Экзамен зачет учебный год 2023 / Dixon, Modern Land Law

Modern Land Law

However, as discussed below, the tenant’s apparent position of strength in this regard has been mitigated by the House of Lords decision in London Diocesan Fund v. Avonridge (2005). In similar fashion, originally, there was no proposal to change the current effect of section 141 of the LPA 1925 whereby a landlord who assigns the reversion loses the right to sue for beaches of covenant, even if they have been committed while he was the landlord (i.e. the rule in Re King (1963)). The Law Commission also proposed a much more radical reform: the abandonment of the requirement of ‘touching and concerning’ as the touchstone for the transmissibility of the benefits and burdens of leasehold covenants. As we shall see, this has now been done for leases granted on or after 1 January 1996, even though most of the problems with the ‘touching’ principle appear to have been generated more by the fact that it is difficult to define in advance what the concept requires, rather than by an analysis of whether the rationale behind the requirement is still compelling.

6.6The new scheme. The law applicable to tenancies granted on or after 1 January 1996: The Landlord and Tenant (Covenants) Act 1995

The Law Commission’s proposals generated much public interest and resulted eventually in the presentation of a Private Member’s Bill to Parliament. It may seem surprising that such a ‘technical’ item of legislation should be presented to Parliament under the cumbersome Private Member’s Bill procedure instead of being guided through smoothly as an uncontroversial government bill. In fact, opposition to the Law Commission’s proposals by landlords’ pressure groups, such as the British Retail Consortium, and pressure on the legislative timetable, meant that the Private Member’s Bill procedure was, at the time, the only hope of securing reform of leasehold covenant law. Even then, the strength of this opposition, when combined with the absence of government protection, nearly destroyed the bill and did result in the new Act being much more of a compromise between tenants’ and landlords’ interests than was envisaged originally by the Law Commission. As we shall see, one view of the legislation is that the improvement in the position of tenants secured by the LTCA 1995 is effectively countered by the corresponding advantages secured for landlords, at least in respect of commercial leases.

The Landlord and Tenants (Covenants) Act 1995 came into force on 1 January 1996. Save for those sections of the Act, mentioned above, that apply to all tenancies, the Act regulates the transmission of the benefit and burden of leasehold covenants in all new tenancies (legal or equitable) granted on or after that date. Consequently, for such tenancies, reference must be made to the Act to determine whether a landlord or tenant is bound by,

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or may enforce, leasehold covenants relating to the land demised in the lease (Oceanic Village v. United Attractions (2000)).

6.6.1 General principles of the 1995 Act

This section indicates in very brief terms the general effect of the LTCA 1995 and the principles on which it is based. The sections following will discuss the position in more detail, although it must be remembered that case law on the 1995 Act is still relatively sparse.

First, the Act applies to tenancies granted on or after 1 January 1996, and it applies in the same way to legal and equitable tenancies. The old rules that differentiated between these types of lease are no longer relevant (section 28(1) of the LTCA 1995). Second, the tenant (whether original or an assignee) is released automatically from the burden of leasehold covenants when he assigns the tenancy (section 5 of the LTCA 1995), subject only to the possibility that he might be required to guarantee performance of the leasehold covenants by the next (but only the next) immediate assignee (section 16 of the LTCA 1995). There is an exception for assignments made in breach of covenant, or assignments made by operation law, when the assigning tenant remains liable (section 11(2)). Third, the original landlord is not released automatically from the burdens of leasehold covenants, but may serve a notice on the tenant applying for such release (section 6). Release will occur if the notice is not answered within a specified time, or if the landlord’s application to the County court in the event of objection by the tenant is successful (section 8). A landlord assigning this reversion in breach of covenant, or by operation of law, cannot serve such a notice (section 11(3)). In any event, a successful notice relieves the original landlord from liability arising only under ‘landlord’ covenants. It does not relieve liability under personal covenants which, because they are expressed to be personal (see below) have not passed to the assignee (BHP Petroleum v. Chesterfield Properties (2001)). However, a landlord is able to contractually limit the period of their liability to the period for which they are in possession (thus avoiding the notice procedure), as decided by the House of Lords in the controversial decision in London Diocesan Fund v. Avonridge (2005). Fourth, the rule that covenants must ‘touch and concern’ the land or ‘have reference to the subject matter of the lease’ before the benefits and burdens can pass to assignees of the lease or the reversion is abolished (sections 2 and 3 of the LTCA 1995). Fifth, the benefit and burden of all leasehold covenants pass automatically to assignees of the lease and of the reversion so that an assignee may enforce, and will be subject to, any covenant contained in the lease (section 3). This means that there is no need to show ‘privity of estate’ and that sections 141 and 142 of the LPA 1925 are no longer applicable to tenancies granted on or after 1 January 1996. Only those covenants that are ‘expressed to be personal’, that are not actually binding on the assignor, or that do not relate to the premises

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subject to the lease will not so pass.93 Note also that unlike the ‘old’ law, the transfer of the benefit of a covenant to an assignee of the landlord does not deprive the assignor of the right to sue in respect of breaches occurring before the assignment, so reversing Re King (1963) for ‘new’ leases (section 24(4) of the LTCA 1995). Sixth, the provisions relating to ‘problem notices’ and overriding leases, discussed above in relation to pre-Act tenancies, also apply to tenancies falling under the Act. For example, if an assigning tenant is called on to pay a sum under his guarantee of the next immediate assignee’s liability, then a ‘problem notice’ must be served within the proper period (six months from the liability arising) for the guarantee to be enforceable. Likewise the guarantor has the option of securing an overriding lease.

6.6.2 The tenant’s position in more detail

The 1995 Act has modified considerably the position of tenants under leasehold covenants. The two most important reforms are the statutory release of all tenants, including the original tenant, from the burden of all covenants when they assign the lease, and the rule that the benefit and burden of covenants in most cases will pass automatically to an assignee of the lease. Gone are the worries about the continuing liability of an original tenant throughout the entire term of the lease, but no longer does a landlord have to prove ‘privity of estate’ and ‘touching and concerning’ before he can enforce leasehold covenants against a tenant in possession. All current tenants under legal or equitable leases granted on or after 1 January 1996 will be bound by the leasehold covenants. For example, an assignee under an equitable lease will be bound to carry out the original tenant’s covenant to repair, even though no privity of estate exists with the current landlord. Similarly, the original tenant will be released from this liability, save only that he may have been required to enter an authorised guarantee agreement (AGA) to guarantee performance of the obligation by the tenant to whom he assigns.

Although the Act has entered into force, and applies to leases granted on or after 1 January 1996, case law remains scarce. The statute itself can be difficult to interpret,94 and the diverse use of the leasehold estate is sure to generate unforeseen difficulties and anomalies. It will be some time yet before the precise operation of the statute is clear, although there has been some limited guidance. What follows, then, is an outline of the effects of the legislation on both a legal and equitable tenant under a lease to which the statute applies. It is important to note at this early stage that the statute says very little about

93Section 3(1)(a) and 3(2) of the LTCA 1995.

94In First Penthouse v. Channel Hotels and Properties (2003), Lightman J when construing section 3 of the Act noted that ‘[t]he Act is the product of rushed drafting and its provisions create exceptional difficulties’.

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the position of subtenants in their relation with landlords. The Act is concerned with the ‘assignment’ of a lease of a reversion: a subtenant takes a new lease from his landlord and is not an assignee.95

6.6.2.1 Release of tenants and authorised guarantee agreements

First for consideration is the principle encapsulating one of the fundamental motives for the legislation: that the original tenant and all subsequent tenants will be released from the obligation to perform the covenants (and lose the right to enforce them) on assignment of the lease, provided that such assignment is not itself in breach of covenant, or otherwise excluded by operation of law (sections 5 and 11 of the LTCA 1995). Necessarily, the release of the original tenant from liability on assignment deprives the landlord of an effective remedy if the tenant currently in possession defaults on the lease. For this reason, a landlord may require the original tenant to enter into an AGA as a condition of the assignment of the lease (section 16). Such an agreement will oblige the assigning tenant to be guarantor of the tenant’s leasehold covenants for the next immediate assignee. So, if T wishes to assign to T1, the landlord may be able to require T to guarantee the performance of the covenants by T1. Under the Act, it is only permitted to require an AGA in order to guarantee performance for the next immediate assignee. Thus, on an assignment by T1 to T2, T’s guarantee agreement is discharged.96 This procedure is a necessary counterbalance to the release of the tenant on assignment, and was proposed by the Law Commission in its original report.

The circumstances in which a landlord may require a tenant to enter into an AGA are found in section 16(3) of the 1995 Act and their meaning is not altogether free from doubt. The issue is best considered first in relation to the original tenant and then any assignee.

6.6.2.1.1 When may the original tenant be required to enter into an AGA?

In considering this issue, it must be remembered that the ability of a landlord to require the original tenant to enter into an AGA is closely connected to the landlord’s ability to control assignment by requiring the tenant to seek his (the landlord’s) consent before assignment.

1If the lease contains an absolute covenant against assignment, then the landlord is entitled without more to require the tenant to enter into an AGA as a condition to giving his consent (section 16(3) of the

95Of course, the Act will apply separately to the lease between the tenant and subtenant, but not between landlord and subtenant.

96Although it may be possible to require T1 to enter into an AGA to guarantee performance by T2, see below.

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LTCA 1995). This is as it should be, given that an absolute covenant against assignment means that the landlord can simply refuse permission to assign without reasons. Some commercial leases will contain such a covenant but they are unattractive to tenants for obvious reasons and are unlikely to be agreed when there is an ample of commercial property for rent.

2If the lease contains a qualified covenant against assignment – meaning that the landlord’s consent to assignment may be withheld only in certain circumstances – and it is a lease of commercial premises and the lease itself stipulates that the giving of an AGA can be a condition of the landlord’s consent to assign – then the landlord may require an AGA. This is so whether or not it is reasonable to impose an AGA (section 16(3) of the LTCA 1995 and section 22 of the LTCA 1995).97 Most leases of commercial premises will fall into this category and, in consequence, the imposition of an AGA will be possible in the majority of cases.98

3If the lease contains a qualified covenant against assignment and is of residential or agricultural premises, or of commercial premises where the lease contains no specific obligation to enter into an AGA, then the landlord can require an AGA only if it is reasonable to do so (section 16(3)(b) of the LTCA). It is not yet clear when it will be ‘reasonable’ to do so, although landlords would argue that it is always reasonable to do so provided no other conditions are attached to the consent to assign.

4If the lease (of any kind) contains no covenant against assignment – meaning that the tenant can assign irrespective of the landlord’s wishes – then the landlord cannot insist on an AGA. However, it is most unlikely in practice that a lease will omit to give the landlord the right to control assignment either by an absolute or qualified covenant.

6.6.2.1.2 When may an assignee be required to enter into an AGA?

This is the situation where T (the original tenant) has assigned to T1 and T has been required to enter into an AGA guaranteeing T1’s performance of the

97Section 22 inserts a provision in section 19 of the Landlord and Tenant Act 1927 allowing AGAs in ‘unreasonable’ circumstances. The section also permits other objective conditions to be attacked to consent to assign and these also may not be attacked on the ground of unreasonableness; for example, the potential assignee company have a certain level of capital reserves, or is publicly quoted, or is fully insured, or is backed by appropriate guarantees.

98That is not to say that one will be insisted on in practice – a landlord may regard an AGA as unnecessary to protect its position, given the remedy of forfeiture and there are disadvantages attendant on enforcing AGA liability (i.e. that the former tenant liable under an AGA may be entitled to an overriding lease).

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covenants in the lease. If T1 then assigns to T2, it is absolutely clear that T is released form the AGA, for the original tenant can only ever be required to guarantee performance by the next immediate assignee. But, can T1 be required to enter into an AGA to guarantee performance by T2? The position is unclear. The difficulty arises because the LTCA 1995 appears to say that an AGA may be required by a landlord only when a tenant is released from liability on covenants by virtue of the Act itself (section 16(1) of the LTCA). This is certainly the original tenant, but an assignee (T1) was never, under the old law, liable after he had assigned to another (T2). The assignee’s liability ended when he assigned and did not continue in the same way as that of the original tenant. Hence the assignee (T1) is not released from liability by the Act and so it appears cannot be required to enter into an AGA to guarantee T2.

If this were the final word, it might pose serious difficulty for landlords as they would lose the ability to sue another person as soon as the first assignee assigned to a second assignee.99 Consequently, there are three arguments countering this possibility. First, if the assignee (T1) enters into direct covenants with the landlord on assignment, these would have continued to bind throughout the entire term of the lease, so T1’s release is caused by the Act and so he can be required to enter into an AGA in exactly the same circumstances as the original tenant. This is because, in effect, the assignee has become the original tenant by making direct covenants with the landlord. Given that this will occur in most assignments concerning commercial premises, perhaps there will be few difficulties in practice. Second, and more controversially, if the lease itself contains a covenant requiring a tenant to enter into an AGA, this is itself a tenant’s covenant that will run to all assignees under the rules of the LTCA providing for the automatic transmission of benefits and burdens. In other words, if the requirement to enter an AGA is treated as a ‘normal’ covenant, it will run to assignees. However, this might contravene the anti-avoidance provisions of the LTCA and so it remains to be seen how the courts resolve this contradiction in the effect of the LTCA 1995 in those cases where the assignee has not been required to enter into direct covenants with the landlord. Third, also controversially, it could be argued that because the benefit and burden of leasehold covenants now pass to assignees under the Act, their release from those covenants on assignment is, after all, caused by the Act. Hence, the assignee can be required to enter into an AGA after all. This is in effect an argument that the Act has entirely replaced the old law and so any reference to it – by saying

99Where the lease is assigned by the original tenant, ignoring guarantors, the landlord has two potential defendants: the current tenant and the original tenant under an AGA. If the assignee assigns, the landlord would ‘lose’ a defendant, now having only the current tenant (T2) and not the original tenant (the AGA lapses) and not the first assignee (T1) as he cannot be required to enter into an AGA.

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that assignees are not released by the Act but by the old law – is misplaced and inaccurate.

Obviously, these provisions are complicated, not least because of the elliptical statutory language, but the crucial point is that if a lease granted on or after 1 January 1996 contains a promise by the original tenant not to assign without the landlord’s consent, and the landlord requires an AGA before he will give such consent, the assigning tenant will be required to enter an AGA in order to assign if that is reasonable or, for leases of commercial premises, simply if the need for an AGA was stated expressly as a condition on which consent to assignment could be refused by the landlord. For assignees, if the assignee has made direct covenants, he will be an ‘original’ tenant for these purposes. If he has not then his position is uncertain, but there are good arguments why he too should be subject to the AGA regime. Importantly, if a landlord seeks to enforce a (lawful) AGA liability against the last immediate tenant (the ‘AGA tenant’), the ‘problem notice’ procedure of section 17 of the LTCA is applicable. This means that the guaranteeing tenant must be given at least six months notice of any liability arising under the AGA100 and, if the liability is met, of claiming an overriding lease under section 18 of the LTCA 1995.101 So to sum up this point, although landlords have lost the right to sue the original tenant throughout the entire term of the lease, all professionally drafted leases are likely to contain a provision enabling the landlord to impose an AGA on the original tenant (and possibly later assignors). It can occur, therefore, that each assignee will thus have to guarantee performance of the covenants by the tenant to whom they assign (but only that tenant). In effect, the landlord retains a second defendant as ‘compensation’ for losing the original tenant as a second defendant.102 Seen as such, it seems that the Law Commission’s aim of relieving the original tenant of continuing liability has been achieved at the price of transferring that liability ‘down the chain’ of assignments to each assigning tenant in turn. Undoubtedly, this is fairer because it equates liability with possession and liability for the assignee who the assignor has chosen, but it should not be thought that the 1995 Act has diminished to any great extent the totality of rights available to a landlord when default occurs.

100Of course, the actual default is by the tenant to whom he assigned.

101If the overriding lease is claimed, it will have the effect of propelling the AGA tenant back into possession ‘in between’ the landlord and the current (defaulting) tenant. It will thus give the AGA tenant the opportunity of forfeiting the lease of the defaulting tenant and either taking beneficial possession himself or assigning the lease for value to a new tenant. This might be worth more money that the liability he has paid.

102The first defendant is the current tenant whose actions have actually breached the terms of the lease; for example, by not paying rent.

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6.6.2.2 Automatic transfer of benefits and burdens

Second, and as a corollary to the above, the other major effect of the LTCA is that assignees of the current tenant will acquire the benefit and burden of leasehold covenants relating to the demised premises, save only that benefits and burdens of covenants that are ‘expressed to be personal to any person’ will not pass (section 3(6)(a) of the LTCA 1995).103 However, this does not deprive the assignor of the right to sue for pre-assignment breaches, so reversing Re King (1963) (section 24(4) of the LTCA 1995). As noted above, the decision to ensure that the benefit and burden of all leasehold covenants relating to the demised premises pass on assignment was taken in response to concerns over the adequacy of the ‘touching and concerning’ test. Under the new law, it appears that we need not attempt to differentiate between ‘proprietary’ and ‘personal’ covenants, because all pass unless ‘expressed to be personal’ (BHP Petroleum v. Chesterfield Properties (2001)). It is not at all clear that this was a wise reform because the distinction between obligations attaching to the land (e.g. ‘the tenant must repair’) and obligations attaching only to the person (e.g. ‘the tenant must walk the landlord’s dog’) is at the heart of property law; see, for example, the distinction between leases and licences. If it is argued that very few ‘personal’ covenants are found in leases anyway, so implying that making all covenants run will cause little practical hardship, surely that also demonstrates that the occasions for applying the allegedly fickle ‘touching and concerning’ test were also rare and caused little practical hardship! In fact, much will turn on how the courts interpret the statute when it says that a covenant that ‘(in whatever terms) is expressed to be personal’ will not run. In this regard, it seems that the courts are reluctant to turn away from old – and logical – distinctions. In First Penthouse v. Channel Hotels and Properties (2003), Lightman J was considering whether a covenant was ‘expressed to be personal’ within the meaning if the statute. As well as noting that the statute generally was of low quality, he decided that a covenant is expressed to be personal ‘in whatever terms’ if either it says so in words (e.g. ‘this is personal’) or if its substance is such that its personal character is expressed through the nature of the obligation it imposes.104 In other words, that a covenant is expressed to be personal either expressly or impliedly.

103There is an exception because the anomalous rule in Mobil Oil that covenants to renew a lease required separate registration in order to bind an assignee of the reversion remains intact (section 3(6)(b) of the LTCA 1995). Consequently, the tenant will not be able to exercise the benefit of the covenant unless its burden has been entered on the register of title by means of a Notice.

104‘[T]he tenancy does not have to spell it out in terms that the covenant is to be personal. The intention may be expressed explicitly or implicitly. The intention may be stated in terms or it may be deduced from the language used in its proper context’ – at para. 49.

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Of course, to say that the covenant may be ‘expressed to be personal’ explicitly or impliedly is but a small step from the old ‘touching and concerning test’, but then again many commentators could not understand why the LTCA 1995 ever thought that it was sensible to make all covenants run unless they were ‘expressed to be personal’. After all, property obligations are different from personal ones, even if not ‘expressed’ to be so.

6.6.3 An assessment of the landlord’s position

The landlord may, at first, appear to have lost most by the passing of this new Act. After all, the original landlord is not automatically released from performance of his covenants, but apparently has to serve a notice on the tenant requesting this, and the landlord has lost the right to sue the original tenant throughout the term of the lease. However, as intimated already, all is not as it seems.

First, following the House of Lords decision in London Diocesan Fund v. Avonridge (2005), it is now clear that a landlord can stipulate in the original lease that his liability ceases when he assigns the reversion. In other words, provided the lease contains a clause limiting the landlord’s liability to the period of his possession, when L assigns to L1, all liability for L will cease and he does not have to serve a notice on the tenant requesting release from liability for future breaches of covenant. According to the majority in the House of Lords (Lord Walker dissenting), this is perfectly possible because the LTCA 1995 was not intended to do away with the parties’ freedom of contract. So if a landlord can negotiate an ‘Avonridge clause’, all liability for future breaches ceases on assignment and L1 becomes the only person liable. Of course, as pointed out by Lord Walker in his dissent, this effectively makes the notice procedure in sections 5 and 8 entirely redundant and amounts effectively to an avoidance device. As anticipated, most professionally drafted commercial leases now contain an Avonridge clause, thus rendering the original landlord immune from liability after he has assigned the reversion and, more importantly, placing the tenant in a position where he has limited remedies for future breaches of covenant. This is exactly what the LTCA 1995 was intended to avoid.105

Second, the benefit and burden of all landlord’s covenants will pass automatically to an assignee of the reversion, unless expressed to be personal and with the exception of the landlord’s covenant to renew the lease at the

105All that need happen is that the original landlord deliberately assign to L1, under an Avonridge clause, thus ensuring its release from liability. If L1 is a mere ‘shell’ company, then T’s remedies are worthless. Indeed, L may assign to L1 – a company set up just for this purpose – deliberately to relieve itself of liability.

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tenant’s option (section 3(6)(b) of the LTCA 1995). With the passing of the benefit and burden of all the tenant’s covenants – even to an equitable tenant and equitable assignee – every landlord can now be certain of having a remedy against the tenant in possession of the land. Although landlords acting against assignees of equitable leases did have ways of ensuring that leasehold obligations were observed, the simplification of the rules concerning enforceability brought about by the Act is a definite advantage for landlords. Third, the ability to require the original tenant, and with careful attention all assigning tenants,106 to enter into an AGA, places the landlord in a strong position – the more so in commercial leases, where with careful drafting there is no requirement or reasonableness. Fourth, the ‘problem notice’ procedure is tiresome, but will not hinder a careful landlord. The landlord – or, more realistically, his legal advisers – will simply have time limits to observe, and this is already a common feature of the landlord and tenant relationship. Moreover, if the tenant called to account under the AGA chooses to take up the option of an overriding lease, this is unlikely to disturb the landlord; after all, the landlord knows that the tenant under the overriding lease is solvent, as they have just paid the sum demanded.107 Fifth, the benefit of a landlord’s right of re-entry is automatically annexed to the land, thus giving all assignees of the reversion the opportunity to forfeit the lease if the current tenant defaults (section 4 of the LTCA 1995), or, indeed, if there is any default on a covenant affecting the land irrespective of whether the covenant binds the defaulter.108

6.6.4 To sum up

It is tempting to shy away from the law of leasehold covenants because of its complexity. Admittedly, this is understandable when dealing with the law applicable to tenancies granted before 1 January 1996 where the old common law/statutory rules still hold sway and where it is vital to distinguish between different types of covenant and different types of landlord and tenant. However, for leases granted on or after 1 January 1996, the position is relatively simple.

1All leasehold covenants relating to the demised premises bind assignees of the landlord and tenant (including equitable

106By making all assignees covenant directly with the landlord and so become as original tenants.

107However, the landlord should stop to consider whether he wishes to forfeit the lease of the current tenant and thereby regain possession of the land and its capital value. If he sues the AGA tenant, the landlord risks that tenant taking an overriding lease and himself resuming possession and himself having the opportunity to cash in on the value of the land by reassigning it.

108As section 6.5.5 and see Kataria v. Safeland plc (1997).

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