Leasehold Covenants

Question 1

What is a leasehold covenant?

Answer 1

A promise between a landlord and a tenant to perform certain obligations under the lease.

Covenants are either:

Express: agreed between the parties and documented in the lease

Implied: by statute or the courts - covenants are implied if the parties leave out certain express covenants in their lease or express covenants need supplementing.
Note: some implied covenants can override express covenants.

Question 2

What are some common landlord and tenant express covenants?

Answer 2

Landlord:
- Quiet enjoyment: not to interfere with the tenant’s enjoyment of the lease
- To insure: L will get insurance for damage by fire etc.
- To repair (for which T will pay a service charge)
- To enforce the covenants of other leases in the same building (when the tenancy is the lease of a flat in a block of flats).

Tenant:
- To pay rent (including any service charge and insurance premium)
- To repair: T usually not liable for fair wear and tear
- Alterations: restrictions on what internal and external alterations the tenant can make to the property
- Alienation: how the tenant can assign or sublet the property

Question 3

When must a landlord not withhold consent unreasonably?

Answer 3

If there is a qualified clause in the lease, meaning the lease permits the tenant to assign or sublet subject to the landlord’s consent, under law this is upgraded to a fully qualified clause. Meaning the landlord cannot withhold that consent unreasonably and must respond to any request to assign/sublet within a reasonable time.

Must also state in writing to the tenant why consent is refused or what conditions will be imposed. Unreasonable would be e.g. personal reasons.

The landlord is not allowed to charge the tenant for their consent but can recover fees for the tenant incurred in order to give consent.

Consent will be given in the form of a licence, entered into by the landlord, the outgoing tenant and the assignee/subtenant. This is so that there is a contractual relationship between the landlord and the assignee/subtenant.

Question 4

What are common implied landlord and tenant covenants?

Answer 4

Landlord:
- Quiet enjoyment (implied if not expressed)
- Not to frustrate/interfere with the purpose of the lease (non-derogation from grant)
- Repair (for residential tenancies of 7 years of less)
- Section 4 Defective premises Act (duty to keep tenants safe from defects L knows or ought to know about if L has breached their repair obligations)

Tenant:
- To pay rent
- To pay rates/taxes
- To use property in a tenant-like manner
- Not to commit waste (be negligent causing land to change)
- To allow landlord to enter and view

Question 5

How are leasehold covenants enforced for pre-1996 leases on assignment?

Answer 5

Covenants can be enforced directly by the parties to the original lease via privity of contract. That means L can sue T for breach of any covenant by T.

If either L or T assigns the reversion or lease (respectively), the covenant can only be enforced against the new party via privity of estate or ss141 and 142 LPA 1925 (only covenants that touch and concern the land). The original parties remain on the hook to each other due to privity of contract. To get around this, L will ask A to enter into a licence to assign to privity of contract is established between L and A.

Question 6

How are leasehold covenants enforced for post-1996 leases on assignment?

Answer 6

Privity of contract is abolished - the original tenant is no longer liable after assignment. The new tenant takes on all the covenants (not just those that touch and concern the land) and is liable for any new breach. L may require T to enter into an Authorised Guarantee Agreement so L can pursue T for any breach by A of the covenants, L will still want A and T to enter into a licence to assign so L has PoC with A .

Question 7

How are leasehold covenants enforced on a sub-letting of the lease?

Answer 7

If T sublets, there is no PoC or PoE between L and ST. There is only PoC between L and T. This means L cannot enforce the covenants directly against ST under both old and new leases.

• For both old and new leases there is an exception. Any leasehold covenants which as restrictive covenants can be directly enforced against the ST directly.
• For non-restrictive covenants, L has two options:

a) L can sue T, who is responsible for the ST. T can get an indemnity from ST to cover the costs of reimbursing L is ST breaches their covenant; or

b) L can directly covenant with ST as a condition of subletting (can be imposed as part of the alienation covenant as long as they are reasonable). This creates a contractual relationship between L and ST. This can be achieved via a licence to sublet.

Question 8

What is the presumption if there is no mention of an action in a lease?

Answer 8

That the tenant is free to do it. 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.

Question 9

What is a landlord’s covenant for quiet enjoyment?

Answer 9

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.

Question 10

What is a service charge?

Answer 10

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 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.

Question 11

What is the basic structure of a lease?

Answer 11

Will include the following provisions:
- parties, date, definitions, interpretation provisions
- demise and rents
- tenant covenants
- landlord covenants
- rights granted/excepted and reserved
- execution

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.

Question 12

What are the essentials for the creation of a lease?

Answer 12

• Certainty of term
• Exclusive possession
• Correct formalities to create a lease

Question 13

What are Prescribed Lease Clauses?

Answer 13

A list of set clauses at the front of a lease which help to speed up registration of registrable leases at the Land Registry.

Question 14

What are some of the usual tenant’s covenants in a lease?

Answer 14

Payment of rent, payment of service charge, use of premises, covenant against assignment and subletting.

Question 15

How might a tenant get out of a lease early?

Answer 15

By a break clause or assigning or subletting the lease

Question 16

What is security of tenure?

Answer 16

Tenants with security of tenure can continue to occupy the premises after the end of the contractual term.

May request a new tenancy and the landlord’s ability to recover the premises is limited.

Comes from the Landlord and Tenant Act 1954.

Question 17

What are the benefits of security of tenure?

Answer 17

Tenants:
- Can invest in the premises
- Can build up goodwill
- Don’t have to worry about moving costs

Landlord:
- More appealing to tenants
- Tenant more likely to look after the premises?
- May be more beneficial at rent review
Disadvantage: administratively more complicated, less freedom

Question 18

What kinds of leases can have security of tenure?

Answer 18

1) Any tenancy (fixed term or periodic)
- does not include licences or tenancy at will

2) Occupied by the tenant
- note if underlets the whole or part of the premises it will lose security of tenure over the whole or part of the premises accordingly

3) For the purposes of a business
- Any trade, profession or employment
Held to be business purposes: charity shop, tennis club for members, residential use that furthers the tenant’s business
NOT: sunday school sessions provided free of charge, a tenant of a house taking a small number of lodgers without profit

Question 19

What tenancies are excluded from security of tenure?

Answer 19

• Agricultural tenancies
• Mining leases
• Service tenancies (lease granted as part of a tenant’s employment)
• Fixed term tenancies of six months or less (but can become protected if the tenant has been in occupation for 12 months or more, whether through successive tenancies or if the tenancy is renewable beyond six months)

Question 20

What is a ‘contracted out’ tenancy?

Answer 20

S38A of the Landlord and Tenant Act 1954 allows the parties to agree to exclude a fixed term lease from the security of tenure provisions - this is contracting out.

Note: A periodic tenancy that qualifies for security of tenure cannot be contracted out.

Question 20

What is the procedure for contracting out?

Answer 20

Two-stage procedure:

1) The landlord must serve a warning notice on the tenant in a prescribed form. This details the consequences of contracting out the security of tenure provisions.
It must be served before the parties complete the lease.

2) The tenant must provide a declaration in prescribed form to the landlord before completing the lease.

If lease completion is at least 14 days from the date of warning notice, then this can be a simple signed declaration.

If lease completion is less than 14 days away then the tenant must provide a statutory declaration (declared before an independent solicitor)

Lease MUST contain reference to both the notice and declaration
- if procedure is not correctly carried out or not correctly referred to in the lease the likelihood is that the lease will enjoy security of tenure.

Question 21

What is a leasehold covenant?

Answer 21

Leasehold covenant is a promise contained in a lease given by a landlord or a tenant

Question 22

What is meant by a covenant to keep the premises in repair?

Answer 22

It also entails an obligation to put the premises in repair first (if at the time they were out of repair).

This can be very onerous if the premises are in a state of disrepair at the beginning of the term.

Question 23

How can a repair obligation be limited?

Answer 23

This can be limited by a schedule of condition (photographs and verbal description of the premises prepared by a surveyor annexed to the lease).

Repair obligation would 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.

Question 24

What is the standard of repair under a general repairing covenant?

Answer 24

Must keep the premises in the condition in which they would be kept by a reasonably minded owner, having regard to:

• 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
• The express words of the covenant

Question 25

What is renewal vs repair?

Answer 25

A covenant to repair does not require renewal of the whole or substantially the whole of the property. (question of degree)

Question 26

What is an absolute covenant?

Answer 26

If there is an absolute covenant the tenant is completely prohibited from doing something; the tenant is absolutely not able to underlet one of its rooms in its office block and will be at the mercy of the landlord, who will be able to consider or ignore any requests.

“The tenant shall not do”

Question 27

What is a fully qualified covenant?

Answer 27

If there is a fully qualified covenant, the landlord has to be reasonable if it is going to withhold its consent.

“The tenant shall not do without the Landlord’s consent such consent not to be unreasonably withheld or delayed”

Question 28

What is a qualified covenant?

Answer 28

If there is a qualified covenant, then the tenant can go and ask the landlord for its consent although the landlord does not have to give it.

“The tenant shall not do without the Landlord’s consent”

Question 29

What is meant by reasonableness for fully qualified covenants?

Answer 29

The landlord is not entitled to refuse its consent on grounds which have nothing to do with the landlord and tenant relationship.

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 with, eg, the proposed assignee’s ability to pay the rent or bad references.

Question 30

Statutory intervention with alterations, user and alienation

Answer 30

Alteration clauses: converts a qualified covenant against alterations that amount to improvements into a fully qualified one. (meaning landlord’s consent cannot be unreasonably withheld)

User class: statute prevents a landlord demanding payment for granting its consent (unless also involves a change to the structure of the property)

Alienation (assignment and subletting): converts a qualified covenant into a fully qualified covenant.

Question 31

What are improvements for alterations?

Answer 31

Improvements are to be construed as works which improve the premises from the tenant’s perspective.

But landlord is entitled to ask for:
- 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)
- payment of the landlord’s expenses in giving consent

Usually set out in the Licence for Alterations (a deed documenting consent) but even if not, the landlord is still permitted to ask for them.

Question 32

What if the change of use also involves a change to the structure?

Answer 32

The landlord can increase the rent or charge the tenant a lump sum (fine or premium) in return for consent.

The landlord will be entitled to recover its costs and expenses involved in the application for consent.

Question 33

What is an assignment of a lease?

Answer 33

Is the ‘sale’ by the tenant of the remainder of their lease to another party. It is very common for a tenant to want to dispose of/sell the lease. It is a way of handing hte lease over to someone else.

The party to whom the lease is sold then becomes the immediate tenant of the landlord but it is not necessary to amend the lease to show this.

For a registered lease the change of proprietor is shown in the proprietor register of the leasehold title.

Question 34

What if a lease is silent as to assignment?

Answer 34

Then the benefit of the lease is assignable.

But most lease contain restrictions so that the landlord has to consent to the assignment and therefore has control over who ends up being the tenant.

Question 35

How are covenants against assignment construed in the tenant’s favour?

Answer 35

A covenant against assignment does not prohibit subletting of the whole or part.

A covenant against sub-letting the whole does not prohibit a subletting of part.

Question 36

How is a landlord’s consent to assignment recorded?

Answer 36

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.

Question 37

What are the formalities required for the assignment of a lease?

Answer 37

Deed and registration

Deed: LPA 1925 required a deed to be used to transfer a legal estate. There is no short lease exception and even if the lease being assigned does fall within the short lease exception, the assignment must still be by deed. (usually TR1)

Registration: If the lease is registered at the Land Registry, the deed of assignment must also be registered to update the registered proprietor of the lease as the assignee.

Question 38

What is subletting a lease?

Answer 38

Where the tenant grants a new lease out of its own lease - called an underlease or sublease.

Means the tenant is always responsible for performing the covenants in the lease.

Question 39

What are the formalities for a sublease?

Answer 39

Largely the same - new underlease document must be drafted and entered into. The general rule is therefore that the lease must be granted by deed which must be registered (if over 7 years).

Formally recorded in a Licence to Underlet which the landlord, tenant and undertenant will all be party.

Question 40

Statutory intervention with alienation covenant

Answer 40

(Applies to fully qualified covenants (and qualified covenants which have been upgraded by statute)):

Where a tenant applies to the landlord in writing for consent to alienate the landlord must:

• give written consent within a reasonable time (28 days from the receipt of the application and references)
• burden is on the landlord to prove reasonable refusal and written reasons must be provided.

Must be given sufficient information to enable it to reach a decision and landlord must ask for further information if it requires it.

If landlord does not comply with this it may be liable for tortious damages for breach of statutory duty.

Question 41

What are pre-conditions for new tenancies?

Answer 41

Applies to any lease that has been granted on or after 1 January 1996.

In new leases, LTA 1927 states:
- landlord and tenant can agree the circumstances in which the landlord may withhold consent to an assignment
- L and T 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.

Eg: An authorised guarantee agreement

Question 42

What is an authorised guarantee agreement?

Answer 42

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 outgoing tenant.

The landlord will only ever have the current tenant and the tenant immediately prior to the current tenant ‘on the hook’.

Applies to new leases (granted on or after 1 January 1996).

Question 43

When is refusal unreasonably withheld (alienation)?

Answer 43

A landlord’s consent is unreasonably withheld if the refusal is designed to achieve a collateral purpose unconnected with the landlord and tenant relationship,
or if the detriment to the tenant is disproportionate to the benefit to the landlord.

The burden of proving that a refusal of consent is reasonable is on the landlord.

Question 44

If the lease does not contain a covenant in respect of alterations, can the tenant undertake the alterations?

Answer 44

The tenant is permitted to make the alterations providing they do not devalue the premises.

Unless the lease stipulates otherwise the tenant is free to carry out any alterations to the premises. This is only subject to the legal doctrine of waste, which prevents alterations which would devalue the premises.