
Security of tenure
Security of tenure is a right for the tenant to remain in premises at the end of the lease term and to request the grant of a new lease.
1.7 Rights granted
The tenant may need a right of way to access the premises or a right to park cars in a nearby car park. These easements will need to be set out clearly in the lease.
Examples may include rights over other parts of the building (eg to use common parts and conducting media for utilities).
1.8 Rights excepted and reserved
The landlord may need to reserve rights for itself to access the tenant’s premises, perhaps to run
cables through it or to carry out repairs to the rest of the building
1.9 Other provisions
- Rent review (a mechanism to review the rent at regular intervals)
- Service charge (where the lease is of part of a property or an estate)
Service charge
Service charge is a sum of money charged by the landlord to tenants to cover costs of services to tenants within a property (such as an industrial estate, block of flats,
shopping centre). The charges cover costs to do with maintenance and repairs of exteriors (roofs etc) and common parts but exclude the tenant’s demised areas because the tenants will usually have agreed to repair those areas themselves in the lease.
1.10 Execution
The landlord and the tenant and any guarantor will need to execute the document in accordance with normal attestation rules. To be legal, a lease must be granted by deed (LPA 1925, s 52) unless it falls within the exception for short leases of three years or less under LPA 1925, s 54(2).
Prescribed lease clauses
When the Land Registration Act 2002 came into force more leases became registrable. The Land
Registry devised a method to speed up lease registration. Where you are granting a registrable lease, your lease must include a list of prescribed lease clauses at the front.
You will see that, in the majority of cases, the main areas to focus on will be:
Date of lease
* Landlord’s title number
* Parties
* Term
* Easements granted and reserved
1.11 Summary
- Most residential and commercial leases follow a basic structure which includes the following
provisions: - Parties, date, definitions, interpretation provisions
- Demise and rents
- Tenant covenants
- Landlord covenants
- Rights granted/excepted and reserved
- Execution
Summary
- A lease may also contain a forfeiture provision, a clause dealing with insured risks, and
provisions relating to security of tenure, rent review and service charge. - A tenant may do anything not expressly prohibited by the lease.
- A covenant for quiet enjoyment means a landlord must not interfere with a tenant’s possession.
- Covenants in leases
Leasehold covenant
A leasehold covenant is a promise contained in a lease given by a
landlord or a tenant.
Leasehold covenant
We will now explore four of the usual covenants found in most residential and commercial leases
(repair, alterations, user and alienation) and the different types of covenant you may encounter.
2.1 Repair
A lease will generally include a covenant by the tenant relating to repair. Under a general
repairing covenant, the tenant must, according to the Court of Appeal in Proudfoot v Hart (1890)
LR 25 QBD 42, keep the premises in the condition in which they would be kept by a reasonably
minded owner, having regard to
2.1 Repair
- The character and type of premises at the beginning of the lease - the obligation is neither
diminished nor increased by a change in the character of the neighbourhood; - The age of the premises; and
- The express words of the covenant.
2.1 Repair
Note. A covenant to keep the premises in repair also entails an obligation to put them in repair
first, if at the time of the letting they were out of repair. This can be a very onerous obligation if the premises are in a state of disrepair at the beginning of the term. A repair obligation can be limited by a schedule of condition (photographs and verbal description of the premises prepared by a surveyor annexed to the lease). The repair obligation would then state the tenant ‘is under no obligation to put the premises in any better state of repair than as evidenced by the schedule of condition annexed to the lease’.
2.1 Repair
A covenant to repair does not require renewal of the whole or substantially the whole of the
property. It is a question of degree whether the work involves repair or renewal, but if the works constitute ‘renewal’ rather than ‘repair’, they will not fall within the tenant’s repair obligation. Whether works are classed as ‘repair’ or ‘renewal’ depends upon whether the whole or substantially the whole needs to be replaced.
In Lurcott v Wakely [1911] 1 K.B. 905
The front external wall of a 200-year-old house had to be taken down to ground floor level and rebuilt. The defects were attributable to old age. The tenant
was held liable under his repairing covenant. The courts said ‘repair is restoration by renewal or
replacement of subsidiary parts. Renewal, as distinguished from repair, is reconstruction of the
entirety’.
Brew Brothers Ltd v Snax (Ross) Ltd [1970] 1 All ER 587
It was held that works required to the property did not fall within the scope of the repairing covenant because the cost to undertake the
works was only slightly less than the value of the premises.
2.2 Types of covenant
- Absolute covenant
If there is an absolute covenant the tenant is completely prohibited from doing something (eg ‘the Tenant shall not underlet part of the Premises’) and will be at the mercy of the landlord, who will be able to consider or ignore any request
- Qualified covenant
If there is a qualified covenant (eg ‘the Tenant shall not make any non-structural alterations to the Premises without the consent of the Landlord’) then the tenant can go and ask the landlord for its consent although the landlord does not have to give it!
- Fully qualified covenant
If there is a fully qualified covenant (eg ‘the Tenant shall not make any internal, non-structural alterations to the Premises without the consent of the Landlord, such consent not to be unreasonably withheld’) the landlord has to be reasonable if it is going to withhold its consent.
2.3 Fully qualified covenants – ‘reasonableness’
The courts have considered the test of ‘reasonableness’, especially in respect of cases on assignment, underletting and carrying out alterations. International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] stated the basic principles to be applied in determining the reasonableness of a landlord’s decision and made it
clear that a landlord is not entitled to refuse its consent on grounds which have nothing to do with
the landlord and tenant relationship.
Example: Reasonableness of a landlord’s refusal
It would not be reasonable for a landlord to refuse consent on the basis that it did not like the
proposed assignee or it supported a different football team. It must be something to do with, for example, the proposed assignee’s ability to pay the rent or bad references.
2.4 Statutory intervention with certain covenants
The statutes relating to user, alterations and alienation intervene with regards to such qualified
covenants and it is for you to work out what effect the statute has on the clause to understand what the landlord and the tenant can and cannot do.
2.5 Alteration covenants
Leases will normally allow the tenant to make some alterations to the premises. Unless the lease stipulates otherwise, the tenant is free to carry out any alterations to the premises, subject to the legal doctrine of ‘waste’ which prevents alterations which would devalue
the premises.
Landlord and Tenant Act (LTA) 1927, s 19(2)
The Landlord and Tenant Act (LTA) 1927, s 19(2) applies to ‘qualified’ alterations covenants. Where there is a qualified covenant against alteration then LTA 1927, s 19(2) implies into a qualified covenant against improvements a proviso that the landlord’s consent is not to be unreasonably withheld. It therefore converts a qualified covenant against alterations that amount to improvements into a
fully qualified one.
LTA 1927, s 19(2) only applies to alterations that amount to an improvement. What then constitutes an ‘improvement’?
The leading case is Lambert v FW Woolworth & Co Limited [1938] Ch 833 which held that ‘improvements’ are to be construed widely as works which improve the premises from the tenant’s perspective.
LTA 1927, s 19(2) allows the landlord to require as a condition of giving consent:
* Payment of compensation for loss in value to the reversion caused by the alterations;
* Reinstatement of the premises if reasonable (at the end of the lease term); and
* Payment of the landlord’s expenses in giving consent.
The above conditions would usually be set out in the Licence for Alterations (a deed documenting
the landlord’s consent) but, even if they are not, the landlord is still permitted to ask for them.
2.6 User covenants
A lease will often contain a tenant covenant relating to the use of the premises. A landlord will want control over what the tenant is to use the premises for eg for residential use or a specific
business purpose. A tenant may be able to change the use of the premises depending upon the type of covenant. LTA 1927, s 19(3) applies to ‘qualified’ user covenants.
2.6 User covenants
It does not imply a reasonableness proviso into qualified user covenants, but does prevent a
landlord demanding payment for granting its consent, unless the change of use also involves a
change to the structure of the property. If the change of use does involve a change to the structure, the landlord can increase the rent or charge the tenant a lump sum (in the statute referred to as a ‘fine’ or ‘premium’) in return for the
consent. The landlord will be entitled to recover its costs and expenses involved in the application for consent eg surveyor’s fees and legal fees.
2.7 Alienation covenants
Alienation: Is the term used to describe a method for the tenant disposing of the whole, or
part, of their interest in a leasehold property. In practice, this term is usually used to describe assignment, underletting and parting with possession although it does encompass charging/mortgaging the lease or surrendering it. Restrictions on alienation are very common in shorter leases.
2.7.1 Assignment of a lease
Assignment: An assignment is the transfer by the tenant of the remainder of their lease to
another party (the ‘assignee’).
2.7.1 Assignment of a lease
It is very common for a tenant to want to dispose of/sell the lease. It is a way of handing the lease
over to someone else. Perhaps a tenant has outgrown the leased property and needs to move to
bigger premises, or perhaps the tenant has no need for the property because it is too large.
The party to whom the lease is sold (called the ‘assignee’) then becomes the immediate tenant of the landlord but it is not necessary to amend the lease to show this.
In the case of a registered lease, the change of proprietor (ie the tenant) is shown in the proprietorship register of the leasehold title.
If the lease is silent as to assignment, then the benefit of a lease is freely assignable.
Most leases contain restrictions on assignment so that the landlord has to consent to the assignment and therefore has control over who ends up being the tenant.
The covenant is construed in the tenant’s favour so that:
* A covenant against assignment does not prohibit subletting of the whole or part (Church v
Brown (1808) 15 Ves Jr 258, 33 ER 752).
* A covenant against sub-letting the whole does not prohibit a subletting of part (Wilson v
Rosenthal (1906) 22 TLR 233).
A landlord’s consent is formally recorded in a deed called a licence to assign to which the landlord, tenant and assignee will all be parties.
2.7.2 Subletting of a lease
Subletting: This involves a tenant granting a lease out of its own lease. This lease is called an
underlease (or sublease). The lease out of which it was granted is now called the headlease (or superior lease).
Note. The terms in bold are used interchangeably in practice.
2.7.3 Why would a tenant sublet rather than assign?
Subletting would mean that the tenant would remain responsible for performing the covenants in
the lease and still be in the picture until the end of the lease term. Reasons could be that the tenant does not need the property for a temporary period so can earn an income from the undertenant for this period. Alternatively, the tenant may have tried to market the property for an assignment but found that no one came forward because the rent payable under the lease was too high against the backdrop of the current market rents. Perhaps underletting at a lower rent means the tenant at least goes some way to minimising its outgoings.
2.7.4 Formalities
The procedure to grant an underlease is largely the same as for the grant of a new lease out of a
freehold, as it simply involves a new underlease document being drafted and entered into.
General Rule
The lease must be granted by deed (LPA 1925, s 52) which must be
registered if the term is for over 7 years (LRA 2002, s 27(2)(b))
Licence to Underlet
The headlease will generally require the tenant to obtain landlord’s consent to an underletting of
the premises. As with an assignment, this is formally recorded in a deed called a licence to underlet to which the landlord, tenant and undertenant will all be party.
2.8 Statutory intervention with alienation covenants
2.8.1 Absolute covenants
No statutory provisions apply to an absolute prohibition against any particular dealing so there is
nothing that can aid a tenant here if it wanted to ask for landlord’s consent to deal. However, just because there is an absolute covenant against something, it does not stop the landlord wavering the prohibition as a ‘one-off’, but it is under no obligation to do so.
Leases nowadays generally contain an absolute prohibition against assignment of part of the property. Where a property is not capable of being sub-divided, leases will also contain an absolute prohibition of underletting of part of the property.
2.8.2 Qualified covenants
LTA 1927, s 19(1)(a) applies to all forms of alienation (so including assignment and underletting).
It assists tenants by converting a qualified covenant against alienation into a fully qualified
covenant (ie where landlord’s consent is required, it is not to be unreasonably withheld).
2.8.3 Fully qualified covenants
These types of covenants contain a proviso, be it expressly set out in the lease, or implied by LTA
1927 s 19(1)(a), to the effect that consent to an assignment or an underletting shall not be
unreasonably withheld. Today leases generally contain a fully qualified prohibition against the assignment or underletting
of the whole of the property.
Key case: International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513
This case laid down guidelines as to when a court would consider a landlord to be acting reasonably or unreasonably in withholding consent.
Facts: A 30-year lease was granted containing a covenant by the tenant not to assign the lease without the landlord’s consent. After 13 years, the current tenant sought to assign the lease, but the landlord refused consent on the grounds that the proposed use of the property (as serviced offices) would have a negative effect on the value of the freehold reversion. At first instance, the landlord was held to have unreasonably refused consent to the assignment; the landlord appealed.
Lord Justice Balcombe
[…] The purpose of a covenant against assignment without the consent of the landlord, such
consent not to be unreasonably withheld, is to protect the lessor from having its premises used
or occupied in an undesirable way, or by an undesirable tenant or assignee […]
Lord Justice Balcombe
[…] A landlord is not entitled to refuse its consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease. An example of a case where the landlord’s consent was unreasonably withheld because the refusal was designed to achieve a collateral purpose unconnected with the terms of the lease is Bromley Park Garden Estates Ltd. v. Moss [1982] 1 W.L.R. 1019.
Lord Justice Balcombe
[…] It is not necessary for the landlord to prove that the conclusions which led it to refuse
consent were justified, if they were conclusions which might be reached by a reasonable
person in the circumstances […]
Lord Justice Balcombe
[…] It may be reasonable for the landlord to refuse its consent to an assignment on the ground of the purpose for which the proposed assignee intends to use the premises, even though that
purpose is not forbidden by the lease.
Judgement
Held: The landlord’s refusal was deemed unreasonable as the detriment to the tenant was
disproportionate to the benefit to the landlord. In addition, the reason for refusal affected neither
the landlord in its capacity as landlord, nor the tenant in its capacity as tenant.
2.8.4 Fully qualified covenants: landlord’s statutory duty
The Landlord and Tenant Act 1988 (LTA 1988), s 1 applies to fully qualified covenants and to all
forms of alienation. Where a tenant applies to the landlord in writing for consent, LTA 1988, s 1 provides that:
* The landlord must give written consent within a reasonable time (unless it is reasonable to refuse).
* The burden is on the landlord to prove reasonable refusal – s 1(6), and written reasons must be provided.
2.8.4 Fully qualified covenants: landlord’s statutory duty
The landlord is entitled to be given sufficient information to enable it to reach a decision. A ‘reasonable time’ will not generally expire before this has been done but the landlord must ask for further information if it requires it.
28 days from receipt of the application and references by the landlord was deemed to be a
reasonable period in Dong Bang Minerva (UK) v Davina [1996] 3 WLUK 117. If a landlord does not comply with the LTA 1988, it may be liable for tortious damages for breach of statutory duty.
Example: Reasonableness of refusal of consent
Reasonable refusal examples:
- Unsatisfactory tenant’s reference.
- The proposed assignee’s use of the property would damage the landlord’s own commercial interests as the assignee proposed to run a rival business next door.
- The proposed subletting was at a substantial premium and at a rent well below the open market value.
- Where the existing tenant is already in breach of covenant – the landlord can insist upon the
breach being remedied before giving consent unless it is clear that the assignee can remedy
the breach.
Unreasonable refusal examples:
- Where the landlord’s intention was to bring the tenancy to an end and the landlord did not
therefore propose to give consent to any assignee, not just to the particular assignee in question. - Where the proposed assignee was already a tenant of the landlord in another property which would have been difficult to re-let.
2.8.5 New leases: pre-conditions for assignment
LTA 1927, s 19(1A) applies to any lease that has been granted on or after 1 January 1996.
In new leases, LTA 1927, s 19(1A) (inserted by s 22 Landlord and Tenant (Covenants) Act 1995)
states that:
* The landlord and tenant can agree the circumstances in which the landlord may withhold consent to an assignment.
* The landlord and tenant can agree the conditions subject to which consent may be granted.
* Such circumstances or conditions will be automatically reasonable if imposed by the landlord when giving consent to assign.
2.8.5 New leases: pre-conditions for assignment
One of the common conditions attached to the landlord’s consent for an assignment under LTA
1927, s 19(1A) and one seen in most commercial leases, is that the outgoing tenant enters into an
authorised guarantee agreement (AGA) promising to perform the incoming assignee’s obligations
under the lease, if it defaults.
AGAs are a creation of Landlord and Tenant (Covenants) Act 1995 (LTCA 1995), s 16.
New leases
A lease granted on or after 1 January 1996 is known as a ‘new lease’.
A lease granted on or after 1 January 1996 is known as a ‘new lease’.
An AGA is a guarantee by an outgoing tenant of the
immediate assignee’s obligations only, so that in the event of any future assignment by the
assignee, a further AGA will be required from the assignee (in its capacity as the outgoing
tenant). The landlord will only ever have the current tenant and the tenant immediately prior to the
current tenant ‘on the hook’ under an AGA.
2.9 Summary
Unless expressly prohibited in the lease, a tenant is free to do anything.
* A leasehold covenant is a promise by either the landlord or tenant. Usual tenant covenants
found in most leases relate to repair, user, alterations and alienation.
* A covenant to repair includes an obligation to put premises into repair. It does not include
renewal of the whole or substantially the whole of the premises. A covenant to repair can be limited by a schedule of condition.
* A covenant can be absolute, qualified or fully qualified.
* Statute intervenes in respect of certain qualified covenants.
2.9 Summary
- LTA 1927, s 19(2) upgrades a qualified covenant to a fully qualified covenant in respect of works that constitute, in the eyes of the tenant, an improvement to the premises.
- LTA 1927, s 19(3) applies to qualified user covenants. It does not impose a reasonableness
requirement but does prevent a landlord from demanding payment for its consent. - If a tenant assigns their lease, they are transferring their leasehold estate to a new party who
‘steps into the shoes’ of the tenant. - If a tenant underlets their premises, they grant a new lease to a third party out of their own
lease.
Summary
- To assign a lease, a deed must be used. If the lease is registered, the assignment must be registered at the Land Registry.
- A qualified covenant against alienation will be ‘upgraded’ to a fully qualified covenant so that
the landlord cannot unreasonably withhold its consent (LTA 1927, s 19(1)(a). In acting reasonably, the landlord cannot refuse consent on grounds that have nothing to do with the landlord and tenant relationship. - LTA 1988, s 1 applies to fully qualified alienation covenants and requires a landlord to respond
to a tenant’s request in writing within a ‘reasonable period’ (deemed to be 28 days). - LTA 1927, s 19(1A) applies to new leases and assignment covenants. It allows a landlord and tenant to agree in advance the circumstances the landlord can refuse consent and conditions it can require which will be automatically reasonable. This may include a requirement upon assignment that the outgoing tenant enters into an AGA.
3 Enforceability of leasehold covenants
When leases are granted, both the landlord and the tenant enter into covenants agreeing to do, or not to do, certain things. After a period of time, either the landlord or tenant, or both, will leave the land and sell their interests in the land to new parties. The question is then whether the covenants, made by the original parties, can be enforced by or against the new parties (the new owner of the freehold reversion, the ‘reversioner,’ and the new tenant, the ‘assignee’).
Note. The issues raised are similar to those which arise in the running of freehold covenants, but
the law is different
3.1 The original parties – privity of contract
Privity denotes the legal relationship between two or more parties to a contract. When a landlord grants a lease to a tenant, the arrangement is a contract, and privity of contract exists between
them. The terms of the lease are enforceable under the rules of contract law.
3.2 The current landlord and tenant– privity of estate
A lease is not only a contract. Provided the formalities are complied with, a lease gives the tenant a legal estate in the land.
Where the landlord and the tenant are each owners of a legal estate in the same property, there is said to be privity of estate between them.
3.2 The current landlord and tenant– privity of estate
Privity of estate exists between any current landlord and current tenant of the property and lasts only for the period while the lease is vested in the tenant. Upon assignment of either the lease or the reversionary interest, privity of contract will remain between the original landlord and the tenant, but there will no longer exist privity of estate
between them. This is because the leasehold or freehold estate has passed upon assignment from
the original contracting party to their successor in title. Consequently, privity of estate will now exist between whomever is the current landlord and tenant.
3.2.1 The legal issue
When the tenant assigns its interest to a successor in title, there is no contractual relationship between the landlord and the new tenant (the assignee). Likewise, where the landlord sells its reversionary interest, there is no contractual relationship between its successor in title (the reversioner) and the tenant.
3.3 Enforceability of leasehold covenants
Were covenants to be unenforceable for lack of a contractual relationship between the parties currently in the position of landlord and tenant, then all covenants, when made, would have a very limited lifespan. They would only remain enforceable while the original covenanting parties
remained landlord and tenant. They would come to an end as soon as these parties sold their interests in the land. Such a short lifespan of a covenant would not always be convenient.
3.3 Enforceability of leasehold covenants
On the other hand, if every covenant entered into by the original parties were to bind successors in title to these parties, irrespective of the absence of a contractual relationship, successors could find themselves bound to perform all kinds of strange promises. This could potentially make the land less attractive to buyers; an eventuality that courts strive to avoid.
3.3 Enforceability of leasehold covenants
The rules and principles are an attempt to strike a fair balance between the covenants potentially
having a short lifespan and the covenants binding all successors in title and potentially making
land less attractive to purchase.
There are two sets of rules which determine the enforceability of leasehold covenants. The old
system which relate to ‘old leases’ (granted before 1 January 1996) and the new system, which
relate to ‘new leases’ (granted on or after 1 January 1996).
3.4 Old leases
All leases created before 1 January 1996 (‘old leases’) (the date when the Landlord and Tenant (Covenants) Act 1995 (‘LTCA 1995’) came into force) are governed by the old system of rules. Privity of contract and privity of estate are very important in old leases.
3.4 Old leases
In old leases, the liability of the original landlord and the original tenant continues for the full
duration of the lease term. This is the case even after an assignment of either the reversion (landlord’s interest) or the lease (tenant’s interest). This means that the original tenant and the original landlord of an old lease remain liable for the covenants they entered under the lease long
after the leasehold/reversionary interests have been sold or given away to others.
3.4 Old leases
This continuing liability of the original contracting parties led to both absurdities and hardshipsfor the original parties. For example, many original tenants were held liable for rent payments or for the costs of repairs years after they had assigned their leases.
3.4.1 Old leases: privity of contract and estate
Privity of contract means the original landlord and tenant are liable for breaches of covenant by their successors for the entire lease duration. The impact of this is greatest for tenants. Privity of estate allows the tenant covenants that ‘touch and concern’ the land in an old lease to be enforceable by and against successor landlord and tenants
3.5 LTCA 1995
The law on the running of covenants in leases was reformed by the implementation of the LTCA
1995, which came into force on 1 January 1996. The LTCA 1995 makes some fundamental changes to the running of covenants on assignment of a lease/the reversion for new leases. This was in part to avoid some of the absurdities and hardships for the original parties as a result of their continuing liability, and to endeavour to make the law
fairer.
Assessment focus point
It is the date of creation of the lease which is critical, not the date of any subsequent assignment. If the lease is granted on or after 1 January 1996, it is a new lease. Note. The LTCA 1995 also introduced some provisions which are retrospective and apply to all leases, both old and new. These retrospective provisions are explored in the final part of this
chapter.
3.6 LTCA 1995 - abolishing original party liability
The LTCA 1995 effectively abolishes privity of contract for all new leases. The effect of this is that the original landlord and the original tenant are no longer liable for the covenants for the full duration of the lease term.
Note. A party remains liable for breaches of covenant which occur during their period of occupation (s 23(1))
3.6.1 Tenants of new leases
A tenant with a new lease will (generally) obtain an automatic release (s 5) from the tenant’s
covenants upon assignment. Its liability for a breach of covenant caused by any subsequent assignee ceases when it assigns the lease. The effect of this is that a tenant under a new lease will only be liable for breaches of the covenants contained within the lease while it remains a tenant of the property. There is no automatic if the assignment is ‘an excluded assignment’ (s 11) ie in breach of the alienation covenant. For example, if the tenant has assigned the lease without the permission of the landlord in breach of the terms of the lease.
3.6.2 Landlords of new leases
There is no automatic release of the landlord upon assignment of the reversion of a new lease. The
landlord must apply for such a release from the tenant (s 6). A release is generally granted by the
tenant, but if the tenant refuses to release the outgoing landlord from their obligations, the landlord can apply to the court (s 8).
3.7 New leases
The LTCA 1995 made some fundamental changes to the running of leasehold covenants on
assignment of a lease/the reversion. In relation to a lease granted on or after 1 January 1996,
these new rules govern whether an assignee of the reversion or the lease can sue or be sued for a
breach of covenant.
LTCA 1995, s 3 provides for the automatic transmission of the benefit and burden of all landlord
covenants to the new owner of the reversion, and of the benefit and burden of all tenant
covenants to the assignee.
3.7 New leases
This means:
* When a tenant assigns a lease, the assignee acquires the benefit and burden of all the covenants in the lease.
* When a landlord assigns the reversionary interest, the incoming landlord acquires the benefit
and burden of the covenants.
Only exception
The only exception to this rule in LTCA 1995, s 3(6) is for those covenants which are ‘expressed to
be personal to any person’. The benefit and burden of covenants which are expressed to be
personal will not pass to a third party. ‘Expressed to be personal’ is not defined in the LTCA 1995, but it appears to mean that the
covenant is expressly stated to be between two named parties to the lease.
3.8 New leases - suing a former tenant
An assignee of the lease becomes liable from the date of assignment for all covenants in the lease
under LTCA 1995, s 3 (other than those expressed to be personal).
It makes sense that a landlord will seek to enforce any breach of covenant against the current
tenant; the current tenant should be easy to locate and the landlord may be able to obtain an equitable remedy, such as specific performance. However, should the assignee be unwilling or unable to comply, the landlord may look to other parties for compensation in respect of breaches of covenant committed by a subsequent
assignee
3.8 New leases - suing a former tenant
If the outgoing tenant has been automatically released from its obligations under the lease on
assignment under LTCA 1995, s 5, it will not be liable. However, if the outgoing tenant has provided an authorised guarantee agreement (AGA) under LTCA 1995, s 16 on assignment, the landlord could sue the former tenant who is guaranteeing the obligations of their immediate successor. Remember, an AGA is a guarantee by an outgoing tenant of the obligations of the incoming assignee. It can be required by the landlord as a condition of giving its consent to an assignment of a new lease.
3.8.1 Landlord’s choice
The presence of an AGA provides the landlord with a choice. It could sue the current tenant and may be able to obtain an equitable remedy, such as specific performance. If the current tenant is not worth suing, the landlord could sue the outgoing tenant who is acting as guarantor for the assignee. If the landlord sues the former tenant under the AGA, its remedy is limited to damages because the former tenant is not in control of the premises anymore. Such damages may be extensive.
3.8.2 Options for a former tenant who is sued
The former tenant may be able to recoup damages paid out on behalf of a defaulting assignee
using an indemnity. Under a new lease, an outgoing tenant should ensure that their assignee enters into an express indemnity covenant on assignment whereby the assignee agrees with the assignor to pay the
rent and to perform all the covenants for the remainder of the lease. The former tenant may then
sue the assignee for breach of the indemnity covenant and recoup the damages paid to the
landlord
3.8.2 Options for a former tenant who is sued
Alternatively, in the absence of an express indemnity covenant, the assignor could claim an
indemnity at common law under the rule in Moule v Garrett (1872) LR 7 Exch 101. The former tenant has the benefit of a quasi-contractual course of action under the rule where if
one person is compelled to pay damages because of the legal default of another, the former is entitled to recover those damages from the defaulting party. This means that a former tenant can theoretically sue directly a subsequent assignee in respect of breaches committed by that assignee. (This rule can only be used to take action against assignees, and not sub-tenants.)
3.8.2 Options for a former tenant who is sued
These methods of indemnity are of limited practical value. If the assignee in possession were worth
suing, the landlord would have sued it in the first place! The outgoing tenant ought to make sure
that it assigns to a financially sound and trustworthy assignee.
Indemnity
An indemnity is a contractual obligation given by one party (the indemnifier - in this case the assignee) to compensate for loss which is incurred by another party (in this case the former tenant) which is caused by the indemnifier’s (the assignee’s) action(s).
3.9 LTCA 1995 - retrospective provisions
There are some sections of the LTCA 1995 which apply to all leases (both ‘old’ and ‘new’ leases),
regardless of when they were created. These are:
* Section 17, Tenant default notice
* Section 18, Liability for variations
* Section 19, Overriding leases
These provisions apply to former tenants who remain liable either under an old lease (original
tenant liability) or because of their liability under a new lease under an authorised guarantee
agreement (AGA).
3.9.1 Tenant default notice
The LTCA 1995, s 17 states that where a landlord wishes to pursue a former tenant who remains
liable under the terms of the lease for a fixed charge, the landlord must serve notice of the potential claim on such tenants within six months of the charge becoming due. If the landlord has not notified the former tenant of this claim and the amount due within this period, the landlord will be precluded from making a claim against it.
Fixed charge
A fixed charge is defined in s 17 as including arrears of rent, service charge or insurance premiums but not unascertained liabilities or damages which become ascertained
only after a court order has been obtained.
3.9.2 Liability for variations
The LTCA 1995, s 18 states that former tenants and guarantors are not liable to pay any additional amounts owing in respect of variations which have been made to the lease subsequent to assignment which they could not have anticipated at the time when the lease was entered into.
Example: Liability for anticipated variations
The former tenant who is still liable for the rent under an old lease or under an AGA (in respect of a new lease) will still be liable for rent which is reviewed after assignment pursuant to the rent review clause in the original lease. Such a variation was anticipated at the time when the lease was entered into.
3.9.3 Overriding leases
The LTCA 1995, s 19 provides for the creation of an overriding lease in certain circumstances. If a former tenant is called upon by the landlord to pay rent or other fixed charges due from an assignee under, s 17, that former tenant is entitled to request from the landlord an overriding lease, becoming the immediate landlord of the defaulting party
Assessment focus point
Do not confuse an ‘overriding lease’ under the LTCA 1995 with an ‘overriding interest’ under the
LRA 2002, they are completely different.
Overriding lease
The overriding lease is granted for a term equal to the remaining term of the lease in question plus three days. It contains the same covenants as the lease in question (other than those covenants which are expressed to be personal).
If the former tenant requests an overriding lease, the landlord is obliged to grant it within a
reasonable time.
Overriding lease
The former tenant is then better able to ensure the assignee’s compliance under the terms of the lease, or terminate the assignee’s lease and re-let the property, or assign the overriding lease to a more reliable tenant.
3.10 Subleases
When there is a sublease in place, there is no direct relationship between the (head) landlord and
the subtenant. The landlord is not the direct landlord of the subtenant. This means that the landlord, who is usually the owner of the land, might not be able to enforce the covenants in the head lease directly against the subtenant, the occupier of the land.
3.10 Subleases
Despite the lack of direct relationship, LTCA, s 3(5) allows restrictive covenants in new leases to
be enforced against any owner or occupier of the premises. However, landlords will not be able to enforce directly against a subtenant any positive covenants.
Effect of subleases
- Any tenant (whether the original tenant or an assignee) knowing they are responsible for breaches of the subtenant is likely to include a provision in the sublease in which the subtenant covenants to observe and perform the covenants contained in the head lease. This makes it easier for the tenant to control the actions of the subtenant and it indirectly protects the
landlord. - If the landlord forfeits the head lease, the sublease is also automatically terminated, subject to
a claim for relief. The threat of this should be a strong incentive to a subtenant to observe the
covenants in the head lease. - In addition, a prudent landlord will, as a condition of consent to the subletting, insist on any subtenant of the property entering into direct covenants with it to observe and perform the covenants in the lease. This will create a contractual relationship between the landlord and the subtenant, enabling enforcement of the covenants based upon the law of contract.
3.11 Summary
- The original landlord and original tenant have a contractual relationship. Enforcement of the
leasehold covenants will be governed by normal contractual principles. - When the tenant assigns its interest and/or the landlord sells its interest, there is no contractual
relationship between the new landlord/tenant. - In old leases, the liability of the original landlord and the original tenant continues for the full
duration of the lease term, even after an assignment of the lease or the reversion because of privity of contract.
3.11 Summary
- Privity of estate exists between any current landlord and current tenant of the property and lasts only for the period while the lease is vested in the tenant.
- The LTCA 1995 changed the principle of original tenant and original landlord liability for new
leases. The original landlord and the original tenant are no longer liable for the leasehold covenants for the full duration of the lease term. - Upon assignment of a new lease, the LTCA 1995 provides for the automatic transmission of the
benefit and burden of the covenants to the new owner of the reversion/the lease.
3.11 Summary
- The only exception is that the benefit and burden of covenants which are expressed to be
personal will not pass to a third party. - The outgoing landlord/tenant remain liable for breaches of covenant before the assignment/sale.
- If a lease is assigned in breach of an alienation covenant, this is an excluded assignment and
the defaulting tenant will not be released from its obligations under the terms of the lease.
3.11 Summary
- If a landlord chooses to sue a former tenant who remains liable for the covenants under an authorised guarantee agreement, the former tenant may rely on an express or common law indemnity to recoup its losses from the defaulting tenant.
- The LTCA 1995, ss 17 to 19 apply to all leases regardless of when they were created.
- Under the LTCA 1995, s 17, if a landlord wishes to pursue a former tenant for a fixed charge, the
landlord must serve notice of the potential claim on such a tenant within six months of the
charge becoming due.
- Under the LTCA 1995, s 18, former tenants are not liable in respect of variations which have
been made to the lease which they could not have anticipated at the time when the lease was
entered into. - Under the LTCA 1995, s 19, if a former tenant pays rent or other fixed charges pursuant to s 17,
that former tenant may request from the landlord an overriding lease. - When it is granted an overriding lease, the former tenant is better able to ensure the assignee’s
compliance under the terms of the lease or terminate the assignee’s lease. - A landlord may sue a subtenant for breach of a restrictive covenant in the headlease.
