Effectiveness of the Landlords and Tenants Covenant

This essay critically considers whether the Landlords and Tenants Covenant Act 1995 has eliminated the problems that existed in relation to the enforcement of leasehold covenants prior to the Act coming into force. The essay finds that although, the Act makes efforts to address the problems in the enforcement of leasehold covenants, there are still areas that are not addressed effectively as yet. Moreover, the law is applicable only to new leases formed after 1995 and not to the old leases that were made before 1995. If you need assistance with your law dissertation, then you can consider seeking expert law dissertation help.

There were specific areas of gaps and defects with relation to covenants in leases that were noted in the Law Commission Report (no 174) prior to the enactment of the Landlords and Tenants Covenant Act 1995. One of the gaps noted in the Law Commission Report was related to the problem of continuing liability of the original landlord. Under the prior law, even when a lease created a new legal estate, as per which the property was vested in the tenant, the original parties remained liable for the whole term of the lease due to the privity of contract between the original landlord and the original tenant. This meant that the original landlord and tenant were liable to perform their respective covenants even though they no longer had any interest in the property.

Another problem with the prior law was that there was an inconsistent interpretation of the concept of 'touch and concern'. The covenants that were enforceable between the original landlord and tenants were those that had direct bearing on the relationship between landlord and tenant, that is, covenants which “touch and concern” the land or had “reference to the subject-matter of the lease.”

The third problem in the existing law was related to the imbalance between a tenant and landlord because the tenant retained the ability to sue the landlord for breach of covenant committed during his possession even after the assignment of the lease. However, no similar right was given to the landlord after the assignment of the reversion.

The covenants in lease allow the enforcement of the covenant to be enforced against the landlord and tenant and their successors. Leasehold covenants are undertakings by the parties under the deed of the lease. The enforcement of covenants prior to the passage of the the Landlords and Tenants Covenant Act 1995 was done through the doctrines of privity of contract and privity of estate. Privity of contract relates to the relationship between the original parties to the contract, that is, the original lessor and lessee, with covenants being enforceable between landlord and tenant and between tenant and the sub-tenant but not between landlord and the sub-tenant or between the landlord and assignee. One of the important changes made by the Act was to disapply the rule of privity of contract for tenancies that entered into force after 1995. Thus, leases after 1995 have covenants that are directly enforceable by and against the landlord and his successors in title, and by and against the tenant and his successors in title. The doctrine of privity of contract no longer applies to made covenants enforceable only against the original parties to the contract.

Law Commission, Landlord and Tenant Law: Privity of Contract and Estate (London: HMSO 1993).
Stuart v Joy [1904] 1 K.B. 362.
Spencer's Case (1583) 77 E.R. 72.
Law of Property Act 1925, sections 141 and 142.
City and Metropolitan Properties v Greycroft (1987) 1 WLR 1085.
Re King (1963) Ch 459.
Martin Boxer, Landlord and Tenant: The New Regime and its Pitfalls, A Critical Guide to the Landlord and Tenant (Covenants) Act 1995 (London: Cavendish, 1996) 25.

Privity of estate relates to the relationship between the current landlord and tenant, who have been assigned the estate from the previous landlord and tenant. The impact of this doctrine is that parties are liable for all breaches of covenants that "touch and concern" the land during the period that they are within the relationship of privity of estate and the landlord or tenant are not be liable for breaches before the lease was granted or assigned. The concept of ‘touch and concern’ was also noted in Sections141 (1) and 142 (1) of the Law of Property Act 1925, which automatically transfer the benefit of all covenants, and the burden of all covenants respectively, to the new landlord if the covenants have reference to the subject matter of the lease. The Landlords and Tenants Covenant Act 1995 abolished the ‘touch and concern’ concept under Sections 2 and 3.

With the enactment of the Landlords and Tenants Covenant Act 1995, these defects were addressed, albeit only in connection with those leases that were entered into after 1995. Indeed, one of the purposes for the enactment of the Landlord and Tenant (Covenants) Act 1995 was to reform the existing law on leasehold covenants as the continuing liability was particularly burdensome for the original tenant even after lease was assigned to another tenant. With the enactment of this law, both equitable and legal tenancies were reformed to a degree as the law includes both kinds of leases. Under Section 2 of the Act, notion of privity of estate is made obsolete because covenants are described as either "landlord covenants" or "tenant covenants." Under Section 3, assignees are liable only for the period that they hold the lease. Under Section 5, tenants are only liable for the period that they hold the lease. Once the lease is assigned to another, the liability of the tenant comes to an end. At the same time, landlord covenants will also benefit the tenants only for the period of their lease. With respect to tenants, these are the two most important provisions of the new law as they are automatically released on assignment and benefits can be passed on to the new assignees.

Release from liability does not imply that the release will affect any liability arising from a breach of covenant before the assignment as per Section 24. An exception to release of liability is provided in Section 16 where assignments conditional upon the consent of the landlord due to absolute or qualified covenant to assign, allow the landlord to require a tenant to enter an authorised guarantee agreement. An authorised guarantee agreement is an agreement by the tenant guaranteeing the performance of the tenant's covenants in the lease by persons to whom the lease may be assigned by the tenant. An authorised guarantee agreement sees the tenant entering into the agreement as principal debtor or a guarantor. This would allow the landlord to seek redress from the assignor if he does not get redress from the assignee.

The inclusion of authorised guarantee agreement in the law raises a question as to whether it is appropriate that tenant can be requested to enter in to an authorised guarantee agreement. It may be argued that the requiring the tenant to enter into such an agreement limits the effect of automatic release from liability as the tenant will still be liable as a guarantor. Therefore, despite there being an automatic release from liability on assignment, the tenant can be made liable after assignment under an authorised guarantee agreement. However, the liability is only for the next and immediate assignee of the tenant under Section 16 and not for the entire period of the lease as the case was earlier. Even if it is considered that the provision of authorised guarantee agreement is made to provide some remedy to landlord where the assignee of the tenant defaults on the lease, the provisions in the statute, particularly Section 16 (3) are not free from ambiguities. The effect of the provision is that the tenant may have

Section 28(1) of Landlords and Tenants Covenant Act 1995.
Martin Dixon, Modern Land Law (Psychology Press 2005).

no option but to sign an authorised guarantee agreement if that is required by the landlord in order for him to give his consent for the assignment. As assignment without landlord’s consent does not release the tenant from liability anyway, this presents a difficult situation for tenants

Another question that is raised is whether it is appropriate that there is a provision for automatic release from liability for a tenant upon assignment of his lease, but that release from liability must be applied for by a landlord upon assignment of his reversion. There are differences between the liability of landlord and tenant under the law. Under Section 3, landlord's covenants are annexed to the leased property and the landlord’s assignee is liable to perform the covenants for as long as he holds the reversion to the lease. The landlord is not automatically released from liability under the lease on assignment to another landlord but has to apply for release by notice to the tenant as per Section 6. The notice has to be given within four weeks of the date of the assignment, and failing tenant’s reply to the notice four weeks of the notice, the landlord is released. If the tenant refuses to release the landlord from the covenants, then the landlord has to apply to the court to be released as per Section 8. Therefore, there is a difference in how liability of tenants and landlords is treated.

However, there is also a difference in how tenant’s and landlord’s assignments are treated. A tenant has to take landlord’s consent before assignment to another, whereas a landlord does not need to take the tenant’s consent before assignment. It may be mentioned here that tenants who do not take landlord’s consent before assignment are not able to secure release from liability. In the event of the tenant’s assignment taking place without the consent of the landlord or assignment happening due to an operation of the law (for instance, if the tenant becomes bankrupt), Section 11 of the Act becomes applicable and it denotes such an assignment to be an excluded assignment. Under excluded assignment, the release of liability of the tenant will be deferred until the next assignment takes place which is not an excluded assignment. In effect, the liability of the tenant will continue even after the assignment has taken place. No such repercussions are made out for the landlord for assignment without tenant’s consent. At the same time, if the landlord withholds his consent for the assignment by the tenant, then the court may consider if it is reasonable for the landlord to withhold his consent. Moreover, as benefits pass directly to the new assignees of the tenant, the landlord also have remedy against the tenant in possession. Therefore, there seems to be a balance drawn by making the tenant ask for tenant’s consent to release him from liability under covenants.

Can we say that the new law is free from any defects? This question is important because there were many defects in the legal position on leasehold covenants prior to the passage of the Landlords and Tenants Covenant Act 1995, which sought to provide solutions to the problems that existed in the law of the time. One of the defects of the statute is noted in First Penthouse, wherein Lightman J noted that the statute was rushed through so that the drafting itself is problematic at times and provisions create difficulties in interpretation. Another difficulty with the statute is that it does not clarify the position of the subtenant vis a vis the landlord. The Act concerns itself mostly with assignment and subtenant is not an assignee but takes a new lease.

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Ashworth Frazer Ltd v Gloucester City Council [2002] 1 All ER 377.
Martin Dixon, Modern Land Law (Psychology Press 2005) 236.
First Penthouse v Channel Hotels and Properties (2004) EWCA Civ 1072.
Martin Dixon, Modern Land Law (Psychology Press 2005) 232.

To conclude, while the 1995 Act responds to the defects in the prior legal position, there are still areas that need attention. In particular, there is a need to have greater clarity about the statutory provisions, especially related to the authorised guarantee agreements.

Table of cases

Ashworth Frazer Ltd v Gloucester City Council [2002] 1 All ER 377

City and Metropolitan Properties v Greycroft (1987) 1 WLR 1085.

First Penthouse v Channel Hotels and Properties (2004) EWCA Civ 1072.

Re King (1963) Ch 459.

Spencer's Case (1583) 77 E.R. 72.

Stuart v Joy [1904] 1 K.B. 362

Books

Dixon M, Modern Land Law (Psychology Press 2005).

Journals

Boxer M, Landlord and Tenant: The New Regime and its Pitfalls, A Critical Guide to the Landlord and Tenant (Covenants) Act 1995 (London: Cavendish, 1996).