Saturday, March 28, 2009

Leasehold Covenants

Were the defects in the law relating to the enforceability of leasehold covenants so serious as to justify the scheme introduced by the Landlord and Tenant (Covenants) Act 1995 for leases granted after 31 December 1995? - Justin Santiago

The Landlord and Tenant Covenants Act (LTCA) 1995 provided a new set of rules governing the enforceability of leasehold covenants under the broad category of the law governing the conduct of landlords and tenants. Leasehold covenants are those terms agreed in a lease that relate to the parties obligations in their capacities as landlords and tenants. The law related to leasehold covenants before 1995 were mostly derived from common law and the LPA 1925. This has changed with the Landlord and Tenant (Covenants) Act 1995 and applies to leases granted after 1996.

The arguments below will show the defects of common law regime and the inadequacy of the LPA in three broad areas :-

1. The principle of continuing liability with its over emphasis on the doctrine of the privity of contract
2. The different abilities of the original tenant and the original landlord to sue on personal covenants and on legal and equitable leases and the difference in treatment of legal leases and
3. The vagueness of terms such as touch and concern land which required extensive judicial interpretation

There will also be a discussion on how effective the LTCA has been in resolving these deficiencies.

The original landlord (L) and tenant (T) had continuing liability for and can be sued on all covenants for the entire term of the lease, even after the assignment of the reversion by L or the assignment of the lease by T, due to the privity of contract. However it was unjust unjust that both L and T should be held liable for breach of any covenant for the whole duration of the lease, even if the breach was performed by a subsequent landlord (AL) or subsequent tenant (AT). Such covenants vulnerable to breaches include, inter alia, paying rent, performing repair obligations and to use the leased land only for the stipulated purpose. Compelling the original T to rectify the breach could prove to be costly, more so if he is going to liable for all other subsequent assignees’ breaches.

Also, by comparing the scope of both AL and AT’s liabilities and abilities to sue, it can be seen that AT has a more limited scope to sue. AT’s ability to sue depends on the rule in the Spencer’s Case, one of the criteris is, (1) there must be a legal lease, (2) there is an assignment of the lease by deed; (3) there is privity of estate between L and T; and (4) the covenant must touch and concern the leased land. Where there is privity of estate, the benefit and burden of covenants relating to L’s land run with any assignment, such that the assignees will be bound by them, pursuant to S78 and S79 LPA 1925.
Therefore, AT may only enforce covenants in a legal lease.

AL, on the other hand, has the ability to sue pursuant to S141 LPA 1925, on covenants in all leases which have reference to the subject matter of the lease pursuant to S142 LPA, which includes legal leases, equitable leases and oral leases, which are leases for a term not exceeding 3 years at the best rent reasonably obtained under S54(2) LPA 1925. This shows that L has a wider scope to sue while T has a limited scope to sue.

There were also question on which covenants touch and concern the land and which have reference to the subject matter of the lease. If these could not be determined, they could be deemed to be personal and thus could not bind any assignee of the reversion or the lease.

LTCA 1995 was enacted to reform some of these rules. It, however, applies to tenancies created after LTCA 1995 takes effect on 1 January 1996. Tenancies created before that continue to be governed by the previous common law rules. It balances the rights of L and T and is now more certain compared to the pre-1996 rules.

LTCA 1995 abolishes the rule that the original parties continue to be liable for all covenants, whether personal or otherwise, and added the onus of release from the covenant on L. LTCA 1995 also releases T from all obligations, save for a few exceptions, and included a special provision for recourse against any occupier other than T himself. His burden for breaches of covenant are reduced S17 T needs to be notified by L/L1 of the breach of the covenant by T1 and is liable up to a maximum of six months. Previously there was no time limit in which he had to be notified of the breaches committed by subsequent assignees.

S3 provides that the benefit and burden of all L and T covenants shall pass on an assignment, except for those that are expressed to be personal, per S3(6)(a). LTCA 1995 does not require the differentiation between covenants that touch or concern the land, or covenants having reference to the subject matter of the lease. Instead, it distinguishes covenants that are expressed to be personal, as these are the covenants that continue to bind the original parties to them for the whole term, due to the doctrine of privity of contract. One must note that the lease must stipulate that such covenants are intended to be personal, or else they will pass upon assignment and bind the assignees.

After the assignment of the reversion, the original L would not be liable for or entitled to the burden or benefit of the covenants only if he has applied to be released under S6 in accordance with the procedure set out in S8. Thus, L has the onus of applying to be released from the covenants after an assignment, otherwise he continues to bear the danger of being sued.

After the assignment of the lease, the original T would be released automatically from all the landlord and tenant covenants, per S5. S16 provides that upon an assignment, T may be required by L to enter into an authorized guarantee agreement (AGA) to guarantee the AT’s performance of the covenants. S11 provides that neither L nor T shall be released if the assignment is one in breach of a covenant or by operation of law. Thus, although T is automatically released per S5, he may continue to be liable if he is a guarantor under S16, or if the assignment is an excluded assignment, or if the covenant is expressed to be personal.

LTCA 1995 has no application to sub-leases, but in cases where a sub-lease is granted, L now has a recourse against the sub-tenant, pursuant to S3(5), in respect of a restrictive covenant, whereby it can be enforced against any occupier of that premises. Alternatively, he may rely on Contract (Rights of Third Parties) Act 1999 if the covenant was intended to benefit and bind successors and assignees.

However the 1995 Act did not affect covenants expressed to be personal : BHP Petroleum v Chesterfield – personal covenants are not affected by the statutory scheme of release however the Court of Appeal decided that landlord covenants are not released by the statutory mechanism and the original covenantor remains liable despite having parted with all interest in the property. The problem here is with regard to the term expressed to be personal.

Also London Diocesan Fund and others v Avonridge Property Company Ltd House of Lords has ruled that landlords can draft their way out of the statutory release provisions of the Landlord and Tenant (Covenants) Act 1995.

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