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Modern Land Law

has the benefit of covenants, but is not subject to the burden of them; that is, the tenant has the right to enforce a covenant, but cannot be compelled to observe any obligation the lease imposes. Consequently, in any ‘real life’ problem, there are always two distinct questions to be answered.

1Has the benefit of the particular covenant in issue run to the claimant?

2Is the defendant subject to the burden of it?

Only if both of these questions can be answered positively can there be an action ‘on the covenant’ between claimant and defendant.

Figure 6.2

6.4.2Two sets of rules concerning the enforceability of leasehold covenants

The rules relating to the enforceability of leasehold covenants have undergone a radical transformation in recent years. As we shall see, the common law/pre-1996 statutory rules were unsatisfactory in many respects and this prompted the Law Commission to propose wholesale reform of the law of leasehold covenants.56 Although the Law Commission’s proposals were not enacted as originally conceived, they did provide the impetus for reform. After much consideration and consultation, a Private Member’s Bill was presented to Parliament and this became the Landlord and Tenant (Covenants) Act 1995 (LTCA 1995). This reforming statute applies to all leases – legal and equitable – that are granted on or after 1 January 1996, and it establishes

56 Law Commission Report No. 174.

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a code for determining the enforceability of leasehold covenants in all such leases. However, for leases granted before 1 January 1996, the old common law/statutory rules still apply, save only that sections 17–20 of the 1995 Act operate retrospectively and apply to them. In due course, the 1995 Act and cases decided under it will come to govern the great majority of leases, but for now it is necessary to be aware of both the pre-1996 principles and those of the 1995 Act. This is all the more important when we remember that many pre-1996 leases will have been granted for terms in excess of 90 years and will have decades left to run.

6.5 Rules for leases granted before 1 January 1996

These rules are found in both common law and statute. They are complicated, often inconsistent, and may produce injustice. They were ripe for reform.

6.5.1Liability between the original landlord and original tenant: the general rule

In any action on a leasehold covenant between the original landlord and the original tenant in a pre-1996 lease, all covenants are enforceable.57 This is simply because the liability of these original parties to the lease is based squarely in contract; that is, the contract between them, which is also the lease. Liability is said to be based on ‘privity of contract’. Importantly, as noted, all covenants are enforceable, whether or not they relate to the leasehold land or to a personal obligation undertaken by either party. For example, between the original parties, a tenant’s covenant to provide the landlord with a free pint of beer (personal) is just as enforceable as a landlord’s covenant to repair the premises (proprietary).

6.5.2The continuing liability of the original tenant throughout the entire term of the lease

The fact that the liability of the original tenant is founded in contract has important consequences. Even though the original tenant may assign (i.e. sell or transfer) his lease to another, he will remain liable on the leasehold covenants in a pre-1996 lease throughout the entire term of the lease (Allied London Investments Ltd v. Hambro Life Assurance Ltd (1984)). This liability will be enforceable by whomsoever has the benefit of the covenants. So, if the current tenant violates any of the covenants (e.g. the covenant to pay rent), the landlord may look to the original tenant to perform the covenant (pay the rent),

57‘Original’ here means the landlord and tenant that were the first parties to the lease, it having been granted between them.

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even though the original tenant may have actually left the land many years ago and had nothing to do with the breach. A typical example is where the original tenant took a lease in, say, 1950, but the current tenant (say, the fifth assignee) defaults on the rent in 2006. The original tenant remains liable for this rent, despite having parted with possession years before and in ignorance of the identity of all assignees apart from the very first person to whom he assigned. It should come as no surprise that this continuing liability attracted considerable criticism and, as we shall see, it has been abolished by the 1995 Act for tenancies granted on or after 1 January 1996. For tenancies granted prior to the Act, the original tenant remains liable throughout the term of the lease, subject only to the following exceptions and mitigating factors.

1The liability of an original tenant will not continue after an assignment of a perpetually renewable lease.58 If it were otherwise, the original tenant would forever be liable and there would be no limit or certainty to his obligation.

2The lease between the original landlord and original tenant may stipulate expressly that the tenant’s liability is to end when the lease is assigned. This is rare, but perfectly possible due to the contractual nature of a lease.59 It depends on the original tenant having, and using, a dominant bargaining position. It can occur on a more widespread scale when there is an oversupply of premises for rent, such as during a recession in the commercial property market.

3The original tenant will not be liable for breaches of covenant committed by an assignee where the original term of the lease has been statutorily extended under the Landlord and Tenant Act 1954 (and, by analogy, under the Housing Act 1988) and the breach occurs during the statutory extension (City of London Corp v. Fell (1993)). This is because the original tenant’s liability is to be construed, as a matter of contract, as relating to the period of time as originally agreed, and not to the subsequent legislative extension of that term. The counterargument – that the original parties should have contemplated the risk of a statutory extension when they signed the lease – was not accepted in Fell.

4The original tenant will not be liable if a subsequent assignee of the lease and landlord agree to surrender the old lease and carry out a ‘regrant’ of the lease on new terms. Simply put, the ‘original’ lease has ended and the original tenant’s liability with it. In most cases, this surrender and regrant will be explicit, but it can be presumed if current landlord and tenant so vary the terms of the ‘old’ lease that,

58Section 145, Schedule 25 of the LPA 1922.

59See London Diocesan Fund v. Avonridge Property Company Ltd (2005).

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in reality, it ceases to exist. This is a more extreme version of the principle noted below, that an original tenant may not be liable if subsequent tenant and landlord vary the terms of individual leasehold covenants.60

5If the original tenant is made liable on a covenant through the actual breach of that covenant by an assignee, the original tenant under a pre-1996 tenancy may have a right to recover any damages or rent paid by them under an indemnity obligation. A right to claim an indemnity61 may be in the form of an express or implied obligation undertaken by an assignee of the original tenant, and any subsequent assignee, to reimburse any monies paid by the original tenant where the actual acts of default are attributable to that assignee. An indemnity obligation can take one of three forms. First, each assignee in turn may have made an express covenant of indemnity with their assignor, promising to indemnify the assignor in respect of liabilities arising post-assignment. So, a ‘chain’ of indemnity covenants may exist, stretching from original tenant to current tenant. If, then, the original tenant is forced to pay, he may claim an indemnity from his assignee, who may pass that liability to their assignee, and so on until the current (and defaulting) tenant is reached. As can be seen, however, a chain of indemnity is only as strong as its weakest link and the original tenant may find that the chain is broken before the defaulting tenant is reached. Second, in the absence of an express indemnity covenant, the original tenant may be able to rely on the covenant of indemnity that is implied under section 77 LPA 1925. However, this covenant may – and often is – expressly excluded by the terms of the original lease. Third, the original tenant may be able to rely on an action in ‘restitution’ against the person (i.e. the defaulting tenant) whose liability has been discharged by the original tenant but, of course, only to the extent that the defaulter was actually liable.62 This will occur where it can be shown that the defaulting tenant has been unjustly enriched at the expense of the original tenant and so will be required to reverse the unjust enrichment. It has been held that an express exclusion of the section 77 indemnity covenant does not also exclude the implied indemnity available under the rule in Moule v. Garrett.63

60Friends Provident Life Office v. British Railways Board (1996).

61Effectively, recovery of sums paid.

62Moule v. Garrett (1872). The action was formerly said to arise in ‘quasi-contract’ but English law’s recognition of a general principle of restitution has made this fiction unnecessary.

63Re Healing Research Trustee Co (1992).

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6The original tenant will not be liable for any increased rent resulting from a variation of the terms of the lease. In the case of variations effected on or after 1 January 1996, section 18 of the LTCA 1995 applies retrospectively and it means that the original tenant’s liability for rent cannot be increased by any variation to the lease after it (the lease) has been assigned. Note, however, that the original tenant escapes liability only for the increased rent attributable to the variation. Liability remains for the originally agreed rent. Further, section 18 does not affect the operation of rent review clauses. So, if a tenant’s rent is increased because of the effect of a rent review clause that was itself a term of the original lease (e.g. a clause that says the rent may be adjusted every five years in line with inflation), the original tenant is liable for this increased rent if the current tenant defaults, because this increase is contemplated by the lease itself. It matters not that the increased rent may be far in excess of what the original tenant paid when he actually occupied the premises, because the increase has not been caused by a variation to the terms of the lease, but by the lease itself. A ‘variation’ (i.e. a change in rent for which the original tenant is not liable under section 18) is where the current tenant and current landlord effectively alter the terms of the lease between themselves and it is quite right that the original tenant should not be liable for any increased rent flowing from this later agreement to which he is not a party. Indeed, such is the common sense embodied in section 18 that the court in Friends Provident Life Office v. British Railways Board (1996) had already decided, prior to the entry into force of the LTCA 1995, that privity of contract meant privity to the original contract, and not some later variation of it.64 As it turns out, then, section 18 of the LTCA 1995 was not actually needed. This means that no original tenant will be liable for an increased rent due to a variation, even if that variation occurred before 1 January 1996 and the entry into force of the LTCA 1995.

7Under section 17 of the 1995 Act, although a pre-1996 original tenant’s liability continues throughout the term of the lease, a landlord may only enforce a liability against this tenant for a ‘fixed charge’ – for example, rent, a service charge or liquidated damages for breach of covenant – by serving a statutory notice (a ‘problem notice’) within six months of the charge becoming due. This ensures that the original tenant is warned early of the potential liability and, in effect, ensures that only a maximum of six months charge

64 See also Beegas Nominees Ltd v. BHP Petroleum Ltd (1998).

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(i.e. rent, etc.) can be claimed without the tenant being able to take action to minimise its liability. Failure to serve a notice relieves the original tenant of all liability for that breach of covenant.65 Moreover, as noted immediately below, the payment by an original tenant of a fixed charge in consequence of receiving a problem notice gives the original tenant certain additional rights in relation to the land that he may utilise in an attempt to recover the sum paid.

8If an original tenant is served with a problem notice under section 17 of the LTCA 1995 and pays the charge in full (e.g. the rent owed), the original tenant becomes entitled to the grant of a lease of the property (called an ‘overriding lease’) (section 19 of the LTCA 1995). This effectively inserts the original tenant back into possession of the property as ‘tenant’ of the current landlord, but as ‘landlord’ of the defaulting tenant.66 The advantage of this is that it enables the original tenant – now back in possession – to take action against the current tenant, perhaps by forfeiting (terminating) his lease and thereby to use the land to meet the rental liability. He becomes the tenant of the current landlord but also the landlord of the defaulting tenant. Consequently, the original tenant who takes an overriding lease67 can then pursue action against the defaulting tenant to recover the monies they have paid; for example, suing in damages or forfeiting the lease and then assigning it for value to another person. This is the third provision of the 1995 Act that applies to pre-1996 tenancies. The tenant called on to pay the ‘fixed charge’ may opt for an overriding lease within 12 months of making the payment, and this overriding lease itself is either a pre-1996 or post-1996 tenancy, depending on the nature of the lease that it overrides.68 It contains the same covenants as the overridden lease, except covenants ‘expressed to be personal’. This right to call for an overriding lease against a landlord who claims payment of the fixed charge is itself an interest capable of protection by means of a Notice against a registered title under the LRA 2002 and as a class C(iv) land charge in unregistered land.69 Finally, for completeness, we should remind ourselves that the problem notice/overriding lease

65If, however, the current tenant fails to pay rent in the future, the original tenant’s liability arises for that rent and the landlord has six months from that liability arising to serve a problem notice.

66It is as if the original tenant has created a subtenancy for the defaulting tenant.

67Despite the similarity of name, this has nothing to do with ‘overriding interests’ under the LRA 2002.

68Note, as we shall see, that the same scheme applies where the landlord seeks to enforce a liability for a fixed charge against an ‘AGA tenant’, see section 6.6.2.

69Sections 19 and 20 of the LTCA 1995.

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system applies only when the original tenant is liable for a ‘fixed charge’. So, the original tenant’s liability under other covenants, such as the covenant to repair, remains unaltered unless and until that liability is crystallised by a liquidated damages clause.70

6.5.3The continuing rights and obligations of the original landlord throughout the term of the lease

As with the original tenant, the original landlord remains liable on all the leasehold covenants throughout the term of the lease, even after assignment of the reversion – Stuart v. Joy (1904) – and even to assignees of the tenant if they have the right to enforce the covenants (Celsteel v. Alton (No 2) (1987)).71 In similar fashion, as a matter of principle, the ability of the original landlord under a pre-1996 lease to sue for breaches of covenant should remain for the full duration of the lease. However, if and when the landlord assigns the reversion, he will, in effect, pass the benefit of covenants (the right to sue) to the assignee. This is the effect of section 141(1) of the LPA 1925 for pre-1996 leases because the section operates to transfer the benefit of all proprietary leasehold covenants to the assignee and, following Re King (1963), this means that the original landlord’s right to sue passes to the assignee even if that right existed in respect of a breach of covenant occurring before assignment. So, if in 1989 L has the right to sue T for (say) non-payment of rent, an assignment of the lease by L to L1 in 1990 will pass not only L’s right to sue on the benefit of leasehold covenants from thenceforward, but also L’s accrued right to sue T for the rent owed in 1989. If L wishes to retain this right, it will have to be reconveyed back explicitly by L1 to L at the time of the assignment.72

6.5.4The assignment of the lease to a new tenant for pre-1996 leases

The question here is whether the benefit and burden of any of the covenants in the lease made between the original landlord and the original tenant can ‘run’ with the land automatically when the lease itself is assigned. In simple terms, do the leasehold covenants (benefit and burden) pass automatically to a new tenant on assignment of the lease? In essence, this depends on two factors: first, does ‘privity of estate’ exist between the landlord and tenant so as to allow enforcement of the covenants; and second, do the covenants ‘touch and concern’ the land (Spencer’s Case (1583)).

70A clause fixing the amount of damages in advance of a breach and triggering the ‘fixed charge’ procedure.

71This position is modified for tenancies granted on or after 1 January 1996, and is discussed in section 6.6.3.

72Kataria v. Safeland (1997).

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6.5.5 The claimant and defendant must be in ‘privity of estate’

It is intrinsic to the enforcement of leasehold covenants under pre-1996 tenancies by, and against, the assignee of the lease (the new tenant) that he must stand in the relation of ‘privity of estate’ with a landlord who is also subject to the benefits and burdens of the covenants. In general terms, privity of estate exists where the claimant and defendant in an action on a leasehold covenant currently stand in the relationship of landlord and tenant under a legal lease. This can be broken down into two parts.

1The claimant and defendant must stand in the relationship of landlord and tenant. Hence, there is the potential for privity of estate between the original landlord and an assignee of the lease, between an assignee of the reversion and the original tenant, and between assignees of the reversion and the lease while they are sharing the estate in the land. Significantly, however, there is no privity of estate between a landlord and a subtenant, as they are not each other’s landlord and tenant. So, the simple point is that, in order for the benefit and burden of leasehold covenants to run to an assignee of the original tenant, that assignee must be ‘the tenant’ of the landlord who is suing or being sued.

2The claimant and defendant must be landlord and tenant under a legal lease. Despite some dicta to the contrary,73 it is clear that ‘privity of estate’ can exist only in respect of a legal lease. This means not only that the original lease must be legal in character,74 but also that any assignment of the reversion or the lease (as the case may be) must be in the form prescribed for legal interests; that is, by deed in compliance with section 52 of the LPA 1925. In this respect, it is important to note that, even if the original lease is created as a legal estate without the need for a deed – for example, it is for three years or less – if the ‘legal’ character of it is to be maintained, any assignment of it must be effected by deed (Julian v. Crago (1992)). The insistence that privity of estate can exist only when the assignee tenant and his landlord are tenant and landlord under a legal lease is an historical anomaly generated by the now-defunct distinction between courts of law and courts of equity, but it is a distinction at the heart of the pre-1996 law. Of course, in practice, leasehold covenants are likely to be of importance in long leases where an effective web of transmissible leasehold covenants will be crucial – as in long leases of residential flats. Such leases are very likely to have been granted on legal advice and, as such, will be made by

73Famously, Lord Denning, in Boyer v. Warby (1953).

74See section 6.3.2.

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deed and any assignment of them is likely also to be effected by deed. For leases granted on or after 1 January 1996, the rules concerning the transmissability of leasehold covenants make no distinction between legal and equitable leases and so this condition is not relevant.

6.5.6 The covenant must ‘touch and concern’ the land

In order that the benefit and burden of a leasehold covenant can pass to an assignee of the lease, it is not enough that the tenant stands in a relationship of privity of estate with the claimant/defendant landlord under a legal lease. In addition, for pre-1996 tenancies, only those covenants which ‘touch and concern’ the land are capable of being enforced by, and against, the assignee of a lease. The purpose of this requirement is to distinguish ‘proprietary’ covenants from merely ‘personal’ covenants. Proprietary covenants are those which attach to the land and affect its use, while personal covenants are those which were intended to confer an individual benefit on the original tenant alone. In practice, it can be difficult to distinguish between those covenants which do, and those which do not, ‘touch and concern’ the land, although considerable help has been provided by the guidelines put forward by Lord Oliver in Swift Investments v. Combined English Stores (1989). Although this test is not to be applied mechanically (i.e. each case depends on its own facts), it is of considerable assistance. In determining the nature of a covenant, the following points are to be considered. First, could the covenant benefit any owner of an estate in the land as opposed to the particular original tenant (indicates a proprietary covenant)? Second, does the covenant affect the nature, quality, mode of use or value of the land (indicates a proprietary covenant)? Third, is the covenant expressed to be personal? Examples of covenants which, by this test, would ‘touch and concern the land’ are covenants to repair, covenants restrictive of use of the premises,75 covenants not to assign or sublet without consent and, of course, the tenant’s covenant to pay rent. Covenants imposing an obligation to pay money have, in the past, caused some concern, but it is now clear from Swift that a ‘monetary covenant’ which underpins the performance of covenants that touch and concern the land, will itself ‘touch and concern’. For example, a covenant by a third party promising to underwrite the performance of the covenants (a ‘surety covenant’) does touch and concern the land – it underpins proprietary obligations – so that it may be enforced by a person other than the original party to whom it was made. Note, however, the anomalous position with respect to one particular type of covenant that should by any measure

75 For example, not to carry on a trade or business, not to grow trees over a certain height.

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‘touch and concern’ the land but is in fact treated differently. A landlord’s covenant to renew the lease (i.e. to give the tenant a new lease at the tenant’s option when the old lease expires through time) clearly fulfils the Swift test, but it is not capable of being passed (i.e. binding a new landlord) under leasehold covenant rules. Following Phillips v. Mobil Oil (1989), such covenants must be treated as typical third-party interests under the Land Charges and Land Registration Acts. Hence, in unregistered land, the tenant must ensure that the covenant to renew is registered as a class C(iv) land charge if it is to bind a purchaser of a legal estate in the land (i.e. a new landlord under a legal lease), and, in registered land, the covenant should be registered by means of a Notice, unless it can take effect as an interest which overrides under the ‘actual occupation’ provisions of Schedule 3 paragraph 2 of the LRA 2002. This position is now well established (i.e. conveyancers know about it) and has been continued under the system for post-1996 leases. To sum up then, if the covenants touch and concern the land, they may be enforced by, or against, an assignee of the lease (a new tenant) by or against a landlord with whom the tenant then stands in the relationship of privity of estate under a legal lease or legal assignment thereof.

6.5.7 Special rules

As noted above, even if the assignee of the lease is liable under the leasehold covenants, the liability of the original tenant under a pre-1996 tenancy continues throughout the entire term and, given that this is a primary liability, a landlord may resort to him immediately without resort to the assignee. Hence, it is always in the original tenant’s interest to ensure that any assignee of the lease is able and willing to fulfil all covenants. In contrast, the liability of an assignee of the lease extends only to breaches committed while the lease is vested in them. Therefore, an assignee is not liable for breaches of covenant committed before assignment of the lease (Grescot v. Green (1700)) unless these are of a continuing nature.76 Likewise, there is no liability for breaches committed after the lease has been assigned (Paul v. Nurse (1828)), for that liability must fall on the new tenant. Also, under pre-1996 tenancies, the original tenant is able to sue for breaches of covenants committed while he was in possession of the property, even though the lease may have been assigned subsequently (City and Metropolitan Properties v. Greycroft (1987)). The same is probably true for all subsequent assignees. Finally, in contrast with the position of original landlords, we may note that an original tenant does not lose the right to sue for breaches of covenant occurring before assignment.

76 For example, continuing non-payment of rent after assignment.

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