The biggest advantage of lease is that it is possible to enforce covenants between the parties. The underlying principles guiding the liability of these covenants in leases are explained below.
Leases granted on or after 1st January 1996
Leases that are granted on or after 1st of January 1996 come under the Landlord and Tenant (Covenants) Act of 1995. Under the provisions of the Act, the original landlord or the person who originally granted the lease shall be bound by all the covenants in the lease when the tenant remains as a tenant. When he lawfully assigns the lease or sub-lets the property, he is released from future liabilities occurring in the lease covenants unless he has agreed to enter into an ‘authorised guarantee agreement’ or AGA. This is an agreement that is entered by the outgoing tenant with his landlord. He guarantees that the immediate successor in title shall perform all of the lease covenants. A tenant is obliged to enter into an AGA only when;
a) The lease is for a commercial property, where both parties have agreed in the contract that an AGA shall be provided in the case of an assignment. However, this condition cannot be agreed in advance in the case of a residential property lease.
b) When the landlord requires under the law that the provisions of the AGA are a condition of giving consent to an assignment. It is the decision of the court as to whether a condition has been lawfully imposed in a particular case.
The guarantee provided by the AGA only extends to performance of covenants by the immediate tenant and not to those who come subsequently. However, they shall remain liable for any breach that was done before the date of assignment.
Subsequent assignees are bound by all covenants mentioned in the lease, except those that are mentioned as ‘personal’ and said to be applicable to the original tenant. Although, subsequent assignees shall remain liable for any breach that was committed before the date of assignment, they shall not be liable for breaches that are committed after the tenancy ends. But if he has given an AGA, he shall be held accountable for the performance of a covenant by his immediate successor.
It should be noted that the provisions for automatic release do not apply if the assignment itself was made in breach of a covenant in the lease, nor is it applicable when it occurs by an operation of law, i.e. on the death of the tenant where the lease passes on to the immediate family. Also, when an assignee remains liable through an AGA, he should seek an indemnity covenant from the successor of the title. This should be given expressly.
As for performance of covenants by the original landlord, he is not automatically released from his covenants when he sells the reversion. Automatic release however, applies to the person who is the tenant for the time being and seeking to be released from future liability before or within four weeks of the date of the assignment of the reversion.
Leases granted before 1st January 1996
Liability of tenants
The Landlord and Tenants (Covenants) Act of 1995, does not apply to leases that were granted before 1st January 1996. The underlying principle guiding this thought is that the original tenant shall remain bound by the covenants for the whole of the contractual term. Unless the landlord expressly releases the original tenant from the covenant, he remains liable even after assigning it to a successor.
Thus, it can be clearly seen that the original tenant shall be held liable for any breach of covenant during the term of his tenancy, irrespective of the fact that the breach was conducted by a subsequent successor.
All succeeding assignees shall also be liable for any breach that was committed when the ownership of lease vests with them, in respect of covenants that ‘touch and concern’ the land. To the uninitiated, touch and concern refers to covenants that are entered between parties as landowners, instead of being mere individuals. This provision adheres to the doctrine of privity of estate.
This gives the landlord an opportunity to seek redress from the original tenant or the particular assignee who has committed a breach. He cannot sue both of them, but can choose whom to sue. This is of utmost importance when the tenant in question is facing untold financial difficulties and is not worth suing. But, if the original landlord passes the reversion, the right to sue passes to the person who transfers that reversion; because all rights attached to the reversion pass to the transferee including the right to sue for an existing breach of covenant.
Thus, it can be deduced that an assignee will have to indemnify his assignor with respect to the breach of a covenant committed after the date of assignment. This is done irrespective of the fact that the assignor has parted with the lease or not. When a registered lease is transferred, the indemnity is covered under Sc12 para 20 to the LRA 2002, even if no value was given to the assignment. In the case of unregistered land, there shall be no valuable consideration for the assignment, but an express indemnity shall be required by the assignor. As per Standard Conditions 4.6.4 and SCPC 6.6.4 the transfer deed should contain an express provision of indemnity covenant unless it is implied by law.
If the terms of the lease provide that any further assignment of lease requires the permission of the original landlord, he can under some circumstances, insist that the assignee enter into a direct contractual relationship with him. This is usually contained in the same document where the landlord provides his consent to the assignment; also called licence to assign. This is one way of ensuring that the subsequent assignee has the same liability as the original tenant.
Liability of landlords
The doctrine of privity of contract dictates that the original landlord shall remain bound to the original tenant throughout the term of the lease. And when he is unable to do so (either through his own act or by default), he shall be liable for damages to the tenant. This was the gist of the decision in the case of Eagon v Dent [1965] 2All ER 335. The facts of the case are that the landlord sold a reversion to a third party. The original tenant who could not exercise an unregistered option against the buyer of the reversion recovered damages from the landlord for a breach of covenant.
Besides the original landlord, subsequent transferee of reversions shall also be liable in respect of breach of covenants that touch and concern the land which are committed while the reversion is vested in them. This is again under the doctrine of privity of estate.
Default notices – Liability of former tenants
Thus, former tenants can remain liable for breach of covenants made by assignees in the case of assignments that take place before the 1st of January 1996. With respect to leases that are given on or after that date, the assignee can be made liable if the outgoing tenant has given an AGA. To protect former tenants from arrears of rent, s 17 of the Landlord and Tenants(Covenants) Act provides that the landlord can claim rent arrears only when he has served a ‘default notice’ on the former tenant. This notice should be served within six months of the amount falling due. The landlord cannot pursue when notice is not served. This also applies to leases that are created before and after the Landlord and Tenant (Covenants) Act came into force.
Liability between Head-landlord and Sub-tenant
The doctrine of privity of estate does not apply in the case of relationship between the head-landlord and the sub-tenant. But a contractual relationship shall exist between them if the head-landlord has entered into a direct covenant with the sub-tenant. The sub-tenant shall also be liable for any restrictive covenant mentioned in the head-lease of which the sub-tenant has notice when he took on the sublease. When a sub-tenant breaches a covenant in the head-lease, the head-landlord has the right to forfeit the head-lease, thereby bringing to an end, the sub-lease as well. This applies irrespective of any direct liability arising from a contract.
Photo courtesy: Haydn Blackey
