As most
readers will by now be aware, the Landlord and Tenant (Covenants) Act 1995 has
been passed and is expected to be brought into force on January 1 1996.
Thereafter, the law governing lease liabilities will be radically different and
lawyers, negotiators and valuers will need to be thoroughly au fait with
the new regime and its ramifications. While the Act’s main thrust is directed
at new leases (ie those granted on or after January 1 1996) it also makes
significant improvements to the position of existing tenants and guarantors.
Touching and
concerning
The first
change to be made in respect of new leases is one which will affect students
rather than practitioners; they will no longer have to agonise over whether
leasehold covenants ‘touch and concern’ the land, since the benefit and burden
of all landlord and tenant covenants (which include covenants contained in
collateral agreements) will automatically pass to an assignee of the lease or
reversion unless ‘expressed to be personal to any person’. While, in practice,
virtually all covenants which are regularly included in leases do touch and
concern the land, the removal of this requirement will be widely welcomed as
simplifying the law.
Release on
assignment
The primary
purpose of the Act, namely the abolition of original tenant liability, is
brought about by section 5. This provides that a tenant who assigns ‘the whole
of premises demised to him … is released from the tenant covenants … and ceases
to be entitled to the benefit of the landlord covenants’. An assignor of part
of the premises is released in respect of the covenants which ‘fall to be
complied with in relation to’ the part assigned. It should be noted that this
section is so worded as to release any tenant who assigns; thus, the use
of direct covenants to impose liability on assignees even after they have
assigned on is effectively outlawed. Section 5 does not apply to assignments in
breach of covenant or by operation of law. A tenant who is not released because
the assignment falls into this excluded class may be released on any subsequent
assignment which is not excluded.
The release
of tenants on an assignment is, however, tempered by section 16 which entitles
a landlord, in certain circumstances, to require the assigning tenant to
guarantee the performance of the covenants by the assignee. Such a guarantee
cannot be imposed where the tenant is free to assign without the landlord’s
consent. It can always be imposed where the tenant is absolutely prohibited
from assigning. In the more usual situation, where the tenant can assign with
the landlord’s consent, a guarantee can be required where it is reasonable to
do so. These ‘authorised guarantee agreements’ cannot impose any liability on
the assignor in relation to any time after the assignee is himself released.
Hence, once the assignee assigns on, the assignor drops off the hook (save
where the assignment is an excluded one — see above). The section expressly
provides that the general law relating to guarantees applies, notably that
relating to the release of sureties. Furthermore, as we shall see below,
section 18 provides that no former tenant shall be liable in respect of a
covenant which is subsequently varied.
Not
surprisingly, given that tenants do not have any control over the assignment of
a reversion, landlords who assign are not to be released automatically from
their covenants. They can, nevertheless, apply to be released. This can be done
by serving a prescribed form of notice on the tenant either before or within
four weeks of the assignment. If the tenant either consents or fails to object
within four weeks of service the landlord is released. If the tenant objects
the landlord can apply to the county court for a release. A landlord who is not
released following an assignment can, when the reversion is next assigned, apply
to be released in the same way.
Licences to
assign
The price to
be paid by commercial tenants for the abolition of privity is that, in new
leases, landlords will be very much more free to prescribe in advance the
circumstances in which they will consent to an assignment. A new sub-section
(1A) is to be added to section 19(1) of the Landlord and Tenant Act 1927, but
this will not apply to residential leases. This will allow a landlord and
tenant to enter into an agreement which either specifies the circumstances in
which consent to an assignment will be given, or which prescribes any
conditions to that consent. Where this is done a landlord cannot be regarded as
unreasonably withholding his consent where he acts in accordance with that
agreement. However, where these predetermined circumstances or conditions are
not purely factual criteria, but lie in the discretion of the landlord or any
other person, the agreement must either require the person exercising that
discretion to act reasonably or must give the tenant an unrestricted right to
have its exercise reviewed by an independent third party.
existing leases
Although it
has long been accepted that existing tenants could not be given any general
release, a number of important provisions in the Act will apply to both new and
existing tenants and these will afford some important relief to the latter and
to existing sureties.
Once the Act
comes into force a landlord will not be able to recover any fixed charge from
either a former tenant or a surety unless, within six months of the charge
becoming due, he serves on that person a prescribed form of notice which
informs him that the charge is now due, the amount of the charge and, where
relevant, any interest payable. This will give former tenants and guarantors
some important protection against landlords who allow arrears of rent and
service charge payments (with penal rates of interest) to build up without
their knowledge. This will not, however, extend to claims for damages for
breach of covenant.
As already
indicated, the Act also provides that, henceforth, neither a former tenant nor
a guarantor will be liable to the extent that a covenant has been subsequently
varied. This is particularly important for original tenants where the existing
law has been particularly harsh.
Finally, the
Act has provided an ingenious solution to the ‘responsibility without power’
problem faced by a former tenant from whom a landlord has extracted payment. In
future, such a tenant (or a guarantor) will be able to call for an overriding
lease which will render him landlord to the defaulting assignee. In this way he
can, through forfeiture, regain possession of the premises for which he is
being held liable.
This Act is
long overdue and will be welcomed by most. It addresses difficulties which were
not tackled by the original reform proposals, notably those concerning licences
to assign. It is to be hoped that the solution adopted in this area does not
rebound on tenants since landlords are, on the face of it, being given an opportunity
to make assignment more difficult than at present. This may well not be taken
for fear of the effect that a very restrictive approach would have on rental
value.
Those
drafting and negotiating leases will have a busy time reviewing their current
practices and precedents. One difficulty which the Act does not appear to have
foreseen is that, in the run up to January 1 1996, tenants will not wish to
sign up to the old privity regime. While there will be no difficulty in
producing contractual provisions to match that new statutory scheme, it appears
that the new assignment regime (which for most landlords is the essential quid
pro quo) cannot be included in such leases since it would fall foul of the
existing section 19(1). A quiet six months is not what the leasehold property
market needs.
