Landlords can “breathe easy” following a House of Lords decision that allows them to contract out of liabilities to tenants when assigning a lease.
In a landmark ruling that applies to both commercial and residential leases, the court said that it will uphold liability-exclusion clauses contained in leases assigned by the landlord.
North London investor Avonridge Property escaped liability after an assignee’s failure to pay rent led to the head landlord forfeiting six business leases in Wealdstone, Middlesex.
The decision left the six tenants, who had paid Avonridge a total of £458,000 in premiums for effectively “valueless leases”, with no legal right to damages.
According to Avonridge’s barrister, Mark Warwick of Selbourne Chambers, the ruling grants landlords “a very valuable drafting tool”.
“Any well-advised landlord, when granting a lease, should now limit its liability to the period when it is the landlord,” he said. “This should ensure that it has no liability after parting with its interest in the premises.”
When assigning the lease of the six shops to Dhirajlal Phithwa in 2002, Avonridge inserted a clause stating that it would no longer be liable in respect of covenants for quiet enjoyment and for payment of the rent reserved by the headlease.
Phithwa later vanished, and the head landlord the London Diocesan Fund and the Parochial Church Council of Holy Trinity commenced forfeiture proceedings. The tenants were later granted new tenancies, but on less beneficial terms.
In October 2004, the Court of Appeal upheld a damages claim brought by the tenants, ruling that the clause limiting Avonridge’s liability “fell foul” of the anti-avoidance provisions in section 25 of the Landlord and Tenant (Covenants) Act 1995.
However, the House of Lords has now quashed that decision and held that, upon a lawful assignment, the landlord should be given an “exit route” from his future liabilities.
Lord Nicholls said that although the assignment had “the appearance of a scam” because the tenants paid large premiums in exchange for valueless leases, the Act was not intended to encroach upon the parties’ freedom to vary the contract.
He added: “The risks involved were not obscure or concealed. They were evident on the face of the subleases. Any competent conveyancer would, or should, have warned the sublessees of the risks, clearly and forcefully.”
London Diocesan Fund and others v Avonridge Property Co Ltd; sub nom Avonridge Property Co Ltd v Mashru and others House of Lords (Lord Nicholls of Birkenhead, Lord Hoffmann, Lord Hope of Craighead, Lord Scott of Foscote and Baroness Hale of Richmond) 1 December 2005.
Mark Warwick (instructed by Philippsohn Crawfords Berwald) appeared for the appellants; Nathan Wells (instructed by Gattas Denfield) appeared for the respondents.
References: EGi Legal News 01/12/05
