Leasehold Covenants

A Lease Hold is a Legal Estate in land. This is defined in section 1.1 of the LPA, as a term of years absolute. This is discussed in the blog post entitles Leases and Licenses.

This post will be more focused on the enforceability of leasehold covenants on the future owners of the land.

When a lease is created, the terms of the lease agreement are the leasehold covenants. These can be expressly created, and some can be implied. Generally, when a lease is made, no covenantee will rely on the implied covenants, they will almost always be expressly stated, from paying rent, to the upkeep of the property, to restrictions on how they may use the property.

In 1995 the Land lord and Tenants Covenants Act was made, and from January 1st, 1996, the new leasehold covenants rules were passed to correct some of the problems that they had with the old rules from the LPA 1925. These rules are still relevant as all new leases will only apply for the new rules if the original lease was created after 1st of January 1996. Leases can be granted for any period of time. In some cases, there have been leases granted for 999 years. Therefore, the old rules are very must still relevant.

 

Old Leasehold Covenant Rules

There are two types of convent in a leasehold. Tenants covenants, which places the burden on the tenant and give the benefit to the landlord. This may be for example a restriction on how they can use the land that the lease has been granted on.

Landlord covenants are those which burden the landlord and give the benefit to the tenant. These can be, for example, a covenant for the landlord to maintain the exterior of the building.

The Burden of the Tenants covenants, and the Benefit of the Landlords covenants will pass to the Tenant as long as they ‘Touch and Concern the Land’. Authority for this is ‘Spencer’s Case’ and is defined in the case of Swift Investments V Combined English Stores Group PLC.

The Benefit of the Tenants covenants, and the Burden of the Landlords covenants will pass to the Landlord assuming that they have ‘reference to the subject matter of the lease’. The authority for this is section 142 LPA 1925. This is defined in Swift investments and means the same as ‘touches and concerns the land’.

 

New Leasehold Covenant Rules

Similarly in the New Leasehold rules there are still tenant covenants and Landlord covenants.

The Burden of the Tenants covenants will pass under Section 3.2.A and the Benefit of the Landlords covenants will pass to the new tenant automatically Section 3.2.B as long as they are not expressed to be personal under Section 3(6)

The benefit of the Tenants covenants will pass under Section 3.3.B and the Burden of the land lord’s covenants will pass under Section 3.3.A. as long as they are not expressed to be personal- Section 3(6).

However, these will not pass automatically. Permission is needed in order to release the Landlord of their duties and pass them to the next landlord. They must apply to the tenant. If the tenant remains silent or reuses, the landlord may make an application to the court, which will make a ruling and potentially release the Landlord of their duties.

 

Remedies

In the case of the landlord claiming against a breach caused by the tenant, they have many different options:

  • Debt Action- an action to make the Tenant pay the rent to the land lord.
  • Damages- a form of repayment in view of the breach.
  • Forfeiture- ending the lease early. This will only be an option if there was a forfeiture clause in the lease agreement.
  • Injunction- a court order preventing the tenant to treat the land in a specific way.
  • Specific performance- Making the Tenant do something. The court rarely imposes specific performance, they will usually grant damages in view of specific performance.

In the case of the Tenant claiming against a breach of the Landlord covenants, there are only 3 remedies possible:

  • Damages- a form of repayment for the breach.
  • Specific performance- forcing the Landlord for act upon their breach.
  • Self Help- this is where the tenant will aware the landlord that the will stop paying rent and instead use the money to fix the breach. This does not allow any tenant to just stop paying rent to fix problems. They must be in the landlord covenants, breached attempts to get the landlord to not be in breach and notice must have been served to the landlord if no action was taken.

 

Other parties to claim against under Old Law

Under the old law, being the original contracting party when the lease was made was a big deal. Because of the Privty of Contract between the original parties, they will always remain liable for any breaches.

Therefore, the Landlord may bring a claim against the original tenant for any breaches, even though they may not even be in occupation anymore. This goes for breaches of Tenant covenants as well. The original landlord, may be sued if the freehold land was sold and the new landlord breached the landlord covenants. They will only ever be able to claim for damages as they are not in occupation anymore.

In order to protect themselves, they will be able, on assignment of the lease, to make the new tenant sign an indemnity. This means that any breach that the original party get sued for, will be able to recover the damages from the new tenant.

Although this sounds good, it will be hard to enforce this if the original party has no money. For example, if they have stopped paying rent, there will be little point using the indemnity as that party will have no money to pay them back anyway. And also in the commercial scene, if the indemnity was made with a company, and the company goes into liquidation, there will be no body to bring the claim against. This will cause a break in the chain of indemnity, in which case the previous assignee will not be able to claim any money back from the liquidated party. This may also be the case in a residential claim if that person cannot be found, or they are deceased, there will be no party to claim back from.

 

Other Parties to claim against under New Law

Under the new rules, on assignment, the tenant’s covenants will automatically pass to the new tenant. This will also release the existing Tenant from any future liability. This goes for Landlord covenants; however they must ask the tenant for permission before it is released.

However, in a commercial scenario, under section 17 of the LT(C)A, a Landlord may make old tenant sign an Authorised Guarantee Agreement (AGA) which will mean that whoever they assign their lease on to, they will be liable for any breaches. This is a way of protection from the landlord and makes the Tenant careful who they assign their lease too. In return, they may create an indemnity for the new Tenant to sign, however in reality this will be of little use if the existing tenant cannot afford to pay for the breach themselves anyway.

The law under Moule v Garett states that any party that has to pay out as a result of another party’s breach, will be able to claim the money back from the party in breach. It does not have to go directly through a chain of indemnity. This applied to the old rules also.

The new law also created a retrospective law which applies to the old claims as well. The law states that the party making the claim will only be able to claim for 6 months worth of rent. This stops landlords in particular waiting for the rent to build up and make a big claim against a party that does not own or occupy that land anymore.

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