Remedies for Breach of Leasehold Covenants

Question 1

What is the liability position for breach of covenants in relation to leases granted before 1st January 1996 (old leases)?

Answer 1

• Original tenants remain liable for covenants under the lease for a full term. (regardless of any assignments to other tenants).
• This means current tenants can be sued in privity of estate, and original tenants can be sued under privy of contract (under the original lease).
• Intervening tenants (ie tenants in between the original and current tenants) may also be sued under privity of contract, as most landlords require a direct covenant from each incoming tenant.

Question 2

What is the liability position for breach of covenants in relation to leases granted on or after 1st January 1996 (new leases)?

Answer 2

Landlord and Tenant (Covenants) Act 1995 replaces the law of privity of contract and privity of estate with new set of rules.

Original tenant is released from liability for covenants in the lease on assignment to the new tenant (ie there is no continued liability under priority of estate like with old leases).

As landlord therefore can’t sue original tenant directly, the law allows them to provide certain conditions which nee to be met before they consent to an assignment. This would usually be a condition whereby the old tenant must enter into an authorised guarantee agreement (AGA).

Question 3

What is an AGA and when is it used?

Answer 3

It is an authorised guarantee agreement which is a contractual promise from the original tenant to remain liable for breaches covenants under the lease, after the assignment of the lease to a new tenant.

It is used for new leases which no longer confer the benefit of privity of estate onto the landlord.

Question 4

Why is an AGA necessary?

Answer 4

• Necessary when a new lease (ie lease created on or after 01.01.1996) is being assigned to a new tenant.
• The AGA is a contractual promise from the original tenant to the landlord. It provides the landlord with a guarantee that the original tenant will remain liable for any breaches of covenant for the remainder of the term of the lease.
• It is only needed for new leases as old leases (ie those created prior to 01.01.1996) afford landlord the ability to sue the original tenant for breaches of covenants (for the remainder of the lease term) under the rules of privity of estate.

Question 5

When is a tenant released from the AGA they enter into ?

Answer 5

AGA only lasts for the duration of the assignee’s ownership of the lease.

Therefore if the assignee then assigns the lease to someone else, the original tenant is released from their AGA. The outgoing assignee will then need to provide the landlord with a fresh AGA to ensure they remain liable (and so on).

Question 6

Explain the action in debt remedy available to landlords’ where tenants’ are in breach of their covenant to pay rent.

Answer 6

Non-payment of rent is a debt.

If the tenant (or another party liable under an AGA or privity of estate) is under breach of covenant to pay rent, it can be recovered at the High Court or County Court (if the claim is within limitation period).

Question 6

What is the limitation period for the non-payment of rent?

Answer 6

6 years from the date of breach.

Question 7

Explain the ‘Commercial Rent Arrears Recovery (CRAR)’ remedy available to recover rent where the covenant to pay rent has been breached.

Answer 7

CRAR permits landlord to enter property and seize all goods belonging to current tenant.

This remedy only applies to commercial premises.

CRAR method is only available in relation to rent paid for the possession and use of premises, and at least 7 days rent must be outstanding.

Arrears of other payments (such as insurance rent) are NOT recoverable using CRAR, even if they are defined as rent in the lease.

Question 8

Explain the procedural rules of the CRAR method of recovery of rent.

Answer 8

There is a strict procedure to follow. eg landlord must give 7 days notice of intention to enter and must use an enforcement agency to enter the premises and seize the goods.

The landlord is not allowed to seize items or equipment up to the value of £1350 which are necessary for the tenant’s business (eg computes and phones).

Landlord can also only take items belonging to the tenant (not goods which are leased or subject to a hire purchase agreement).

If tenant doesn’t pay arrears, landlord can sell off the goods (provided it is done at public auction and tenant is given at least 7 days clear notice).

Question 9

Is insurance rent arrears recoverable under the CRAR method?

Answer 9

No.

Only actual rent is recoverable using CRAR, meaning insurance rent and other payments in arrears cannot be recover during this method.

Question 10

How many days notice does the tenant need to be given of landlord’s intention to use CRAR method?

Answer 10

7 days notice.

Question 11

How many days notice does landlord need to give tenant when selling their goods at auction under the CRAR method?

Answer 11

7 clear days.

Question 12

Explain how the landlord may pursue guarantors for rental arrears of a tenant.

Answer 12

A guarantor of the current tenant may be sued in the same way as the tenant.

A landlord must comply with s17 of the Landlord and Tenants Covenants Act 1995 in order to be able to pursue a former tenant or the guarantor of a former tenant for rental arrears (whether under a new or old lease).

Question 13

Explain how a landlord can sue a guarantor of an old tenant (or an old tenant itself) through s17 LT(C)A 1995.

Answer 13

1) Landlord must serve a default notice on any former tenants, or their guarantors, if landlord intends to recover a fixed charge from them. fixed charge is a monetary payment such as rent, service charge, or other liquidated sum.

2) Default notice use be served within 6 months of current tenant’s breach, otherwise landlord will be unable to claim from the former tenant or their guarantor. Landlord doesn’t have to start proceedings within 6 months, but the notice must be served within 6 months.

3) s17 applies to ALL leases regardless of when they were granted.

Question 13

Does the liability of a guarantor for the original tenant extend throughout the term of the lease (regardless of assignment by the guaranteed tenant) under old leases?

Answer 13

Yes - the guarantor remains automatically liable.

Question 14

Explain the liability of a guarantor for the original tenant under a new lease.

Answer 14

The guarantor’s continued liability is not automatic.

The guarantor is therefore automatically released form liability on an assignment of the last by the guaranteed tenant (and guarantor would likely refuse to directly covenant with landlord to continue to guarantee the rent of future assignee’s).

However, most of the time the guarantor of the outgoing tenant will guarantee the the outgoing tenant’s obligations under the AGA, thereby indirectly guaranteeing the incoming tenant until a further assignment takes place.

Question 15

what is the benefit to the former tenant / guarantor paying the amount due under a s17 notice?

Answer 15

They will regain some control over the property, by entering into a head lease with the landlord (overriding lease).

This means former tenant/ guarantor becomes landlord of defaulting party and then gains landlord rights over that person.

Question 16

What happens where the landlord serves notice on a former tenant or its guarantor under s17?

Answer 16

That person may be able to regain some control of the property by payinghte sum calculated in the default notice and calling for an overriding lease.

An overriding lease is a head lease between the landlord and the former tenant/ guarantor, which makes the former tenant/ guarantor the immediate landlord of the defaulting tenant.

Question 17

Explain how rent deposits can be used to recover renal arrears (ie breach of covenant to pay rent).

Answer 17

Landlord may require a deposit of 6-12months rent upfront at the start of the lease term if they have reason to belie e tenant may struggle to meet rental obligations.

Upon default, this will entitle landlord to withdraw money from the deposit amount received at the start of the term. This is as long as the landlord has complied with the terms of the rent despite deed.

Question 18

What does a rent despite deed usually set out?

Answer 18

1) Usually sets out the landlord’s right to withdraw money from the despite amount immediately upon breach of covenant to pay rent by the tenant.

2) Deed normally requires tenant to top up deposit when the landlord has withdrawn money from it (under the circumstances where tenant has not paid rent).

3) Also normally states the rent despite balance is returned to tenant at end of term or earlier if there is a lawful assignment of the lease.

Question 19

Explain the remedy of forfeiture available on tenant’s breach of covenant to pay rent.

Answer 19

• Forfeiture brings lease to an end and enables landlord to regain vacant possession of the property.
• This is only available as a remedy if the lease has a forfeiture clause in it. They are not always labelled as forfeiture clauses, and can have other headings (eg provisos or re-entry clauses).

Question 20

Explain the typical forfeiture procedure on default of rent by the tenant.

Answer 20

• Where there is non-payment of rent, landlord can proceed to forfeit if rent has been outstanding for a specified period (this is typically 21 days but will depend on the clause).
• Common law requires notice to be given but the lease usually excludes this obligation.
• Landlord can then either take possession through ‘peaceful entry (ie without force). If this isn’t possible, they can do so by obtaining a court order.
• Tenant can apply to the court for relief from forfeiture, where court could allow the lease to continue on the condition the tenant paid all arrears and costs.

Question 21

When could the landlord be seen to have waived their right to forfeiture?

Answer 21

Landlord will waive their right to forfeiture if they carry out an act demonstrating an intention to continue the relationship (eg demanding or accepting rent after the breach has arisen).

Question 22

Explain the specific performance remedy for breach of the tenant’s covenant to repair.

Answer 22

This remedy is only available where the other remedies available are not sufficient or appropriate.

It orders the tenant to fulfil their repair obligations.

Question 23

Which factors may the court consider warrant the remedy of specific performance for the tenant’s failure to fulfil their repair obligations under the lease?

Answer 23

1) No forfeiture or landlord’s self help clause is in the contract;

2) Damages are not an adequate remedy; and

3) Court is sure order is not being sought by the landlord just to harass/ put pressure on the tenant.

Question 24

Explain the remedy of damages for breach of covenant.

Answer 24

Where tenant is in breach of covenant to repair, damages are an available remedy to the landlord.

Question 25

Explain the provision of s18 LTA 1927.

Answer 25

This limits amount of damages to amount by which landlords reversion (usually freehold building) has diminished in value as a result of the disrepair.

Leasehold Property (Repairs Act) 1938 - applies to leases granted for ore than 7 years with more than 3 years of the term left. If this applies and landlord wishes to sue tenant for damages, notice must be served on tenant. Tenant has the option to

Question 26

Explain the provision of the Leasehold Property (Repairs) Act 1938.

Answer 26

Applies to leases granted for ore than 7 years with more than 3 years of the term left.

If this applies and landlord wishes to sue tenant for damages, notice must be served on tenant.

Tenant has the option to serve counter notice within 28 days. If they do, landlord must get leave the court to continue with the claim.

Question 27

Explain the self help (Jervis v Harris) clause.

Answer 27

Typical self help clause allows landlord to enter property to check compliance with tenant’s repair covenant.

If there is a breach, landlord can serve notice specifying works which need to be done. If tenant then fails to start these works within the specified period after the notice, (or doesn’t proceed with them properly), landlord may enter and carry out the works. Landlord is then entitled to reclaim the full amount from the tenant as a debt.

Question 28

What is the major benefit of the self help clause (as opposed to recovering the amount for breach of repair covenant in damages)?

Answer 28

The benefit is that the s18 LTA 1927, and the leasehold property repairs act 1938 do not apply to the debt action. This avoids using the damages route entirely and is much more likely to allow landlord to recover the full amount for the repairs.

Question 29

Explain the forfeiture procedure as a remedy for breach of the tenant’s repair covenant.

Answer 29

Landlord must serve notice in compliance with provisions in section 146 LPA 1925.

If tenant does not comply with the notice, landlord can forfeit either by peaceful re-entry or by court order. Tenant is able to apply for relief from forfeiture.

If the lease was for a term of more than 7 years (and has ore than 3 years left on it) the Leasehold Property (repairs) Act 1938 applies and requires the s146 notice to include notification of the tenant’s right to serve a counter notice within 28 days. If tenant does so, landlord can only proceed with claim by leave of the court.

Question 30

Explain the notice requirements for s146 LPA 1925 (re remedy for breach of covenants aside from covenant to pay rent), and the additional requirement which is added when the Leasehold Property (repairs) Act 1938 applies.

Answer 30

• S146 notice must:
  1) specify the breach;
  2) require the brach to be remedied within a reasonable time (if capable of remedy); and
  3) require the tenant to pay compensation for the breach.
• The Leasehold Property (Repairs) Act 1938 adds an additional requirement where the lease was for over 7 years and 3 years of the term (or more) remain. This requires the notice to tell tenant they are entitled to serve counter notice within 28 days.
• If counter notice is served under the leasehold act, the landlord may only proceed with the claim by leave of the court.

Question 30

What is the difference between forfeiture remedy for non-payment of rent compared to breach of repair covenants?

Answer 30

• Landlord can proceed to forfeiture for non-payment of rent along as the non-payment period specified in the lease has been complied with.
• Forfeiture proceedings in relation to all other covenant breaches can only be initiated if landlord has served a s146 LPA 1925 notice (and complied with the additional notice provision in the leasehold repairs act 1938 where it applies).

Question 31

List the remedies available for breaches of all other covenants (ie aside from payment of rent and repair covenants).

Answer 31

This may be assigning or underletting without relevant consent or failing to gain permission before making alterations to the property.

The possible remedies are as follows:

1) Forfeiture (although there is no need for the s146 notice unless it relates to repair covenants).

2) Injunction for breach of negative covenant (eg user covenant) or to prevent the anticipated breach.

3) Specified Performance - this only applies where positive obligation is precise enough, performance is not required over a period of time and damages are not an adequate remedy. This is at the discretion of the court.

4) Damages - recoverable under normal contract rules.

5) Pursuing a former tenant or their guarantor.

6) Deduction from a rent deposit deed - this can be used provided the deed allows deduction from the despite for costs losses and expenses suffered by the landlord due to breach by the tenant.

Question 32

What is a surrender of a lease?

Answer 32

Tenant will surrender its lease to the landlord.

It is a mutual agreement between tenant and landlord and treats the lease as no longer being in existence.

Usually carried out by a deed of surrender, dealing with issues such as arrears.

Effectively this is a contract to end the lease and come to an agreement on how curious outstanding debts are to be paid struck off by the agreement of both parties.