Экзамен зачет учебный год 2023 / Dixon, Modern Land Law

Modern Land Law

6.5.8The assignment of the reversion to a new landlord under pre-1996 tenancies

The question to be considered here is the mirror image of that considered above; that is, whether an assignee of the reversion (the ‘new’ landlord) is able to enjoy the benefits of the covenants in the original lease and whether he is subject to the burdens they impose. However, although the issue is the same, the relevant conditions are slightly different from those concerning assignment of the lease, primarily because of the intervention of statute.

6.5.9Section 141 of the Law of Property Act 1925: the benefit of the original landlord’s covenants

For pre-1996 tenancies, section 141(1) of the LPA 1925 provides that an assignment of the landlord’s reversion carries with it the benefit (the right to sue) of all covenants which ‘have reference to the subject matter of the lease’. In essence, this is a statutory transfer of the benefit of all covenants which ‘touch and concern’ the land (Hua Chiao Commercial Bank v. Chiaphua Investment Corp

(1987)). Importantly, this means that the benefit of all ‘touching and concerning’ covenants are transferred to an assignee of the reversion, irrespective of whether privity of estate exists, although, of course, the defendant in an action must still be liable on the covenants and privity of estate may be necessary to establish this. It also means (because of the clear words of the section) that the ‘new’ landlord acquires the right to sue in respect of breaches of covenant that occurred before assignment and that the ‘old’ landlord loses this right (London and County (A and D) Ltd v. Wilfred Sportsman Ltd (1971)). The test of covenants that have ‘reference to the subject matter of the lease’ (i.e. ‘touch and concern’) is that specified by Lord Oliver in Swift. In practical terms, then, the transfer of the benefit of all proprietary covenants to an assignee of the landlord is a simple matter: statute ensures that they pass automatically with the lease. Note that under the LTCA 1995, section 141(1) has no application to tenancies granted on or after 1 January 1996. It is replaced by a provision having wider effect.

6.5.10Section 142 of the Law of Property Act 1925: the burden of the original landlord’s covenants

For pre-1996 tenancies, section 142(1) of the LPA 1925 provides that an assignment of the landlord’s reversion carries with it the burden of (the obligation to perform) all covenants which also ‘have reference to the subject matter of the lease’. In essence, this is a statutory transfer of the burden of all covenants which ‘touch and concern’ the land. Again, this means that the obligation to perform these covenants passes to an assignee of the reversion, irrespective of privity of estate, although the claimant (e.g. the current tenant) may need

274

Chapter 6: Leases

to plead such privity in order to prove that the benefit of the covenant has run to him. In this respect, the Swift test of ‘touching and concerning’ is again relevant, although, as discussed below, some problems have emerged. Note that under the LTCA 1995, section 141(1) has no application to tenancies granted on or after 1 January 1996. Again then, in practical terms, the position for pre1996 leases is relatively simple: the burden of all proprietary covenants passes to an assignee of the reversion automatically. However, for reasons that are not particularly cogent or convincing, there are some exceptions to this simple rule.

1It is clear that a landlord’s covenant to renew the lease at the tenant’s option when the original term expires does ‘have reference to the subject matter of the lease’ and hence is capable of being enforced against assignees of the reversion (Simpson v. Clayton (1838)). However, according to Beesly v. Hallwood Estates (1960) and Phillips v. Mobil Oil (1989), the burden of this covenant does not pass automatically on assignment of the reversion, despite the clear words of section 142(1) of the LPA 1925. According to the judge in that case, such a covenant is registrable as a class C(iv) estate contract in unregistered land, and must be so registered in order to bind the assignee of the reversion; it will not pass automatically. This does seem a strange decision, and has been roundly criticised as being inconsistent with section 142. Indeed, in Armstrong and Holmes v. Holmes (1993), the judge criticised Hallwood and pointed out that it had been disproved of by the Court of Appeal in Greene v. Church Commissioners (1974). However, even under the new regime of the LTCA 1995, these covenants will continue to be registrable in both registered and unregistered land (section 3(6)(b) of the LTCA 1995). Fortunately, however, in respect of registered land, if the burden of such a covenant cannot pass automatically under ‘leasehold covenant rules’ (as Mobil Oil implies77), it is likely to constitute an interest which overrides under Schedule 3, paragraph 2 of the LRA 2002 and be binding on the assignee of the reversion because the tenant who can enforce it will be in actual occupation of the land to which the covenant relates.

2In contrast to a surety covenant which underpins the performance of leasehold obligations (see above), a covenant by the landlord to repay a deposit given by the tenant does not ‘touch and concern’ and cannot, therefore, be enforced against an assignee of the

77But note the words of section 29(2)(b) of the LRA 2002, that a disposition of a registered leasehold estate is subject to the burden of an interest which is an incident of the estate.

275

Modern Land Law

landlord who actually received the money under a tenancy granted before 1 January 1996 (Hua Chiao Commercial Bank). This changes for tenancies subject to the LTCA 1995.

3A landlord’s covenant to sell the freehold to the tenant does not ‘touch and concern’ the land, and cannot be enforced against an assignee of the reversion (Woodall v. Clifton (1905)). It is not entirely clear why this covenant should be regarded as personal, whereas the landlord’s covenant to renew the lease is regarded as proprietary. Again, this will change for tenancies subject to the LTCA 1995.

6.5.11 Special rules

As noted above (and in contrast to the position with the original tenant), the ability of the original landlord to sue for breaches of covenant ceases after assignment of the reversion, even if the breach was committed before that assignment. This is because section 141(1) of the LPA 1925 transfers all the assignor’s rights to the assignee whenever they accrue (Re King). Second, the liability of an assignee of the reversion ceases when he assigns the lease to another assignee. However, it is uncertain whether an assignee of the reversion is liable for breaches of covenants committed by the original landlord before assignment. As a matter of principle, it would seem that he should not be so liable, but dicta in Celsteel v. Alton (1985) suggest otherwise. Third, the benefit and burden of leasehold covenants under pre-1996 tenancies pass to the assignee of the reversion by statute, not by the doctrine of privity of estate. Therefore, benefits and burdens pass, and may be sued on, in circumstances where there is no privity of estate, as in the case of equitable leases/equitable assignments, or where the assignee of the reversion sues the original tenant even though the original tenant had never been that assignee’s tenant (e.g. because the lease was assigned before the reversion – Arlesford Trading v. Servansingh (1971)). Fourth, rights of re-entry are special rights reserved by a landlord to ‘re-enter’ the property and terminate the lease as a result of a tenant’s breach of covenant. Importantly, every assignee of the reversion under a pre-1996 tenancy obtains the benefit of this right if it was included in the original lease (section 141 of the LPA 1925) and every tenant will be subject to the right of re-entry even if they are not actually liable on the covenants which have been broken (Shiloh Spinners v. Harding (1973)). This is because the right of re-entry operates against the land, whoever is in possession and irrespective of whether that person was actually the person whose actions breached the covenants. The position is the same for tenancies operating under the new regime (section 4 of the LTCA 1995). Finally, by way of confirmation of the special position of rights of re-entry, we can note Kataria v. Safeland plc (1997). In that case, the reversion was assigned together with a right of re-entry, but the ‘old’ landlord was granted by contract the

276

Chapter 6: Leases

right to recover rent owed prior to the assignment.78 The new landlord was not owed rent but, nevertheless, was permitted to enforce his right of re-entry because rent was owing on the land and the right of re-entry stands separately from the covenants that it underpins.

6.5.12 Equitable leases and equitable assignments of legal leases

As far as pre-1996 tenancies are concerned, all that has been said above about the running of leasehold covenants to successors in title of the original landlord and original tenant apply when both the original lease was legal and the assignment of it was made in the way appropriate to legal interests; that is, by deed. If, however, the original lease is equitable, or if a legal lease is imperfectly assigned (by written contract, not deed), then for pre-1996 tenancies, different considerations apply, primarily because, as explained above, ‘privity of estate’ does not exist under equitable leases or equitable assignments of legal leases.

6.5.13 The original landlord and tenant

The majority of equitable leases arise from a specifically enforceable written contract between the prospective landlord and prospective tenant.79 Consequently, the original parties are bound in contract to perform all the obligations of the lease, even those that are purely personal in nature.

6.5.14The assignment of the reversion of an equitable lease to a new landlord

The intervention of statute means that, where the reversion of an equitable lease is assigned from landlord to landlord (or a legal reversion is imperfectly assigned80), the absence of privity of estate does not seriously prejudice the assignee’s position. This is because sections 141 and 142 of the LPA 1925 ensure the transmission of the benefit and burden of leasehold covenants irrespective of the nature of the lease in which they are contained. Therefore, for pre-1996 tenancies, by virtue of section 141(1) of the LPA 1925, the assignee of the reversion of an equitable lease will be entitled to enforce all leasehold covenants (the benefit) which ‘have reference to the subject matter of the lease’.81 Likewise, under section 142(1), the obligation to perform similar

78In effect, the parties contracted out of Re King (1963).

79Walsh v. Lonsdale. Or a written instrument that is treated as if it were a contract.

80That is, where a written instrument is used instead of the required deed.

81Rother District Investments Ltd v. Corke (2004), where the assignee of the landlord was entitled to forfeit prior to his lease being registered and having, in consequence, an equitable title.

277

Modern Land Law

covenants (the burden) will pass to the assignee. In short, the position is very similar to that operating for legal leases granted before 1 January 1996.

However, for a pre-1996 tenancy, the position is not quite as straightforward as this first appears. In order for the passing of the ‘benefit’ or ‘burden’ to have any practical meaning, the landlord must have someone to sue, or someone who can sue him. If the land is still held by the original tenant there is no problem, as this will be the original contracting party and he will be bound by the terms of the lease. But, if the tenant has also assigned the equitable lease, two further issues must be resolved. First, does the lease itself bind the purchaser of the reversion, so that the new landlord takes the land subject to the equitable tenancy? This falls to be determined by the normal rules of registered or unregistered conveyancing.82 Second, and more importantly for present purposes, before the new landlord can actually rely on the leasehold covenants or be accountable under them, it is also necessary to show that the assignee of the equitable tenant is subject to the burden, or enjoys the benefit of those covenants (as the case may be). For pre-1996 tenancies, this turns on the rules discussed below.

6.5.15 The assignment of the equitable lease to a new tenant

The ability of the benefit or burden of the original tenant’s covenants in a pre1996 tenancy to run with the assignment of an equitable lease (or an imperfect assignment of a legal lease) is complicated. The first point is that traditionally this situation is regarded as lacking the necessary ‘privity of estate’ and so Spencer’s Case (1583) does not apply and the covenants cannot pass automatically.83 However, it is well established that the benefit (but not the burden) of any contract can be expressly assigned. Consequently, an equitable tenant is perfectly free to transfer the benefit of every covenant (including personal ones) to the assignee expressly when the lease is itself assigned. Indeed, this is normal conveyancing procedure, and has the consequence that most equitable assignees will have the right to enforce the original tenant’s covenants against whomsoever is subject to their burden. The reason is, quite simply, that the original contracting party has passed the benefits under the contract (the right to sue) to the person to whom he has also assigned the lease.

Unfortunately, however, there are no parallel rules concerning the passing of the burden of the original equitable tenant’s leasehold covenants. In fact, as Purchase v. Lichfield Brewery (1915) illustrates, an equitable assignee of

82See Chapters 2 and 3 and the position is noted briefly above.

83Whether this be a defensible position is beside the point. The rule is well established and has governed conveyancing practice.

278

Chapter 6: Leases

the lease may not be liable to perform any of the original tenant’s covenants, including the obligation to pay rent. This is the combined effect of the rule that no privity of estate exists between landlord and tenant under an equitable lease (or equitable assignment of a legal lease), so preventing automatic passing of the burden of the covenants, and the rule that burdens of a contract cannot be assigned, so preventing the express inter partes transfer of leasehold obligations. So, while benefits may run under an equitable lease (because of express assignment), and the new tenant may sue the landlord, the landlord cannot sue the tenant. Obviously, this can cause considerable hardship to the landlord who may find the value of his reversion substantially diminished through an assignment of the lease over which he had little control and where the land is now possessed by a tenant whom he cannot control. Consequently, a number of alternative, or ‘indirect’, methods of enforcing the burden of leasehold covenants against equitable assignees of the lease have been developed. These are considered below. For the most part, they will be redundant for tenancies granted on or after 1 January 1996 because of the statutory magic of the LTCA 1995.

First, in Boyer v. Warby (1953), Denning LJ held that the burden of leasehold covenants which ‘touched and concerned’ the land could pass to the assignee of a lease for three years or less (which is legal without a deed), even though the assignment itself was not by deed. On one view, this could be taken to mean that Purchase v. Lichfield Brewery has been overruled, and that burdens (and so benefits) can pass automatically, as with legal leases. However, this wide interpretation is very doubtful, and no conclusive reasons were given in Boyer other than that ‘law’ and ‘equity’ were now fused. Unfortunately, this merely assumes what it has to prove. In other words, Boyer should be limited to its own facts; that is, because the lease was originally legal, even though not made by deed (being for three years or less), its assignment without deed may be treated as an effective transfer of the legal estate, so preserving the required ‘privity of estate’ necessary to make leasehold covenants run.

Second, even if the covenants themselves are not binding on the equitable assignee, they can be enforced against that assignee indirectly by means of a right of re-entry (a forfeiture clause) in the original lease. As we shall see, the right of re-entry allows a landlord to recover premises after a breach of covenant and thereby terminate the lease. Such rights of re-entry stand alone, and may be relied on by a landlord if a covenant is broken, even though the covenant itself was not binding on the tenant (Shiloh Spinners v. Harding (1973)) or, indeed, even if a previous landlord enjoys the personal right to enforce the covenant, as in Kataria v. Safeland plc (1997). This may seem odd because the right of re-entry is usually seen as a remedy for breach of covenant and thus appears to require that a covenant has been broken by the person subject to the remedy of forfeiture. However, land law is more inventive

279

Modern Land Law

than this. A proprietary (‘touching and concerning’) leasehold covenant attaches to the land, even though the current tenant (as an equitable assignee) may not be bound by it. Consequently, if actions take place on the land that contravene the covenant, the covenant has been broken. Admittedly, direct action against the defaulting tenant is not possible (e.g. no action in damages), but action against the land is. So, if the landlord has the benefit of a right of re-entry, the landlord can ‘re-enter’, take possession and bring the lease to an end. Although there are statutory controls on the exercise of the right of re-entry,84 it will be appreciated that the possibility of re-entry is very persuasive in ensuring that the tenant does, in fact, observe the leasehold covenants. Would the tenant be happy to lose his lease through forfeiture, or instead actually perform the leasehold obligations? We must note, however, that the efficacy of this indirect enforcement method is constrained by the following requirements; that a right of re-entry must exist and its benefit have been passed to the current landlord (this is most likely); that the leasehold covenant is proprietary in nature; and that the tenant is bound by the right of re-entry, even though not bound by the actual covenants. This last restriction operates differently, depending on whether the land is registered or unregistered. In unregistered land, rights of re-entry in an equitable lease are not land charges and are binding on a tenant (and any other person in possession) according to the doctrine of notice. A tenant will be deemed to have notice of all terms of the original lease, including the right of re-entry, and hence the condition is satisfied easily. In registered land, the right of re-entry is likely to bind automatically under the express provision in section 29(2)(b) of the LRA 2002.85

Third, even though the landlord and equitable assignee do not stand in a relationship of privity of estate, any ‘restrictive covenants’ (i.e. those preventing the assignee of the lease from doing something on the land) may be enforced by virtue of the principle of Tulk v. Moxhay (1848). This is discussed further in Chapter 8 (the law of freehold covenants), but in essence the rule in Tulk v. Moxhay (1848) permits the enforcement of any restrictive proprietary covenant against a person in possession of the land over which the covenant takes effect. This may be an adverse possessor, freeholder or, as here, an equitable tenant. So, if an equitable lease contains a restrictive covenant and the benefit of that covenant has passed to the current landlord (as is most likely: section 141(1) of the LPA 1925), that covenant can be enforced against the equitable tenant by means of an injunction preventing any continuation of the activity which is prohibited.86 The conditions for this

84See section 6.7.5.

85That a disposition of a registered leasehold estate is subject to the burden of an interest that is an incident of the estate.

86For example, that the tenant may not carry on a trade or business.

280

Chapter 6: Leases

means to enforcement are that the covenant is proprietary (‘touches and concerns’), that it has become attached to the land (achieved through section 79 of the LPA 192587); and that it is binding on the tenant. In unregistered land, the restrictive leasehold covenant cannot be a land charge, and so will be binding according to the doctrine of notice (Dartstone v. Cleveland Petroleum (1969)). Again, the tenant will be deemed to have notice of all covenants contained in the lease. In registered land, the restrictive covenant will be binding because of the effect of section 29(2)(b) of the LRA 2002.

Fourth, it may be possible to argue that a new legal tenancy comes into existence between the landlord and the equitable assignee when the assignee pays rent and this is accepted. Such a periodic tenancy will usually be legal (because it will be for three years or less and no formality is required) and leasehold covenants will be directly enforceable. However, it is not clear why the covenants implied into the ‘new’ legal periodic tenancy between landlord and equitable assignee should be the same as those contained in the original equitable lease, and there remains the difficulty that the parties will have intended and believed that their relations are governed by the old equitable lease, not some new artificial creation.

Finally, it may be possible to imply new contractual obligations on the part of the equitable assignee in favour of the landlord that will then create a direct contractual nexus between those parties. This is similar to the implication of a new periodic tenancy considered above, except that in this case it is simply new obligations that are being implied, not an entirely new lease. The occasions when this implication may be made are a matter of some debate and much will depend on the circumstances under which the assignee has taken the lease. Proprietary estoppel could come to the aid of the landlord, although it will be difficult to prove that there is unconscionability simply because the landlord has been denied the benefit of the covenants. Of course, if the equitable assignee enters into new express covenants directly with the landlord, then these are enforceable as a matter of contract. In fact, the possibility of new, direct covenants between the intended assignee and the landlord is a real option if the landlord has the right to withhold consent to assignment of the lease. In such a case, the insistence on new direct covenants between assignee and landlord will be the price extracted for the landlord’s agreement to the assignment.88

The efficacy of these methods of enforcement against the assignee should not be underestimated. The threat of re-entry, the enforcement of restrictive

87See Chapter 8.

88In practice this is frequently the case. A landlord will wish to have some control over any new tenant (the assignee) and while consent to an assignment cannot usually be refused unreasonably, the insistence by the landlord of a direct contractual relationship with the intended assignee is not unreasonable.

281

Modern Land Law

covenants by injunction and the ability of the landlord to extract new direct covenants can prove just as effective in ensuring that the equitable assignee observes the leasehold covenants as would have been the case had the covenants passed automatically. Consequently, the ‘new’ statutory rules of the LTCA 1995, discussed below in section 6.6 should not be seen as directed primarily at the ‘evils’ associated with equitable leases. These ‘evils’ could be countered and usually were.

6.5.16 The position of subtenants

As was indicated at the very outset of this chapter, a tenant may create out of their interest a ‘shorter’ tenancy for another person. The original tenant under the ‘headlease’ then becomes the landlord of his own tenant, often called the subtenant. Of course, the subtenancy may contain its own covenants, and often these will be identical to those contained in the headlease. However, it may well happen that it is the subtenant (the actual occupier of the land) who so acts as to cause a breach of a covenant which was made between the original landlord and original tenant. An example is where the original tenant has promised not to carry on any trade or business, but then a sublet is established, and the subtenant does just that. Once again, the head landlord has a problem, as he does not stand in the relationship of privity of estate or privity of contract with the subtenant and cannot enforce leasehold covenants against him directly. There are, however, a number of possibilities that may assist the landlord in this situation, assuming that the current tenant is not prepared to act against the subtenant under the lease (the sublease) that exists between them.

1The head landlord may enforce a right of re-entry against the current tenant. This is because, in absolute terms, the acts of the subtenant have caused a violation of the covenant whose performance is owed by the tenant to the landlord. Hence, the landlord has at his disposal the remedy of forfeiture. As is explained below, successful forfeiture of the tenancy automatically terminates the subtenancy.89 Necessarily, this is an effective, but drastic, remedy. It results in the landlord having no tenant and hence no income from the land unless a new lease can be arranged. It may not be a remedy of

first choice.

2The head landlord may be able to use the Tulk v. Moxhay rules to enforce restrictive covenants directly against the subtenant. The situation is effectively the same as that discussed in relation to the position of equitable assignees and subject to the same limitations, both legal and practical.

89 Pennell v. Payne.

282

Chapter 6: Leases

3The subtenant may enter into direct covenants with the head landlord. These can again be enforced directly as a matter of contract. Likewise, the landlord may be able to insist that these covenants are entered into as a condition of his consent to such subtenancy, if that power has been retained in the lease between the landlord and tenant.

6.5.17 The Law Commission and proposals for reform

Prompted by some of the uncertainties, inconsistencies and perceived injustices of the pre-1996 rules, the Law Commission proposed a number of changes to the law of leasehold covenants.90 The Commission believed that the continuing liability of the original tenant throughout the entire term of the lease both distorted the public perception of the nature of the landlord and tenant relationship,91 and caused unwarranted and unfair hardship to tenants who found themselves liable to perform rental or other obligations undertaken some time ago and now broken by some tenant over whom they had no control; for example, where the tenant in breach was the third or fourth assignee. Consequently, they proposed that when a tenant assigned a leasehold interest, he should be released automatically from all liability in respect of any future breaches of the covenants. The only exception would be where an assignment by the tenant was conditional on the landlord’s consent, in which case the landlord could impose a condition whereby the original tenant would guarantee the performance of the covenants by the immediate assignee. However, any continuing liability imposed in this manner could not extend beyond one assignment and it would truly be a guarantee so that the landlord would have to look to the assignee first in the event of any breach.

Somewhat controversially, however, the Law Commission did not feel it necessary to protect the landlord from continuing liability under his covenants. Thus, under the original proposals drafted by the Law Commission, a landlord would remain liable for breaches of covenant committed by his successors unless he served a notice on the tenant indicating his desire to be released. Should the tenant disagree with the proposed release, the matter would be resolved in court, with the landlord seeking to establish that it would be reasonable to release him from continuing responsibility.92

90Report No. 174.

91The perception being that the liability of landlord and tenant was co-extensive with their possession.

92One reason may have been to prevent landlords assigning the lease to a ‘shell’ company with which they were associated and thereby obtaining release from the covenants for themselves. If the ‘shell’ were then to prove empty, this would effectively strip the tenant of any remedy. This may now be possible after London Diocesan Fund v Avonridge (2005).

283