by Roger Benson
Landlords and their advisers had hardly become accustomed to the ducking and weaving necessitated by the proposed VAT changes and the prospect of the abolition of the right to distrain and were still reeling from the surprise left hook of the Landlord and Tenant Act 1988 when they were faced with a further blow in the form of the draft Landlord and Tenant (Covenants) Bill, published last November by the Law Commission in its report on “Privity of Contract and Estate” (Law Com no 174).
If enacted, the proposals would, to some degree, lessen the security of a landlord’s income. The proposals achieve this in their own right. When considered against the background of other recent legislative sorties into the arena of landlord and tenant, their effect becomes all the greater.
Securing the income from an investment property is of paramount concern to any institutional investor. This income is not, like gilts, state guaranteed; it is subject to risk and the greater the risk the less appeal property as a form of investment must necessarily command. The less the appeal of property as an investment, the less quality commercial property there will be in the market.
The Law Commission proposes that a tenant who assigns a lease should, as a general rule, cease to be liable to comply with all the lease covenants; a landlord consenting to an assignment will be able to impose a condition that the tenant guarantees the performance of the lease covenants by his successor only if it is “reasonable” to impose such a condition. The doctrine of privity of contract applies equally to a landlord who assigns a reversion and the Law Commission proposes that a landlord should not cease to be liable unless he serves a notice in a prescribed form on the tenant advising the tenant of his proposal to assign and requesting a release from liability under the lease with effect from the date of assignment. The tenant would have four weeks in which to object, failing which the release would be automatic. Landlords’ advisers who are frequently engaged in the confidential disposal of large multi-let investments (more often than not subject to strict time constraints) will find the Law Commission’s proposals of very little practical significance. In any event, proceedings against the original landlord for breach of a landlord’s covenant are extremely rare.
Very few landlords and their advisers would deny that the present rule book could be amended to make it more equitable. The direct contractual relationship between the original landlord and tenant presently results in both being liable for the non-performance of their respective obligations for the whole term of the lease, whether or not the lease or the reversion has been assigned. The liability of both is direct and primary. Thus the original tenant is liable to pay the rent agreed at a rent review after he has assigned his lease; the rent may even reflect improvements carried out by an assignee, notwithstanding that the lease contained an absolute prohibition against making any improvements. Landlords are not even required to mitigate the original tenant’s potential liability but can sit idly by and allow rent arrears to accrue before demanding payment. The original tenant is bound to pay but has no right to occupy the premises, the subject-matter of the lease.
The Law Commission concedes that the parties to a lease are always free to modify the privity of contract principle or cancel its application. They must appreciate the seriousness of further restricting the principle of freedom of contract. However, one is left wondering how seriously this principle is taken when it is outweighed by their concern that a tenant should not “feel obliged to spend its resources and to adopt an inconvenient way of conducting its affairs to counter the unpredictable effects of a law which does not seem to offer any general benefits”. In other words, the fact that a tenant can avoid the hardships of the doctrine by underletting is dismissed as being too troublesome.
Even in this Thatcherite era, where the marketplace is king, we readily accept and understand the need to restrict the right to freedom of contract for moneylenders and purveyors of consumer credit. However, bearing in mind that the protection afforded to a tenant by the Landlord and Tenant Act 1988 was always something which a tenant was able to negotiate if the commercial circumstances permitted, do landlords now deserve this further body blow? The Commission considers a landlord’s dominant bargaining position to be the principal explanation as to why tenants are unable to negotiate a form of lease which only binds the tenant for the time being. The continuing liability of the tenant named in the lease is considered to be “the norm, so the inertia of the established practice argues against any amendment”.
Can it really be that a landlord’s reluctance to modify or cancel the application of the doctrine of privity of contract reflects nothing more than simply inertia or the desire “to keep all the leases identical to facilitate efficient estate management”? Is it not rather that the landlord is simply doing his utmost to protect his Achilles’ heel — the vulnerability of his income — and achieve a good yield for his investment, a yield which in a depressed market must necessarily be affected by his inability to recover the rent? Those tenant’s advisers who have had to stand up from the negotiating table and make for the door before a landlord was prepared to consider releasing the tenant named in the lease from liability on assignment will understand how deep the institutional landlord’s requirement for security of income runs. Modifications to the privity of contract rule always could be, and always will be, negotiated when the commercial climate is appropriate. If the inequality of bargaining power is as great as certain tenants obviously consider it to be, why have landlords not as a matter of practice sought to insert in their standard form of lease a release of the landlord’s liabilities on the sale of the reversion — whether or not the tenant gets a release on assignment?
If the issue was raised during rental negotiations, in the writer’s experience tenants very quickly withdrew their requirement for a modification of the privity of contract rule when asked to pay an increased rental to reflect the advantage to the tenant and the fact that the landlord was expected to accept an increased risk. How rare it has been over recent years for tenants to enter into negotiations with their landlord for a release of liability in consideration of a share of the premium when assigning their lease with a substantial term to run.
The Law Commission, before making its proposals, did consider certain possible reforms which could be implemented to alleviate specific hardships which arise as a result of the strict application of the principle of privity of contract. Cases can be made for treating commercial and residential property separately, for obliging landlords to serve default notices on persons from whom they will in due course be seeking to recover arrears and for the provision of a statutory right of reassignment on default by an assignee. The Law Commission ought to be asked to re-examine these alternatives.
The effect of the Bill could, if implemented, make a landlord more cautious when approving an assignee’s covenant. This comes in the wake of the Landlord and Tenant Act 1988 where he could be liable for damages for delay.
