Leases - Subletting and assignment etc

Question 1

Alienation

Answer 1

• a method for the tenant disposing of the whole, or part, of their interest in a leasehold property
• usually used to describe assignment, underletting and parting with possession

Question 2

Assignment of a lease

Answer 2

• An assignment is the ‘sale’ by the tenant of the remainder of their lease to another party (the ‘assignee’.)
• 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.

Question 3

How clauses against assignment are construed

Answer 3

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)
• A covenant against sub-letting the whole does not prohibit a subletting of part (Wilson v Rosenthal)

Question 4

How is a landlord’s consent to assignment given

Answer 4

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 5

Assignment - formalities to transfer the lease

Answer 5

• As with a freehold transfer, Land Registry form TR1 is often used
• LPA 1925, s 52 requires a deed 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.
• If the lease is registered at the Land Registry, the deed of assignment must also be registered.

Question 6

Subletting of a lease

Answer 6

• 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 7

Why would a tenant sublet rather than assign?

Answer 7

• Subletting would mean that the tenant would always be 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 or tried to market the property for an assignment but found that no one came forward.

Question 8

Subletting - Formalities

Answer 8

• The procedure 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.
• 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

Question 9

Statutory intervention with alienation covenants - Absolute covenants

Answer 9

• 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 he is under no obligation to do so.
• Leases nowadays generally contain an absolute prohibition against assignment of part of the property.

Question 10

Statutory intervention with alienation covenants - Qualified covenants

Answer 10

• 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.)

Question 11

Statutory intervention with alienation covenants - Fully qualified covenants

Answer 11

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 12

Consent withheld reasonably or unreasonably? - cases

Answer 12

• the burden of proof has now moved to the landlord to prove that his refusal of consent was reasonable under the Landlord and Tenant Act 1988.

International Drilling Fluids Ltd v Louisville Investments

• 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
• It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances.
• It may be reasonable for the landlord to refuse his 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.
• However, in this case, the landlord’s refusal was deemed unreasonable as the detriment to the tenant was disproportionate to the benefit to the landlord.

Question 13

Reasonable refusal of consent - Landlord and Tenant Act 1988 s 1

Answer 13

• 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:
• (1) The landlord must give written consent within a reasonable time (unless it is reasonable to refuse.)
• (2) 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.

Question 14

What constitutes a ‘reasonable time’ under LTA 1988, s 1?

Answer 14

• It will depend on the facts and circumstances, but will usually be measured in days or weeks rather than months and will depend on the landlord having been provided with sufficient details
• It was considered in the case of Dong Bang v Davina [1996] that 28 days from receipt of the application and references by the landlord was a reasonable period within which to inform the tenant of the decision.

Question 15

What are the consequences for a landlord of not complying with LTA 1988, s 1?

Answer 15

• If a landlord does not comply with the LTA 1988, it may be liable for tortious damages for breach of statutory duty.
• A tenant could incur costs such as agent’s fees (for the agent who markets the property) and lawyer’s fees; if consent is not given in time or is unreasonably withheld, the tenant could recover these losses.
• If the landlord’s behaviour is particularly unreasonable a tenant may have exemplary damages awarded.

Question 16

Examples of reasonable refusal

Answer 16

• 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.

Question 17

Examples of unreasonable refusal

Answer 17

• Where the proposed assignee was a diplomat who would be protected by diplomatic immunity.
• 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

Question 18

Pre-conditions for alienation for new tenancies

Answer 18

• LTA 1927, s 19(1A) applies to any lease that has been granted on or after 1 January 1996:
• (1) The landlord and tenant can agree the circumstances in which the landlord may withhold consent to an assignment or underletting.
• (2) The landlord and tenant can agree the conditions subject to which consent may be granted.

Question 19

Conditions commonly attached to the landlord’s consent for an assignment

Answer 19

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.

Question 20

Enforceability of leasehold covenants - Original Parties

Answer 20

• Between the original landlord and original tenant there is a contractual relationship, and therefore enforcement of the covenants will be governed by the normal contractual principles.
• However, when the tenant assigns his 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 his reversionary interest, there is no contractual relationship between his successor in title (the reversioner) and the tenant.

Question 21

The Landlord and Tenant (Covenants) Act 1995

Answer 21

The law on the running of covenants in leases was reformed by the Landlord and Tenant (Covenants) Act 1995 (‘LTA 1995’). This Act only applies to leases created after it came into force on 1 January 1996 (‘new leases’). All leases created before this date (‘old leases’) are governed by the old system of rules.

Question 22

Rules for ‘old leases’ (created pre- 1 Jan 1996)

Answer 22

• In old leases created before 1 January 1996, 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.
• Upon assignment of either the lease or the reversionary interest, privity of contract will remain between the 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.
• Where there exists privity of estate between the parties, the tenant’s covenants in an old lease may be enforceable. However, privity of estate is not the only requirement and other conditions have to be met.
• Privity of estate lasts only for the period while the lease is vested in the tenant.
• The tenant does remain liable after ceasing to be the tenant for any breaches committed while he was the tenant of the property or if he has covenanted directly with the landlord that he will be responsible for breaches of his assignee (Estates Gazette Ltd v Benjamin Restaurants)

Question 23

Rules for ‘new leases’ (created after 1 January 1996)

Answer 23

• The Landlord and Tenant (Covenants) Act 1995 effectively abolishes privity of contract for all new leases.
• A tenant with a new lease will (generally) obtain an automatic release from the tenant’s covenants upon assignment. His liability for a breach of covenant caused by any subsequent assignee ceases when he assigns the lease.
• However, a tenant will not be released from liability if he is in breach of a tenant covenant.

Question 24

Rules for ‘new leases’ (created after 1 January 1996) - Assignment of the reversion

Answer 24

• there is no automatic release for an outgoing landlord.
• The landlord must apply for such a release from the tenant.
• To be released from liability, the landlord must follow the procedure laid down in the Landlord and Tenant (Covenants) Act 1995, s 8(1).
• 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 for a release under the Landlord and Tenant (Covenants) Act 1995, s 8(2)(b).

Question 25

In which circumstances will the landlord not be released?

Answer 25

• The procedure under the Landlord and Tenant (Covenants) Act 1995, s 6 will not release a landlord from covenants which are expressed to be personal
• a landlord will not be released from liability if he is in breach of a landlord covenant in accordance with the Landlord and Tenant (Covenants) Act 1995, s 24(1).

Question 26

Assignment of new leases

Answer 26

• LTA 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.
• this means:
  (1) when a tenant assigns a lease, the assignee acquires the benefit and burden of all the covenants in the lease.
  (2) when a landlord assigns the reversionary interest, the incoming landlord acquires the benefit and burden of the covenants.

Question 27

Assignment of new leases - ‘Expressed to be personal’

Answer 27

The only exception to this rule in the Landlord and Tenant (Covenants) Act 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’ appears to mean that the covenant is expressly stated to be between two named parties to the lease.

Question 28

Extent of assignee’s liability

Answer 28

• There is a limit on the extent of the assignee’s liability under the Landlord and Tenant (Covenants) Act 1995, s 23(1) which states: ‘he shall not by virtue of this Act have any liability or rights under the covenant in relation to any time falling before the assignment.’
• so the parties remain liable for the breaches which occur during their period of occupation.

Edlington Properties Ltd v JH Fenner & Co:

• The tenant had a claim against the former landlord for damages. The tenant was in arrears of rent owed to the new landlord.
• The tenant was not entitled to withhold this rent from the new landlord and set off one claim against the other. These were two separate matters involving different parties relating to separate pre- and post-assignment breaches, and the new landlord was not responsible for the breach of the former landlord.

Question 29

Excluded Assignments

Answer 29

• Under LTA 1995, s 5 a tenant with a new lease will obtain an automatic release from the tenant’s covenants upon assignment, unless there has been an excluded assignment.
• If a lease is assigned in breach of an alienation covenant, this is an ‘excluded assignment’.

Question 30

Suing a former tenant

Answer 30

• An assignee of the lease becomes liable from the date of assignment for all covenants in the lease under the Landlord and Tenant (Covenants) Act 1995, s 3 (other than those expressed to be personal).
• If the outgoing tenant has been automatically released from its obligations under the lease on assignment under the Landlord and Tenant (Covenants) Act 1995, s 5, it will not be liable.
• However, if the outgoing tenant has provided an authorised guarantee agreement (AGA) under the Landlord and Tenant (Covenants) Act 1995, s 16 on assignment, the landlord could sue the former tenant who is guaranteeing the obligations of their immediate successor.
• If the landlord has requested an authorised guarantee agreement under the Landlord and Tenant (Covenants) Act 1995, s 16 from the outgoing tenant/assignor on assignment, the landlord’s remedy is limited to damages.

Question 31

Indemnities

Answer 31

• 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.
• Alternatively, in the absence of an express indemnity covenant, the assignor could claim an indemnity at common law under Moule v Garrett.

Question 32

Indemnities at common law - Moule v Garrett

Answer 32

• a quasi-contractual course of action
• where 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.)
• 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.

Question 33

Subleases

Answer 33

• When there is a sublease in place, ie the tenant has created a lease out of their own lease, there is no direct relationship between the (head) landlord and 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.

Question 34

Subleases - LTA Section 3(5)

Answer 34

• If a subtenant is occupying the premises, the landlord will be able to enforce all restrictive covenants in the head lease against the subtenant.
• However, landlords will not be able to enforce directly against a subtenant any positive covenants. If the subtenant’s conduct puts the tenant in breach of its covenants in the head lease, the landlord can enforce the breach of covenant against its immediate tenant.

Question 35

Subleases - Practical effect of the rules

Answer 35

• (1) 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.
• (2) 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.

Question 36

Preconditions to a tenant with a new lease obtaining an automatic release from the burden of the tenant’s covenants

Answer 36

Landlord and Tenant (Covenants) Act 1995, s 16(3): the assignment must be either an absolute or a qualified assignment; and the lease must contain a condition that the outgoing tenant will provide an AGA.

Question 37

Limits to an AGA

Answer 37

Landlord and Tenant (Covenants) Act 1995, s 16(4):
Does not:
- impose on the tenant any requirement to guarantee in any way the performance of the relevant covenant by any person other than the assignee
- impose on the tenant any liability, restriction or other requirement (of whatever nature) in relation to any time after the assignee is released from that covenant
- so: The guarantee lasts for the period the assignee is the tenant of the premises and the outgoing tenant may only be asked to guarantee the assignee.

Question 38

AGA: choice for the landlord

Answer 38

He 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.

Question 39

Commercial Leases

Answer 39

• In a commercial lease scenario, the Landlord and Tenant (Covenants) Act 1995, s 22 allows the landlord to ask the tenant to satisfy certain conditions before consent to the assignment will be granted.
• One of the common conditions attached to the landlord’s consent for an assignment under the LTA 1927, s 19(1A) and one seen in most commercial leases, is that the outgoing tenant enters into an AGA promising to perform the incoming assignee’s obligations under the lease, if it defaults.

Question 40

Conditions imposed on assignment of commercial leases

Answer 40

• the Landlord and Tenant Act 1927, s 19(1A) states that:
• The landlord and tenant can agree the circumstances in which the landlord may withhold consent to an assignment or underletting.
• 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 or underlet.
• These circumstances and conditions are agreed in advance by including them in the lease when it is drafted.

Question 41

LTA 1995: Retrospective Provisions

Answer 41

There are some sections of the Landlord and Tenant (Covenants) Act 1995 which apply to all leases, regardless of when they were created. These are:
s 17, Tenant Default Notice
s 18, Liability for Variations
s 19, Overriding Leases
- These provisions apply to both old and new leases.
- These provisions apply to former tenants who remain liable either under an old lease (existing tenant liability) or because of their liability under a new lease under an authorised guarantee agreement.

Question 42

s 17 - Tenant Default Notice

Answer 42

• 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.
• A fixed charge is defined 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.
• 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 him.

Question 43

s 18 - Liability for Variations

Answer 43

• 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.
• For example, the former tenant who is still liable for the rent under an old lease or under an authorised guarantee agreement 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.

Question 44

s 19 - Overriding Leases

Answer 44

• 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 the Landlord and Tenant (Covenants) Act 1995, s 17, that former tenant is entitled to request from the landlord an overriding lease, becoming the immediate landlord of the defaulting party.

Question 45

What is an Overriding Lease?

Answer 45

• 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 covenants expressed to be personal)
• If the former tenant requests an overriding lease, the landlord is obliged to grant it within a reasonable time.
• 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.