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Modern Land Law

behind it. As the court said, the jurisdiction to grant relief under section 146 was unlimited, but it had to be exercised equitably. Under section 146(4) of the LPA 1925 (and probably the wider section 146(2)133) a subtenant or mortgagee134 of the original tenant may also apply for relief from forfeiture, even though the breaches of covenant were committed by the tenant, as in Bank of Ireland Home Mortgages v. South Lodge (1996), where relief was granted to the tenant’s mortgagee.

6.7.5.5Availability of relief when the landlord proceeds to forfeit by an action for possession

The position here is effectively governed by section 146 of the LPA 1925, as interpreted by the House of Lords in Billson v. Residential Apartments (1992). As that case makes clear, an action for possession will be the normal method by which the landlord attempts to forfeit the lease. A tenant may apply for relief as soon as the landlord serves a section 146 notice and up to the moment at which the landlord actually recovers possession under an order of the court (i.e. the moment when the order is executed). Thus, although the landlord is subject to a claim for relief after the court has granted the order, prompt action to enter into possession will defeat relief once and for all (Rogers v. Rice). In most cases, the denial of a right to claim relief under section 146 where forfeiture has been by court proceedings and the landlord has actually recovered possession causes little hardship. It also encourages landlords to use the courts for forfeiture, because the same restriction does not apply to forfeiture by peaceful re-entry (see below). However, there will always be cases where a tenant will wish to apply after the landlord has executed the possession order, and, indeed, such is quite possible if it is a tenant’s mortgagee claiming late relief, having been unaware of the forfeiture proceedings. This potential cause for hardship has generated some discussion as to whether the court’s inherent equitable jurisdiction to grant relief has survived the enactment of section 146. The strongest authority is against the survival of such a jurisdiction – Smith v. Metropolitan City Properties

(1986) – but it has been asserted obiter (Abbey National Building Society v.

Maybeech Ltd (1985)) and academically. Technically, Billson leaves the matter open to argument, and although the legislative intention probably was the removal of the inherent jurisdiction in non-rent cases, no doubt a ‘hard case’ would find a court open to persuasion. In Bland v. Ingram’s Estate (2001), the court (uncontroversially) noted the existence of an inherent jurisdiction in respect of non-payment of rent but said nothing about such a jurisdiction in non-rent cases.

133Escalus Properties v. Robinson (1995).

134Including a chargee, Croydon (Unique) Ltd v. Wright (1999).

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6.7.5.6 Availability of relief when forfeiture is by physical re-entry

Prior to Billson, forfeiture by re-entry held some attractions for a landlord in that it was thought that the tenant had lost all rights to apply for relief once the landlord had actually entered the premises. So, for example, a landlord who was forfeiting for breach of an irremediable covenant might serve a section 146 notice and physically re-enter and terminate the lease, all within the space of 14 days. In Billson, however, the House of Lords adopted a purposive approach to section 146 and held that a landlord was ‘proceeding to forfeit’ within that section, so giving the tenant a right to apply for relief, even if he (the landlord) had actually entered on the land. Consequently, a tenant who suffers physical re-entry may apply for relief against a landlord in possession of the property for a ‘reasonable time’ after that possession has occurred. Necessarily, this will make the possession of a landlord who has physically re-entered somewhat fragile, and liable to be defeated by a claim for relief, although it is unlikely that relief will be granted if the landlord has since transferred the land to an innocent third party. In other words, the decision in Billson encourages landlords to forfeit leases by action in the courts, as no relief is available then, when the landlord has finally secured possession under a valid court order.

6.7.5.7 Waiver

A landlord attempting to forfeit the lease must ensure that he has not waived the right to forfeit the lease for the tenant’s breach of covenant. The essence of the matter is that there will be a waiver of forfeiture if there is any act that amounts to an affirmation of the continuing validity of the lease, as this is inconsistent with forfeiture. In the typical case, waiver will exist where a landlord has knowledge of a prior breach of covenant and then does an act which manifests an intention to regard the lease as still in existence (Matthews v. Smallwood (1910)). The most obvious example is where the landlord, or his duly authorised agent, accepts or demands rent after the breach of covenant has occurred, providing that he also knew (or ought to have known) of that breach (David Blackstone v. Burnetts (1973)). This principle is applied strictly, as the courts are astute to ensure that the landlord does not gain the double advantage of forfeiture and rent recovery; after all, the purpose of forfeiture in rent cases is the payment of rent, and with such payment, forfeiture abates (Gill v. Lewis (1956)). So, a ‘without prejudice’ demand for rent does not preserve forfeiture, and the landlord has the relevant degree of knowledge if he is aware that a breach has occurred, even if he did not know the legal consequences of such a breach. However, it remains true that all cases are decided on their own facts, and, for example, in Yorkshire Metropolitan Properties v. CRS Ltd (1997), the landlord’s demand for payments towards insurance costs did not amount to a waiver. Similarly, a landlord’s express or

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implied waiver relates only to a particular breach of covenant, and not to any future breaches. Thus, a waiver of a breach of a restrictive covenant may be taken as a waiver of only the initial breach, and not any continuing breach.

6.7.5.8 Breaches of repairing covenants

All that has been said so far about forfeiture for breach of covenants other than to pay rent applies in equal measure to breaches of the tenant’s covenant to repair, save that the tenant is given additional protection because of the propensity of some landlords to use minor breaches of repairing covenants as a means of ending an otherwise valid lease. Under the Leasehold Property (Repairs) Act 1938, the landlord must serve the section 146 notice in the normal way, but this triggers the tenant’s right to serve a ‘counter-notice’ claiming the protection of the 1938 Act. If this counter-notice is served, the landlord may not forfeit the lease without the permission of the court, and such permission may be given only if one of the grounds specified in section 1(5) of the 1938 Act is established. The Leasehold Property (Repairs) Act applies to leases of seven years or more that have at least three years left to run.

6.7.5.9 Reform

There has been pressure for reform of the law of forfeiture for some time.135 The remedy is seen as disproportionate to the loss to the landlord caused by the breach as well as being capable of misuse in the hands of an unscrupulous landlord who might use the remedy to threaten or cajole an unsuspecting tenant. This is particularly true in those cases where forfeiture by physical re-entry remains possible. Current statutory controls on forfeiture are effective to meet some of the more serious concerns, but in its 2006 Report Termination of Tenancies for Tenant Default,136 the Law Commission make a case for wholesale reform of the law. In essence, the Commission propose the abolition of forfeiture and its replacement by a statutory scheme. Under the scheme, a tenancy could be terminated for breach of covenant by a tenant only as a result of the landlord pursuing a termination action, to which there would be only limited exceptions. There would be no need for a lease to contain a right of re-entry. A ‘termination action’ would be either a ‘termination claim’ or the swifter ‘summary termination procedure’, but both would depend on the landlord serving a notice on the tenant. The procedures would be mutually exclusive and the landlord would have to decide which method to adopt. Necessarily, the scheme incorporates opportunities for the tenant to remedy

135See for example, Report No. 142 (1985), Report No. 221 (1994), Report No. 254 (1998), Consultation Paper No. 174 (2004) and the most recent Report No. 303 (2006), Termination of Tenancies for Tenant Default.

136Report No. 303.

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any default and to seek what is currently known as relief. The court would have discretion to make such order as it thought appropriate and proportionate, based around a number of specified criteria, and these would include a termination order, an order for sale, an order for a new tenancy or an order transferring the tenancy. Likewise, those persons with derivative interests in the land – for example, subtenants and mortgagees – would also have an opportunity to respond to the landlord’s termination action. These proposals have not yet been enacted, but they enjoy widespread support. They appear to offer good protection for the tenant while at the same time preserving a landlord’s ability to recover the land in the face of a defaulting and carefree tenant. The law would be improved significantly by their enactment.

6.8 The tenant’s remedies for breach of covenant

The tenant’s remedies for breach of covenant by the landlord are less extensive than those of the landlord and are based on the normal contractual remedies available to any person who has suffered loss by reason of a breach of a binding legal obligation. Importantly, breach by the landlord of his covenants does not generally entitle the tenant to ignore their own obligations under the leasehold covenants (the covenants are not interdependent), subject only to the limited right to deduct future rent payments, as noted below.

6.8.1 Damages for breach of covenant

The tenant may sue the landlord for damages at common law for any breach of covenant that causes loss, and the measure of damages is that which puts the tenant in the same position as if the breach had not occurred (Calabar v. Stitcher (1984)). In the context of damages for breach of the landlord’s repairing obligations, this means the tenant should be compensated for the loss of comfort and convenience that they would have enjoyed had the repairs been undertaken. This can sometimes be reflected in a reduction in rent, having regard to the diminution in the value of the tenancy (Wallace v. Manchester CC (1998)).

6.8.2 Action for an injunction

The tenant may sue for an injunction to stop a continuing or threatened breach of covenant by the landlord. As with all equitable remedies, this lies at the discretion of the court.

6.8.3 Action for specific performance

It is clear that the tenant may claim specific performance of a landlord’s covenant where this is consistent with the supervisory jurisdiction of the court. Such an order has been granted to enforce performance of a landlord’s

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repairing covenant (Jeune v. Queens Cross Properties (1974)) and particular covenants such as the landlord’s covenant to employ a resident porter (Posner v. Scott-Lewis (1986)). Under section 17 of the Landlord and Tenant Act 1985, there is a statutory jurisdiction to order specific performance of a landlord’s repairing covenant in respect of a dwelling house. This position should be contrasted with that of the landlord where, until recently, a landlord was denied the reciprocal right specifically to enforce the tenant’s repairing obligations.

6.8.4 Retention of future rent

Following Lee-Parker v. Izzet (1971), if the landlord is in breach of a covenant to repair, the tenant may carry out the necessary repairs and deduct the cost thereof from future payments of rent. However, the tenant must be careful not to withhold rent already due, as this will trigger liability to the landlord and perhaps the remedy of forfeiture. In a similar vein, if the landlord is in breach of a repairing covenant, and the tenant therefore refuses to pay rent, the tenant may ‘set off’ any damages they would have received for the landlord’s breach if the landlord should bring an action for arrears of rent. It is only in these two limited circumstances that performance of the tenant’s covenants (i.e. to pay the full rent) are modified in the face of a breach of covenant by the landlord.

6.9 Termination of leases

There are several ways by which the landlord and tenant relationship may come to an end. When it does, possession of the land reverts to the freeholder or other person (e.g. headlessee) entitled on expiry of the term.

6.9.1 By effluxion of time

The most obvious way in which a lease will end is when the contractual term has expired. However, some leases may give the tenant the right to extend the lease at the end of the initial period and, of course, this must be honoured. Likewise, the tenant may be able to claim a statutory extension of the tenancy under the Landlord and Tenant Act 1954 (business tenancies), Agricultural Holdings Act 1986, or the Rent Act 1977 or early Housing Acts (residential tenancies).

6.9.2 By forfeiture

As above.

6.9.3 By notice

Leases sometimes give either or both the landlord and tenant the right to terminate the lease before the end of the contractual period by giving ‘notice’ to

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the other party. These ‘break clauses’ are common in long leases and are intrinsic in periodic tenancies. Importantly, if a periodic tenancy is held by two persons as joint tenants, the notice of only one of them is required to terminate the tenancy, irrespective of the other’s wishes (Hammersmith and Fulham LBC v. Monk (1992)) and the giving of such notice is not a ‘function relating to land’ within section 11 of TOLATA 1996 so as to require any tenant who is also a trustee to consult any beneficiary before giving notice (Brackley v. Notting Hill Housing Trust (2001)). Although this may seem startling, we should remember that a periodic tenancy is in reality a succession of individual tenancies and each new period is in reality a new tenant. Thus, any one of the joint tenants can refuse a new tenancy and so break the chain. In addition, the essence of a periodic tenancy is that it is implied from the circumstances surrounding the occupation. Thus, in the case of a periodic tenancy, the continued occupation of the remaining tenant and acceptance of rent by the landlord will generate a new periodic tenancy with a sole tenant only (Burton v. Camden LBC (1997)). Critically, however, where there is a fixed-term lease containing a break clause, all joint tenants must concur in exercising the break clause for it to be effective.137

A notice to quit given by a tenant will automatically terminate any subtenancies which that tenant may have carved out of their own interest – Pennell v. Payne (1995) – even if the lease appears to stipulate otherwise because this is the proprietary essence of the leasehold estate.138 However, subtenancies will survive if the head tenancy is terminated by a consensual surrender between landlord and tenant, for a subtenant is not party to this bilateral arrangement (Barrett v. Morgan (2000)).

6.9.4 By merger

The tenant may acquire his landlord’s interest in the land and thereby ‘merge’ the lease and reversion, as in Ivory Gate v. Spetale (1998).

6.9.5 By surrender

The tenant may surrender his lease to their landlord, and, if accepted, this will terminate the lease. Surrender may be either expressed or implied by operation of law, this being an example of estoppel (Mattey v. Ervin (1998)) but in either case, there must be an intention to terminate the lease (Charville Estates Ltd v. Unipart (1997)). As noted above, a surrender, being a consensual act between landlord and tenant, will not thereby determine any subtenancies.

137Crawley LBC v. Ure.

138PW v. Milton Gate Investments. Note that this is entirely at odds with the philosophy of

Bruton v. London & Quadrant.

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6.9.6 By enlargement

Under section 153 of the LPA 1925, a tenant of a lease of more than 300 years, of which at least 200 years are left to run, has a right, in some circumstances, to enlarge their leasehold interest into the freehold.

6.9.7 By disclaimer

A lease may come to an end because the tenant denies the landlord’s superior title to the land, and thereby disclaims the lease.

6.9.8 By frustration

Since the decision in National Carriers Ltd v. Panalpina (1981), it has been accepted that the normal law of frustration of contract applies to leases. Thus, a fundamental change of circumstance after the commencement of the lease may so alter the rights and obligations of the parties that the original lease (contract) between them in no sense represents their original bargain, and is frustrated.

6.9.9 By repudiatory breach of contract

Somewhat illogically, although leases could be frustrated, the availability of the other great contractual remedy of repudiation of the lease, because of a fundamental breach of covenant (contract) by the other party, was once not readily accepted in English law. However, in Hussein v. Mehlman (1992), the High Court has taken the first steps to recognise this remedy, on the ground that there is no reason in principle why leases should be regarded as different from other types of contract and the availability of repudiatory principles has been confirmed in Chartered Trust v. Davies (1997). This may well prove a valuable ‘remedy’ for a tenant as it could provide a method by which a tenant can ‘terminate’ a lease because of a landlord’s refusal to perform critical leasehold covenants. As will be apparent from the above, no such right exists under the ‘pure’ law of landlord and tenant as there is no tenant’s right of forfeiture. So it is that contract law may come to a tenant’s aid.

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LEASES

The nature of a lease

The leasehold allows two or more persons to enjoy the benefits of owning an estate in the land at the same time. Both landlord and tenant retain a proprietary right in the land and both of these proprietary rights can be sold or transferred after the lease has been created. All leases will contain covenants (or promises) whereby the landlord and tenant promise to do – or not to do

– certain things in relation to the land. These rights and obligations may ‘run’ with the land on a transfer of the lease or of the landlord’s ‘reversion’. The essential qualities of a lease are that: (a) it gives a person the right of exclusive possession of land; (b) for a certain term; (c) at a rent (Street v. Mountford (1985)), although the last of these is not strictly necessary as a matter of law. Leases may be legal or equitable.

The creation of legal and equitable leases

As a general rule, legal leases must be created by deed. Currently, leases for over seven years, even if created by deed, will not take effect as a legal estate until registered with their own title number. Leases for three years or less that take effect immediately in possession where the tenant does not pay an initial capital sum will be legal, however created (orally, in writing or by deed). Most periodic tenancies are legal leases under this exception.

As a general rule, equitable leases must derive from a written contract (or written document equivalent to a contract). This written agreement will create an equitable lease if it is specifically enforceable (as most are). As an exception, an equitable lease can be generated purely orally via the principles of proprietary estoppel.

Leases in registered and unregistered land

Currently, in registered land, the majority of legal leases for seven years or less are overriding interests (paragraph 1 of Schedules 1 and 3 of the LRA 2002) and legal leases created for more than seven years are registrable as titles in their own right. (If they are not so registered, they will take effect as equitable leases only.)

Equitable leases can be registered as a protected interest by Notice, although most equitable leases will be overriding interests and automatically

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binding against a subsequent purchaser because the equitable tenant will be a person in ‘actual occupation’ of the land, within paragraph 2 of Schedules 1 and 3 of the LRA 2002.

In unregistered land, a legal lease will bind automatically any subsequent purchaser or transferee of the estate out of which it is created. An equitable lease arising from an enforceable written agreement is registrable as a class C(iv) land charge (and void against a purchaser if not so registered). Estoppel equitable leases probably bind a subsequent transferee of the freehold land through the doctrine of notice. For registered land, rules concerning electronic conveyancing may mean that certain types of lease do not exist at all until registered.

The differences between legal and equitable leases

Legal and equitable leases are created in different ways. Equitable leases are potentially very vulnerable to a sale of the freehold or leasehold estate out of which they are created. For leases granted before 1 January 1996, leasehold covenants will ‘run’ with the land in a legal lease more easily than in an equitable one. For leases granted on or after 1 January 1996, leasehold covenants will ‘run’ in legal and equitable leases identically, thanks to the LTCA 1995. Easements may be created by section 62 of the LPA 1925 on the occasion of a grant of a legal lease only. The equitable tenant is a purchaser of an equitable estate in the land and, therefore, cannot be a purchaser of a legal estate so as to avoid being bound by those equitable rights in unregistered land that still depend on the doctrine of notice. Neither could an equitable tenant in unregistered land avoid being bound by an unregistered class C(iv) or class D land charge, both of which are void only against a purchaser of a legal estate.

Leasehold covenants in leases granted before 1 January 1996

In any action on a leasehold covenant between the original landlord and the original tenant, all covenants are enforceable: liability of these original parties is based in contract. Both original parties will remain liable on the leasehold covenants throughout the entire term of the lease, even after they have assigned their interests. The liability is to any person having the right to enforce the covenant. The position of an assignee of the lease (i.e. the tenant’s interest) depends on whether ‘privity of estate’ exists between the landlord and tenant so as to allow enforcement of those covenants which ‘touch and concern’ the land. The position of an assignee of the reversion is governed by the application of sections 141 and 142 of the LPA 1925. ‘Privity of estate’ does not exist in respect of assignees of an equitable lease (although the original parties remain bound in contract). Consequently, although the benefits and

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burdens of leasehold covenants will be passed to the assignee of the reversion in an equitable lease (because sections 141 and 142 of the LPA 1925 still apply), the benefits and burdens will not pass automatically to an assignee of the tenant.

Note 1

An assignee of an equitable lease may obtain the benefit (but not the burden) of the covenants by express assignment, but the lack of privity of estate means that the burdens cannot run.

Note 2

There may be indirect enforcement of the burdens of leasehold covenants against an equitable assignee. For example, by use of the landlord’s right of re-entry and the rules relating to restrictive covenants.

Note 3

Subtenants do not stand in privity of estate with the head landlord, so are treated vis-à-vis that landlord in the same manner as equitable tenants. A subtenant is in privity with his or her own immediate landlord.

Leasehold covenants in leases granted on or after 1 January 1996: the Landlord and Tenant (Covenants) Act 1995

The LTCA 1995 applies to all leases granted on or after 1 January 1996 whether legal or equitable. The original tenant is released from liability under leasehold covenants on assignment, subject only to the possibility of guaranteeing the next immediate tenant’s performance of the covenants under an authorised guarantee agreement (AGA). The original landlord is not automatically released on assignment, but may apply to the court for such release or may rely on an Avonridge clause. The rule that covenants must ‘touch and concern’ the land in order to run to new landlords and tenants is abolished. All covenants will run unless they ‘are expressed to be personal’. By statute, the benefit and burdens of leasehold covenants pass automatically to assignees of the landlord and the tenant without the need to show privity of estate or to rely on sections 141 and 142 of the LPA 1925. A tenant is liable on the leasehold covenants only while in possession of the land, subject only to the possibility that he may be required to guarantee performance of the covenants by the next immediate assignee under an AGA. The rules concerning the imposition of AGAs are very favourable to landlords, particularly landlords of commercial premises.

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