Sublease — Landlord’s covenant as to payment of rent under headlease — Liability expressed to cease on landlord disposing of interest — Whether such limitation of liability void — Section 25(1) of Landlord and Tenant (Covenants) Act 1995 — Appeal allowed
The appellant acquired, by assignment, a headlease of seven shop units for a term of 99 years at an annual rent. It granted subleases of six of the shops to the respondents, in return for a premium, for substantially the same term as its own lease. The subleases contained a landlord’s covenant for quiet enjoyment and for payment of the rent reserved by the headlease, subject to the proviso that the appellant would not continue to be liable under the covenant in the event that it disposed of its interest in the property.
The appellant subsequently assigned the headlease to a third party, which failed to pay the rent due under the headlease. The head lessor accordingly commenced proceedings to forfeit the lease. Although the respondents were granted relief from forfeiture, they were required to pay the rent arrears under the headlease, together with interest and costs, and the new leases granted to them required them to pay an apportioned amount of that rent for the future.
The respondents brought proceedings against the appellant for damages for breach of the landlord’s covenant. They submitted that the proviso in that covenant was rendered void by section 25(1) of the Landlord and Tenant (Covenants) Act 1995 as an attempt to exclude the provisions of the Act relating to release from landlord’s covenants. Those provisions, in sections 6 to 8 of the Act, required the tenants’ consent or a decision of the court. The claim was allowed in a decision later upheld on appeal (see [2004] EWCA Civ 1306; [2005] 1 EGLR 15; [2005] 05 EG 204. The appellant appealed.
Held (Lord Walker of Gestingthorpe dissenting): The appeal was allowed.
Sections 5 to 8 were relieving provisions, providing a means whereby a tenant or landlord could, without the consent of the other party, be relieved from a liability that it had assumed. The mischief at which the statute was aimed was the absence of any such exit route. It was not intended to close any other exit route already open to the parties, or to exclude the parties’ ability to limit liability under their covenants from the outset in any way they might agree. Accordingly, such an agreement did not impinge upon the operation of the statutory provisions. That was so whether the agreed limitation was included in the lease or in a separate document by way of waiver or agreement to release: BHP Petroleum Great Britain Ltd v Chesterfield Properties Ltd [2001] EWCA Civ 1797; [2002] 2 EGLR 121 distinguished.
However, the existence of the covenant meant that the appellant had received substantial premiums in return for subleases that were, from their inception, valueless, since the appellant could at any time place them in jeopardy of forfeiture by assigning the headlease to a worthless assignee, something that was in the appellant’s financial interest to do as soon as possible, and that it had in fact done. Although this did not demonstrate an unintended loophole in the Act, and the risks involved were evident on the face of the subleases, a competent surveyor should have warned the respondents clearly and forcefully of those risks.
Mark Warwick (instructed by Philippsohn Crawfords Berwald) appeared for the appellant; Nathan Wells (instructed by Gattas Denfield) appeared for the respondents.
Sally Dobson, barrister
