Leases: covenants in leases

Question 1

What are tenant covenants?

Answer 1

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.

Question 2

What are landlord covenants?

Answer 2

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 also 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.

Question 3

What are examples of breach of e covenant for quiet enjoyment?

Answer 3

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).

Question 4

What are guarantors covenants?

Answer 4

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.

Question 5

What is Forfeiture?

Answer 5

Forfeiture is the right of the landlord to bring the lease to an early end in the event of tenant breach.

Question 6

What is Security of tenure ?

Answer 6

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.

Question 7

What is service charge?

Answer 7

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.

Question 8

What are Prescribed Lease Clauses?

Answer 8

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 9

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

Answer 9

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

Question 10

What are the benefits of security of tenure for a tenant?

Answer 10

The tenant being able to treat the premises as a long term prospect means that the tenant can invest in fitting out the premises and making them suitable for their purposes.

· A retail or restaurant business know that they can reap the benefits of goodwill from their location.

· A tenant does not have to worry about the considerable upheaval that could be caused by having to move at the end of the contractual term.

Question 11

What are the benefits of security in tenure for landlords?

Answer 11

The premises will be more appealing to prospective tenants.
· The tenant may be encouraged to treat the premises as their own, and therefore look after them. Of course, there will be repairing obligations in the lease anyway, but it is better if the tenant observes them without being coerced into doing so.
· It may be beneficial to the landlord at rent review, as the market rent may be higher for a lease enjoying security of tenure.

Question 12

What is a fixed term tenancy?

Answer 12

· A fixed term tenancy creates exclusive possession and a proprietary interest.
· It binds successors in title to the landlord.
· The tenant can use the property as if they were the owner.
· It can benefit from security of tenure.

Question 13

What is a periodic tenancy?

Answer 13

· A periodic tenancy creates exclusive possession and a proprietary interest.
· It binds successors in title to the landlord. However, it can be brought to an end by notice.
· It can benefit from security of tenure.

Question 14

What is a licence?

Answer 14

· A licence is a personal permission to be on the land and is not a proprietary interest.
· It does not bind successors in title to the owner granting the licence.
· It cannot benefit from security of tenure.

Question 15

What is a tenancy at will?

Answer 15

· A tenancy at will is similar to a licence as it is a personal permission but unlike a licence, the tenant can have exclusive possession.
· However, the important feature is that either landlord or tenant can end the tenancy at any time.
· It cannot benefit from security of tenure.

Question 16

What are the security of tenure provisions?

Answer 16

…any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes…

Tenancy
Occupied
Purposes of a business

Question 17

What can fall under business purposes?

Answer 17

· a charity shop
· a tennis club for members only
· residential use that furthers the tenant’s business (eg, accommodation for medical school students or a lease of a shop, part of which could be used for residential purposes)
These have been held not to be business purposes:
· Sunday school sessions provided free of charge by an individual
· A tenant of a house taking a small number of lodgers without profit

Question 18

What are excluded tenancies for security of tenure?

Answer 18

• Agricultural tenancies (as they have their own statutory regime)
• Mining leases
• Service tenancies (a lease granted as part of a tenant’s employment, eg, a security guard’s flat)
• Fixed term tenancies of six months or less (but can become protected if the tenant has been in occupation for twelve months or more, whether through successive tenancies or if the tenancy is renewable beyond six months)

Question 19

What are contracted our tenancies?

Answer 19

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 known as contracting out.

Assessment tip: Note that only fixed term leases can be contracted out. A periodic tenancy that qualifies for security of tenure cannot be contracted out.

Question 20

What is the procedure for contracting out?

Answer 20

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.
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 the 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).
The lease must contain reference to both the notice and declaration (or statutory declaration) of contracting out.
If the 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 the basis rule for covenants in leases?

Answer 21

The basic rule is that a tenant may do all the things that an owner of an estate can do unless the lease prohibits such actions.

Question 22

What is a leasehold covenant?

Answer 22

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

Question 23

A tenant may be subject to repair obligations under a repairing covenant. What is the tenant’s standard of repair?

Answer 23

The standard of repair is to keep the premises in the condition in which they would be kept by a reasonably minded owner, having regard to the character and type and age of the premises.

Question 24

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

Answer 24

It is an obligation to put the premises into repair at the beginning of the term if they are out of repair and to keep them in repair throughout the term of the lease.

Question 25

What is alienation?

Answer 25

Alienation:a method for the tenant disposing of the whole, or part, of their interest in a leasehold property.

Question 26

What is assignment of a lease?

Answer 26

the ‘sale’ by the tenant of the remainder of their lease to another party

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.)

Question 27

What are formalities to transfer the lease?

Answer 27

Deed + Registration

THERE IS NOT SHORT TERM LEASE EXCEPTION

Question 28

What does subletting of a lease involve?

Answer 28

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).

Question 29

What are the formalities for subletting a lease?

Answer 29

The general rule is therefore that 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)).

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.

Question 30

What happens with qualified covenants against alienation?

Answer 30

A qualified covenant against alienation will be ‘upgraded’ to a fully qualified covenant so that the landlord cannot unreasonably withhold their 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.

Question 31

What happens with absolute covenants against alienation?

Answer 31

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 the landlord could as a ‘one-off’ waive the prohibition but it is under no obligation to do so.

Question 32

What happens with full qualified covenants against alienation?

Answer 32

These type 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.

Question 33

What is the statutory intervention with alienation covenants?

Answer 33

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.) - 28 days from receipt of the application and references by the landlord was deemed to be a reasonable period (Dong Bang Minerva (UK) v Davina [1996] 3 WLUK 117)
* The burden is on the landlord to prove reasonable refusal – s1(6), and written reasons must be provided.
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.
If a landlord does not comply with the LTA 1988, it may be liable for tortious damages for breach of statutory duty.

Question 34

When is refusal of consent reasonable and unreasonable?

Answer 34

• Unsatisfactory tenant’s reference –reasonable
• 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. – reasonable
• The proposed subletting was at a substantial premium and at a rent well below the open market value – reasonable
• 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 – reasonable
• 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 –unreasonable
• Where the proposed assignee was already a tenant of the landlord in another property which would have been difficult to re-let – unreasonable

Question 35

What are the Pre-conditions for alienation for new tenancies?

Answer 35

LTA 1927, s 19(1A) applies to any lease that has been granted on or after 1 January 1996. A lease granted on or after 1 January 1996 is known as a ‘new lease’
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.

Question 36

What is an Authorised Guarantee Agreement (AGA)?

Answer 36

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’.

It is a common conditionattached to the landlord’s consent for an assignment under LTA 1927, s 19(1A) and one seen in most commercial leases for the outgoing tenant.

Question 37

A tenant asks for permission to assign their three year lease (which was created informally) to which the landlord agrees. What are the formalities for the assignment of the lease?

Answer 37

A valid deed.

Question 38

What is privity of contract?

Answer 38

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.

All the terms, regardless of their nature, can be enforced by the original landlord against the original tenant and vice versa.

Question 39

What is privity of estate?

Answer 39

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.

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.

Question 40

What happens to privity when there is assignment?

Answer 40

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.

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) - privity of estate exists but no privity of contract.

Likewise, where the landlord sells its reversionary interest, there is no contractual relationship between its successor in title (the reversioner) and the tenant - privity of estate exists but no privity of contract.

Question 41

What are the two sets of rules for leasehold covenants?

Answer 41

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)

Question 42

How do old leases work?

Answer 42

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.

Question 43

When does privity of estate exist?

Answer 43

• 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.

Question 44

How do leasehold covenants operate in new leases?

Answer 44

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.