The effect of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) on tenants’ liability under leases has been widely considered by commentators, practitioners and the courts. Readers will be familiar with the concept that a tenant is released on assignment of the lease, subject to the possibility of an authorised guarantee agreement guaranteeing their immediate assignee. However, the provisions dealing with landlords’ liability have received far less attention.
Landlords’ liability
For “new tenancies” entered into since the 1995 Act came into force on 1 January 1996, the basic principle is set out in section 13. After the disposal of the reversion to a lease (whether the landlord’s reversionary interest is itself freehold or leasehold), a former landlord remains jointly and severally liable with its successors for the landlord covenants under the lease.
Such landlord covenants can vary in their severity and importance. For example, a lease of the whole of a building to a single tenant is likely to incorporate only landlord covenants dealing with insurance, reinstatement and quiet enjoyment.
At the other end of the spectrum, a lease of part of a complex multilet property (such as a unit within a shopping centre) may include extensive provisions dealing with the supply of services, the repair and maintenance of the structure and common parts of the property, and other matters such as non-competition covenants in favour of particular tenants who may need exclusivity of trade (the latter having recently come under increasing scrutiny in the context of competition law issues).
Unlike the position with tenants’ covenants on the assignment of a lease, there is no automatic release from liability for landlords who sell their reversionary interest. The landlord may be released from its liabilities only if it has complied with the procedure described here.
Release mechanism
Sections 6 and 8 of the 1995 Act enable an outgoing landlord to apply to each of its tenants for a release from the landlord covenants of the lease. Such application can be made at any time before the transfer or within four weeks after completion of the disposal. The application is made by serving a notice on the tenant in the form prescribed by the regulations incorporated by virtue of section 27 of the 1995 Act.
A solicitor acting on behalf of the outgoing landlord should consider whether it is appropriate to serve the relevant release notices on its former tenants. Careful consideration is required, because section 6(2)(b) provides that, upon release of the landlord covenants, the former landlord will no longer be entitled to the benefit of the tenant covenants. This is of particular importance in two situations:
? The landlord is itself a tenant and is disposing of a leasehold reversion where the headlease held by the landlord is an “old tenancy” (meaning it pre-dates the 1995 Act), but is subject to a sublease which is a new tenancy. In this case, the landlord may decide not to serve the release notices in order to keep the sub-tenant on the hook, particularly if the sublease contains a tenant covenant to observe the headlease covenants. This would provide a measure of protection against the ongoing liability the landlord will have as tenant under the headlease.
? The landlord is disposing of a multilet property. There is a risk here that the landlord might obtain a release from some but not all of the tenants. This would leave the landlord liable to some of the tenants for full performance of the landlord covenants (for example, relating to the provision of services) but without the ability to recover contributions from those that accepted the release notice.
Tenant’s choices
The tenant receiving the notice has three options: agree to the release; do nothing (which after four weeks will have the same effect as agreeing to the release); or object to the release.
The tenant may consider that the landlord’s covenants are sufficiently minimal or unimportant, or that the new landlord is of sufficient covenant strength that a release of the outgoing landlord will do the tenant no harm.
However, many tenants will consider that they have nothing to lose by objecting to the release. A tenant that wishes to object must serve a counter-notice on the landlord.
The writer has encountered an increasing number of instances where a tenant refuses consent to a landlord’s release as a matter of course, and without good reason. This appears to be standard estate management practice for many large organisations on the basis that it will preserve the existing landlord’s covenants for the tenant and may give some tactical advantage for the tenant in the future.
Landlord’s dilemma
If a tenant refuses to release the landlord, the landlord will have three options, none of which seem particularly attractive:
? It may apply to the court for a declaration “that it is reasonable for the covenant to be so released”. Unfortunately, there is no guidance as to the meaning of reasonableness in this context, nor does there appear to be any substantive case law on the subject (although there is a large body of case law relating to tenants’ applications for consent to assign, from which parallels may be drawn).
? It may choose to wait and make a further application to be released after a transfer of the new landlord’s interest.
? It may choose to do nothing and accept that it remains liable (and simply rely on whatever indemnity covenant it has obtained from its successor).
Most landlords are unlikely to have any appetite for a court application, especially in relation to matters which are likely to be comparatively trivial. The marked absence of case law on this subject suggests that this has been the case since the 1995 Act came into force.
The provisions of section 7 of the 1995 Act (which enable former landlords to make a further application after a subsequent transfer of the reversion) seem cumbersome and unrealistic. If the landlord wishes to obtain a release later, after a subsequent transfer, it would need to monitor the ownership and dealings with its historic property interests and impose additional contractual obligations on its successors in title to notify it when it disposes of the property.
Avonridge ruling
It would be easier for landlords if leases incorporated an automatic landlord’s release to match the tenant’s. The House of Lords had ruled in London Diocesan Fund and others v Avonridge Property Company Ltd [2005] UKHL 70 that such a release can work, notwithstanding the wide-ranging anti-avoidance provisions in section 25 of the 1995 Act.
However, few well-advised tenants would accept such a clause in the current tenants’ market, particularly where the landlord’s covenants are of any significance, since tenants do not enjoy the same degree of control over changes of landlord as landlords enjoy over changes of tenant.
A case for reform?
The law, however, is perhaps in need of reform so that it reflects the real world in which many tenants automatically refuse consent without good grounds in the knowledge that most landlords are unwilling to litigate.
Options for reform include revised provisions that require the tenant to state its grounds for refusal and to provide evidence to justify it. A step further would be an automatic release for all landlords’ covenants after a disposal, subject to a requirement that notification is given to a tenant of the occurrence of the disposal, and with provision permitting a tenant with reasonable grounds to object to a release. Tenants would then have recourse where it was properly justified, with many of the unjustified or vexatious refusals weeded out.
It would also be helpful if there was guidance as to what constitutes a reasonable refusal in this context, giving a framework for discussion between the parties after a request for such a release.
Tom Hubbard is a solicitor at Hill Dickinson LLP
