Remedies for Breach of Leasehold Covenants

Question 1

How does liability for covenants differ in leases granted before 1 January 1996, and why does this benefit landlords?

Answer 1

• Old Leases (Pre-1996):
  
  1. Privity of Contract: Original tenant remains liable for the entire lease term, even after assigning the lease.
  2. Privity of Estate: Current tenant is liable as long as they hold the lease.
  3. Direct Covenants: Landlord can require each assignee to give a direct covenant upon assignment, ensuring liability of intervening tenants.
     * Example:
     * Tenant A assigns to Tenant B and then to Tenant C. If Tenant C breaches, the landlord can pursue Tenant A, Tenant B, or Tenant C, depending on who gave direct covenants.
     * Benefit for Landlords: Provides multiple routes to enforce covenants, minimizing risk of loss.

Question 2

What changes did the Landlord and Tenant (Covenants) Act 1995 introduce for leases granted after 1 January 1996?

Answer 2

• New Leases (Post-1996):
  1. Release of Original Tenant: Original tenant is automatically released from liability upon assigning the lease.

2. Authorised Guarantee Agreements (AGAs):
   * Outgoing tenant guarantees the assignee’s obligations but only while that assignee holds the lease.
3. Example:
   * Tenant A assigns to Tenant B under an AGA. If Tenant B defaults, Tenant A is liable. When Tenant B assigns to Tenant C, Tenant A is released, and Tenant B must provide a new AGA.
   * Impact: Reduces landlord’s control but ensures limited continuity of liability through AGAs.

Question 3

What is an action in debt, and how is it used to recover unpaid rent?

Answer 3

• Definition: Treats unpaid rent as a recoverable debt enforceable through the High Court or County Court.
• Limitation: Six-year limitation period under the Limitation Act 1980.
• Advantages:
• Quick and straightforward legal remedy.
• Suitable if the tenant or guarantor has sufficient funds to pay the debt and legal costs.
• Example:
• Tenant A owes £15,000 in rent. The landlord can file a claim in court to recover the full amount, plus legal costs.

Question 4

What is CRAR, and what are the requirements and limitations of its use?

Answer 4

• Definition: Allows landlords of commercial premises to seize and sell tenant’s goods to recover unpaid rent.
• Requirements:
  1. At least seven days’ rent arrears.
  2. Seven days’ prior notice of enforcement.
  3. Enforcement must be carried out by a certified enforcement agent.
• Limitations:
  1. Only applies to pure rent, not other payments (e.g., insurance, service charges).

2. Certain items cannot be seized, such as:
   * Items essential to the tenant’s business (e.g., tools up to £1,350 in value).
   * Leased or hired goods.
3. Sale must be at public auction, with seven clear days’ notice to the tenant.
   • Example:
   • A tenant owes £10,000 in rent but has only leased office furniture and computers. CRAR would not be practical due to the nature of the tenant’s assets.

Question 5

How can landlords use guarantors and rent deposits to recover unpaid rent?

Answer 5

• Guarantors:
  1. Guarantees must be in writing and cover unpaid rent and other covenant breaches.

2. Old Leases: Guarantors remain liable for the entire lease term.
3. New Leases: Guarantors are released upon lease assignment unless the guarantee extends to the outgoing tenant’s obligations under an AGA.
4. s.17 Notice: Landlord must serve notice within six months of the breach to pursue guarantors of former tenants.

• Rent Deposits:
  1. Landlords can withdraw funds directly from the deposit to cover rent or covenant breaches.

2. Deposit is usually 6–12 months’ rent and must be replenished by the tenant if used.
   * Example:
   * A tenant fails to pay three months’ rent. The landlord withdraws £6,000 from the rent deposit and requires the tenant to replenish it under the terms of the rent deposit deed.

Question 6

What is forfeiture, and how is it applied for non-payment of rent?

Answer 6

• Definition: Terminates the lease, allowing the landlord to regain possession of the property.
• Requirements:
  1. Lease must contain a forfeiture clause (e.g., re-entry clause).

2. Rent must be overdue, typically for a specified number of days (e.g., 21 days).
3. A formal demand may be required unless the lease waives this requirement.
   * Methods:
4. Peaceable re-entry (without force).
5. Court order (if peaceable re-entry is impractical).

• Risks:
  1. Waiver: Accepting rent post-breach waives forfeiture rights.

2. Tenant may apply for relief from forfeiture, reinstating the lease upon payment of arrears and costs.
   * Example:
   * Tenant B has not paid rent for six months. The landlord serves notice and peaceably re-enters the property to regain possession.

Question 7

What remedies are available for breach of repair covenants, and what are the legal considerations?

Answer 7

1. Specific Performance:
   * Forces tenant to repair. Rarely granted unless damages are inadequate, e.g., Rainbow Estates v Tokenhold Ltd.
2. Damages:
   * Limited by:
   * LTA 1927, s.18: Damages capped by reversion value diminution.

• LP(R)A 1938: Requires notice and court permission for long-term leases.

3. Self-Help (Jervis v Harris Clause):
   
   • Allows landlord to repair and recover costs as a debt, avoiding statutory limits.
4. Forfeiture:
   * Requires a s.146 notice, specifying the breach and remedies.

Question 8

What remedies are available for breaches of covenants other than rent or repair?

Answer 8

1. Forfeiture: Requires a s.146 notice but no counter-notice for non-repair breaches.
2. Injunction: Prevents negative covenant breaches (e.g., unauthorized alterations).
3. Damages: Recoverable under contract law.
4. Specific Performance: Enforces precise obligations where damages are inadequate.
5. Rent Deposit Deductions: Withdraw funds for breach-related costs.

Question 9

What is surrender, and how does it differ from other remedies?

Answer 9

• Definition: Mutual agreement to terminate the lease.
• Process: Typically formalized through a deed of surrender, which can address arrears and other issues.
• Advantages:
• Faster and cheaper than forfeiture.
• Releases tenant from future obligations.
• Disadvantages:
• Requires mutual consent.
• Leaves landlord with an empty property to re-let.

Question 10

A landlord leases office space to Tenant A, who assigns it to Tenant B under an AGA. Tenant B fails to pay nine months’ rent. What are the landlord’s options?

Answer 10

1. Action Against Tenant B:
   
   • File for debt recovery, but Tenant B’s financial troubles may limit success.
     2. Pursue Tenant A (AGA):
   • Recover up to six months’ arrears under s.17 notice.
     3. Forfeiture:
   • Regain possession, but risks prolonged vacancy.
     4. CRAR:
   • Impractical if Tenant B lacks valuable assets.
     5. Rent Deposit (if any):
   • Use to cover arrears, requiring replenishment by Tenant B.

Question 11

What is a s.146 notice, and how does it apply to forfeiture for breaches of non-rent covenants?

Answer 11

A s146 is A statutory notice under the Law of Property Act 1925, required before forfeiture for breaches of covenants other than rent payment.

Contents of a s.146 Notice

1. Specify the Breach:
   * Clearly identify the covenant that has been breached.
   * E.g., failure to repair or unauthorized alterations.
2. Remedial Requirement:
   * If the breach is remediable, the notice must specify steps to remedy the breach and allow a reasonable time for compliance.
3. Compensation Demand:
   * Include a demand for compensation (if appropriate) for losses caused by the breach.

Process for Forfeiture After s.146 Notice:

1. Tenant Compliance Period:
   * The tenant has the opportunity to remedy the breach or negotiate terms.
2. Failure to Comply:
   * If the tenant fails to comply, the landlord may proceed with forfeiture through:

• Peaceable Re-entry: Regaining possession without force.
• Court Order: A safer and more enforceable method.

3. Tenant’s Right to Relief from Forfeiture:
   * The tenant can apply to the court for relief, potentially reinstating the lease.

Additional Requirements for Disrepair Cases, Leasehold Property (Repairs) Act 1938:

• Applies to leases over seven years with three+ years remaining.
• s.146 notice must include the tenant’s right to serve a counter-notice within 28 days.
• If counter-notice is served, the landlord can only proceed with court permission.

Question 12

What is a s.17 notice, and how does it operate under the Landlord and Tenant (Covenants) Act 1995?

Answer 12

To inform former tenants or their guarantors that the landlord intends to recover a fixed charge arising from a breach of covenant by the current tenant.
* Fixed Charges Defined:
* Includes monetary sums such as rent, service charges, or other liquidated sums due under the lease.
* Does not cover unquantified damages for breaches of non-monetary covenants.

Key Features of s.17 Notices:
1. Mandatory for Recovery:
* The landlord cannot pursue former tenants or their guarantors for fixed charges unless a s.17 notice is properly served.

2. Time Limit for Service:
   * Must be served within six months of the fixed charge becoming due.
   * If not served in time, the landlord forfeits the right to recover the charge from former tenants or their guarantors.
3. Notification of Claim, Not Proceedings:
   * The notice does not initiate legal proceedings but serves as a formal claim for payment.
4. Applicable to All Leases:
   * s.17 applies to both old and new leases (granted before or after 1 January 1996).

Operation of s.17 in Practice:
1. Former Tenants:
* Under old leases, former tenants remain liable for covenants due to privity of contract.

• Under new leases, former tenants may be liable only if they provided an AGA.

2. Guarantors:
   * Guarantors of former tenants are also liable for fixed charges if the lease is an old lease or if they guaranteed obligations under an AGA.
3. Limited Recovery:
   * Landlords can only claim arrears accrued within six months prior to the notice.

Question 13

Contents of a s.17 Notice

Answer 13

A valid s.17 notice must include:
1. Details of the Fixed Charge:
* Specify the amount owed (e.g., £12,000 in rent arrears).
2. Date of Breach:
* Indicate when the default occurred.
3. Recipient:
* Identify the former tenant or guarantor.

• Service Requirements:
• Must be served in writing within six months of the default.

Question 14

Risks and Limitations for Landlords with a s17 notice

Answer 14

1. Strict Time Limit:
   * Failure to serve within six months extinguishes the claim.
2. Limited Recovery:
   * Only fixed charges within six months prior to the notice can be claimed.
3. Overriding Lease:
   * If the former tenant/guarantor obtains an overriding lease, the landlord loses direct control over the property.

An overriding lease is A headlease granted to the former tenant or their guarantor upon payment of the fixed charge under a s.17 notice.
* Purpose:
* Enables the former tenant/guarantor to regain control over the property.

• Positions the former tenant/guarantor as the immediate landlord of the defaulting tenant.

Question 15

What are the limitations on claiming damages for breach of the repair covenant?

Answer 15

1. Action for Breach of Contract:
   * Tenant’s failure to repair constitutes a breach of covenant, giving rise to a claim for damages.
2. Statutory Limitations:
   * Section 18, Landlord and Tenant Act 1927:
   * Damages capped at the diminution in the capital value of the landlord’s reversion (e.g., the freehold).

• If repair costs exceed the reduction in value, the landlord cannot recover the full amount.
• Leasehold Property (Repairs) Act 1938:
• Applies to leases granted for more than seven years with at least three years remaining.
• Landlord must:
  1. Serve notice of the intended claim.
  2. Allow tenant 28 days to issue a counter-notice.
  3. Obtain court leave to proceed if a counter-notice is served.

Example:
* A landlord incurs £50,000 in repair costs. However, the reversion value diminishes by only £30,000. Damages are limited to £30,000 under Section 18.

Question 16

What is a Jervis v Harris clause, and how does it benefit landlords?

Answer 16

1. Definition:
   * A lease clause allowing landlords to recover repair costs as a debt instead of damages.
2. Process:
   * Landlord inspects property for repair compliance.

• Serves a notice specifying necessary repairs.
• If tenant fails to comply, landlord carries out repairs and recovers costs from the tenant.

3. Advantages:
   * Avoids the statutory limitations of:
   * Section 18, LTA 1927 (diminution in value).
   * LP(R)A 1938 (counter-notice requirements).

• Converts a potential damages claim into a debt recovery claim, simplifying enforcement.

4. Legal Authority:
   * Jervis v Harris (1996): Established the validity of self-help clauses for repair covenants.

Example:
* Tenant neglects repairs, causing water damage. The landlord performs repairs costing £10,000 and recovers the amount as a debt under the Jervis v Harris clause.

Question 17

How do damages and self-help remedies differ for breach of repair covenants?

Answer 17

1. Basis of Claim:
   * Damages: Claim arises from a breach of contract (tenant’s failure to comply with the repair covenant).

• Self-Help: Claim arises under the terms of a Jervis v Harris clause, allowing the landlord to recover repair costs as a debt.

2. Statutory Limitations:
   * Damages: Subject to:
   * Section 18, Landlord and Tenant Act 1927 (damages capped by diminution in reversion value).

• Leasehold Property (Repairs) Act 1938 (procedural requirements, including counter-notice).
• Self-Help: Not limited by Section 18 or the LP(R)A 1938.

3. Recovery Process:
   * Damages: Requires legal action to recover costs, which may be time-consuming and costly.

• Self-Help: Landlord carries out repairs and directly recovers costs from the tenant without court proceedings.

4. Speed:
   * Damages: Delayed due to litigation and statutory requirements.

• Self-Help: Faster, as the landlord takes immediate action under the clause.

5. Risk and Enforcement:
   * Damages: Dependent on proving the extent of diminution in value; risks associated with tenant insolvency.

• Self-Help: Risk is shifted to the tenant through a debt recovery claim, which simplifies enforcement.

Example to Illustrate the Difference:
* Damages Scenario:
A landlord sues a tenant for £40,000 in repair costs, but under Section 18, damages are limited to £25,000 (diminution in value of the property).

• Self-Help Scenario:
  The lease contains a Jervis v Harris clause. The landlord spends £40,000 on repairs and recovers the full amount from the tenant as a debt without statutory restrictions.