The first day of 2016 marked the 20th anniversary of “new” leases pursuant to the Landlord and Tenant (Covenants) Act 1995 (“the Act”). In those two decades, the Act has had a considerable impact – not all entirely intentional. But how much of a success has it been?
The objects of the Act
It is useful first to revisit the mischiefs which the Act was intended to rectify:
Privity of contract
Prior to the Act, lease covenants remained enforceable against the original tenant and the original landlord for the duration of the lease term, regardless of whether either or both parties had disposed of their interest. As Walton J observed in Allied London Investments Ltd v Hambro Life Assurance Ltd [1984] 1 EGLR 62, “…the assignor does not by assignment get rid of one jot or tittle of his original liability”.
Moreover, it was common practice for landlords to require direct covenants from assignees to perform the lease covenants for the remainder of the term. If there were guarantors, their liability tended to be co-extensive and so, on a breach of covenant, a landlord could usually take his pick of any of the former or current tenants and all of the guarantors.
The Law Commission considered the application of this principle “intrinsically unfair”; former tenants and guarantors carried unquantifiable contingent liabilities and had no means of limiting that liability. A partial protection was offered by the statutorily implied or express chains of indemnities which usually existed between assignors and assignees, but such chains could easily be broken by the insolvency or disappearance of one of the links.
Of course, privity of contract applied equally to the original landlord. A landlord, however, was usually subject to far fewer covenants, a tenant rarely had any control over dispositions by its landlord and, in any event, it was not uncommon for leases to limit a landlord’s liability to its period of ownership.
Uncertainty regarding which leasehold obligations would bind successors
Privity of estate meant that only those covenants that touched and concerned the land would pass to successors in title. The considerable body of case law concerning which covenants were capable of running with the land had led to a set of rules which were “purely arbitrary, and… quite illogical” (per Romer J in Grant v Edmonson [1930] 2 Ch 245). By the time of the Act, this was probably more of a theoretical than a practical concern, as it was usual for assignees to covenant directly with landlords to comply with all the obligations on the part of a tenant in a lease.
Landlord controls over assignment
In return for relinquishing their rights to pursue former tenants and their guarantors, landlords were to have greater control over assignments. Before the Act, it was not permissible for a landlord to define in advance what would amount to a reasonable withholding of consent to an assignment (see Re Smith’s Lease [1951] 157 EG 57). It was the right and duty of the court alone to determine what was reasonable.
How successful has it been?
Goodbye privity of contract?
The Act was successful in its primary aim of abolishing privity of contract in relation to tenant covenants. Consequently, there is no longer a need for chains of indemnities as between assignors and assignees and the statutorily implied covenant for indemnity was repealed. The recent case of Pavilion Property Trustees Ltd and another v Permira Advisers LLP and another [2014] EWHC 145 (Ch); [2014] PLSCS 38 has confirmed that a provision in an authorised guarantee agreement (“AGA”), which purports to make the outgoing tenant liable for not only defaults of its assignee but also for those of any subsequent assignee, will be void.
It is less clear that the provisions relating to the release of landlords have been fully embraced. Landlords’ solicitors frequently attempt to bypass the statutory procedure and provide for the automatic release of the original landlord. It has been held that this does not fall foul of the Act’s anti-avoidance provisions and the House of Lords’ view is that the landlord’s statutory release procedure is simply an alternative to a pre-agreed contractual release (see London Diocesan Fund and others v Avonridge Property Company Ltd [2005] UKHL 70).
Whether or not it is as a result of the existence of such pre-agreed contractual releases or simply because the release process is so cumbersome, it is not often that a tenant receives a landlord’s statutory release notice. It is likely that the process is more than occasionally overlooked. Indeed, in the recent case of Reeves and another v Sandhu [2015] EWHC 985 (Ch) both parties involved and the district judge at first instance forgot that a landlord is not released unless he follows the statutory procedure. The point was only picked up by the judge at appeal.
Goodbye privity of estate?
Overwhelmingly, the issues around privity of estate have also been eradicated; practitioners need no longer concern themselves with the vagaries of whether a lease covenant runs with the land. There has been some residual debate about the extent to which landlords’ obligations in agreements for lease amount to covenants. Practice has evolved, so that well-advised developers will now ensure the marketability of their development by making all development obligations in an agreement for lease personal.
Greater landlord controls over assignment?
The Act’s provisions allowing pre-agreement of circumstances for withholding consent and conditions to be attached to consent are well utilised by landlords. Too well, some might argue. Landlords commonly seek to make the automatic provision of an AGA a pre-agreed condition to an assignment.
The Lease Code 2007 intervened and stipulates that AGAs should not be required as a condition of an assignment unless, at the date of the assignment, the proposed assignee, when assessed together with any guarantor, is of lower financial standing than the assignor (and its guarantor) or is resident or registered overseas. The code is endorsed by the British Property Federation, among others, and the government encourages its adoption. Even so, many draftsmen remain quietly defiant and it is not atypical for first-draft leases to prescribe that an AGA is an automatic condition of an assignment.
On a similar note, it has been decided that, upon the renewal of an “old” lease, a landlord cannot insist on an automatic requirement for an AGA, but may only require one where reasonable (see Wallis Fashion Group Ltd v CGU Life Assurance Ltd [2000] 2 EGLR 49).
Guarantors
No evaluation of the Act would be complete without some reference to the well-documented issues concerning guarantors. The Act made no reference to whether or not its anti-avoidance provisions preclude a guarantor from acting as guarantor of an assignor’s obligations under an AGA (known as a “GAGA”). Lord Neuberger J’s obiter opinion in K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] EWCA Civ 904; [2011] 2 EGLR 11 is that a GAGA is not rendered void by the anti-avoidance provisions. It seems unlikely that the Supreme Court would disagree but, nonetheless, this is not decided law and a potential investor should certainly pause for thought where the only covenant of value is that under a GAGA.
In relation to guarantors generally, case law has decided that a tenant’s guarantor cannot validly agree to directly guarantee the tenant’s assignee’s performance of the tenant covenants (known as a “repeat guarantee”) (see K/S Victoria Street, confirming Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29).
According to further obiter comments in K/S Victoria Street, an existing guarantor can guarantee subsequent (as opposed to immediate) assignees. However, a guarantor probably cannot take an assignment of the lease itself from a tenant whose obligations it has guaranteed. In the case of an excluded assignment, a reassignment to the assignor accompanied by a renewal of a guarantee will not fall foul of the anti-avoidance provisions (see UK Leasing Brighton Ltd and others v Topland Neptune Ltd and another; Zinc Cobham 1 Ltd and others v Adda Hotels (an unlimited company) and others [2015] EWHC 53 (Ch); [2015] EGLR 20).
The inability of a guarantor to give repeat guarantees was described by Lord Neuberger in K/S Victoria Street as “unattractively limiting and commercially unrealistic”. It serves neither tenants nor landlords if tenants cannot easily reorganise their assets intra-group (especially where there is only one strong covenant in the group) and if landlords cannot be protected from group reorganisations by overarching parent company guarantees. This is what most commentators consider to be the principal shortfall of the Act.
Absent privity of contract and continuing original tenant liability, landlords are more likely to require guarantees from an incoming tenant upon an assignment, and that way much potential trouble lies.
Lord Neuberger also said that, if repeat guarantees were permissible, then a landlord could include a requirement in a lease that the original guarantor must guarantee the liability of each successive assignee. This would effectively restore privity of contract so far as the original guarantor was concerned and frustrate the operation of the Act. Weighted against this is the inability of a tenant to offer a repeat guarantee or an assignment to a guarantor, even when this suits the tenant’s (and the guarantor’s) corporate requirements and where there is no element of compulsion by the landlord.
The legacy of the Act
At the time of the Act, it was feared that the investment value of properties might be affected by the loss of original covenantors as a target for the landlord and that abolishing privity of contract could cause rents to rise, so as to compensate landlords for the additional risk. There appears to be no evidence to suggest these fears materialised.
However, the Law Commission was more accurate in its prediction that abolishing privity of contract “could make assigning leases more difficult, time consuming and expensive because landlords would justifiably check the credentials of assignees more carefully”.
It is probably fair to say that, since the Act, assignments are more often resisted by landlords and that alienation provisions in leases are more heavily negotiated. The uncertainty around guarantors and GAGAs has exacerbated the situation. By and large, the Act achieved its objectives but unfortunately created unforeseen complications in relation to guarantors and these threaten to occupy the courts and column inches for years to come.
Lewis Myers is a real estate partner and Elizabeth Thomson is a real estate professional support lawyer at Irwin Mitchell
