#3749 - Leases Running Of Covenants I - GDL Land Law

- Problem: enforcing covenants in leases on new parties.

• original landlord (L) + original tenant (T) – contractual relationship: enforcement by contract principles.

• successors in title (i.e. T assigns lease to T1 or L sells reversion to L1) – no contractual relationship.

• attempt to balance 2 issues:

  • 1. if covenants unenforceable vs. successors v. short lifespan: not always convenient.

  • 2. if covenants always bind successors land less attractive to buyers.

• 2 sets of rules:

  • pre-1996 (old leases): old system of rules.

  • 1996- (new leases): Landlord and Tenant (Covenants) Act 1995 (LT(C)A).

- These notes: old leases.

Privity of Contract and Estate

- Privity of contract: between original landlord (L) + original tenant (T) continuing liability.

• all terms in lease can be enforced between L + T: under rules of contract.

• liability continues for full lease term – even after assignment.

  • T’s liability continues after assignment of lease – Thursby v Plant [1668].

  • L’s liability continues after assignment of reversion – Stuart v Joy [1904].

  • s79 LPA 1925: covenant deemed to be made by covenantor on behalf of self + successors (inc. owners/occupiers for time being) + persons deriving title under successors.

  • (possible absurdities reformed by LT(C)A).

- Privity of estate: between any current landlord + current tenant.

• proprietary relationship: landlord (freehold reversion) + tenant (leasehold) owners of legal estate in same property.

• on assignment by L or T or interest:

  • privity of contract: remains between L + T.

  • privity of estate: between whoever is current landlord + tenant.

  • e.g. below: privity of contract – L + T; privity of estate – L1 + T2.

• may allow covenants to be enforced vs. successors – but dep. on other conditions.

  Assignment of the Lease

- Assignment of lease: assignee liable under privity of estate if conditions met (Spencer’s Case [1583]).

• assignment of lease: privity of estate between L + new tenant (T1).

• Spencer’s Case [1583] – 4 conditions for burden + benefit to pass to assignee of lease (T1):

  • 1. privity of estate between the parties (i.e. those in current position of landlord + tenant).

  • 2. there must be a legal lease.

    • old view: only if created by deed – Purchase v Lichfield Brewery Co [1915].

      • problem: leases <3 years – can be legal without deed (s54(2) LPA 1925).

    • new view: just need appropriate formalities – Boyer v Warbey [1953]: [Ld Denning].

  • 3. lease must have been legally assigned – Cox v Bishop [1857].

    • correct formalities complied with satisfied.

    • NOT equitable assignment: although benefit of covenants may pass to assignee under contract.

  • 4. covenant must touch + concern the land: i.e. affects landlord qua landlord / tenant qua tenant (Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987]: [Ld Oliver]).

    • a. consider if particular type of covenant dealt with in case law.

    • b. apply test: P & A Swift v Combined English Stores [1989]: [Ld Oliver]:

      • i. benefits land itself – lacks utility if separated from land;

      • ii. affects nature, quality, mode of use or value of land;

      • iii. non-personal in nature.

      • (approach followed: Caerns Motor Services Ltd v Texaco Ltd [1994]: [Paul Baker QC]).

    • examples:

      • tenant’s obligations touching + concerning land: to pay rent; repair; decorate; use only in stipulated fashion; not assign without consent; not make alterations; insure premises.

      • landlord’s obligations touching + concerning land: to renew lease at end of term; supply premises with water; not build on adjoining land.

      • covenants NOT touching + concerning land: not to employ certain persons; give lessee right of first refusal on sale of adjoining land; sell reversion to lessee; pay tenant compensation at end of lease if new lease not granted.

- Duration of tenant’s liability: privity of estate lasts only for period lease vested in tenant.

• no liability for breaches before assignment or after assigns lease to 3^rd party: intermediate assignee not liable for breaches by later assignee (but original tenant is!).

• remains liable for any breaches committed while tenant.

  • inc. continuing breaches inherited from assignor (e.g. breaches of repairing covenant).

• but: liable for breaches of assignee if covenanted with landlord to be responsible – Estates Gazette Ltd v Benjamin Restaurants Ltd [1995].

  • common practice: landlord makes consent to assignment conditional on tenant promising continued fulfilment of covenants in lease.

- Original tenant remains liable even after assignment indemnities on assignment.

• original tenant remains liable: landlord can sue for compensation for breaches by subsequent assignee.

  • Walker’s Case [1587]: original tenant remains liable.

  • s79 LPA 1925: original tenant covenants on behalf of self + successors + those who derive title under them.

  • only damages available: not specific performance/injunction – original tenant not in possession.

• but: original tenant may be able to recoup damages from assignees.

  • common law: rule in Moule v Garrett [1872]: where 1 person compelled to pay damages because of legal default of another, entitled to recoup damages from defaulting party.

• statute: implied covenants by assignee to assignor on transfer of lease.

  • unregistered land: s77 LPA 1925: assignee covenants with assignor to pay rent + perform all covenants touching + concerning land for remainder of lease.

    • chain of indemnity created between T + any subsequent assignee: each assignee covenants to previous assignee on assignment. T can sue assignee under contract.

      • but: only assignments for valuable consideration.

    • registered land: Sch. 12 para 20 LRA 2002: assignee covenants with assignor (unless contrary intention) –

      • (2)(a): pay rent reserved in lease; (2)(b): comply with covenants in lease; (2)(c): keep assignor indemnified against actions from failure to comply.

      • any disposition: inc. gifts.

  • express covenants: needed for gift of unregistered land (s77 LPA 1925 does not apply).

• BUT: indemnities of limited practical value – assignee in possession likely not worth suing, or landlord would have sued them in first place.

  • in practice: outgoing tenant should try to assign to financially sound + trustworthy tenant.

• (N.B. ss17-20 LT(C)A 1995 apply to old leases as well:

  • s19: T has right to take lease back from assignee if forced to pay for his breach).

Assignment of the Reversion

- s141 + s142 LPA 1925: assignee inherits benefit + burden of landlord’s covenants which have ‘reference to subject matter of the lease’ – (same as Spencer’s Case: ‘touch + concern’ the land).

• s141 LPA 1925: rent + benefit of lessee’s covenants run with reversion.

  • consequence: right to sue tenant for breaches before assignment passes to new landlord (L1).

    • Re King, Robinson & Gray [1963]: [Ld Diplock]: after assignment, only assignee can sue tenant (whether breach before or after assignment).

    • Arlesford Trading Co Ltd v Servansingh [1971]: L1 can sue T for outstanding rent.

    • in practice: on reversion, L seeking to collect outstanding arrears should –

      • i. collect arrears from L1 directly on assignment (leaving L1 to collect from T); or

      • ii. arrange for L1 to arrears on L’s behalf as agent.

• s142 LPA 1925: burden of lessor’s covenants run with reversion.

  • BUT: covenant to renew lease at end of term estate contract: must be registered to bind L1 – Beesly v Hallwood Estates Ltd [1961] + Phillips v Mobil Oil Co Ltd [1989].

    • unregistered land: Class C(iv) land charge.

    • registered land: notice on charges register.

Head Landlords and Sub-Tenants

- No legal relationship between head landlord + sub-tenant.

• head landlord cannot usually directly enforce covenants in head lease vs. sub-tenant.

- Methods of enforcing covenants in head lease vs. sub-tenant.

• indirect enforcement:

  • s79 LPA 1925: original tenant responsible for breaches of covenant by assignees + those deriving title under them (i.e. sub-tenants) L can sue head-tenant for damages or forfeit head lease.

    • T likely to inc. provision in sub-lease: sub-tenant covenants to observe + perform covenants in head lease.

    • strong incentive for S to observe covenants, as if L forfeits head lease, sub-lease terminated.

• equity: enforce restrictive covenants in head lease directly against sub-tenant – Hemingway Securities v Dunraven Ltd [1996].

  • if covenant fulfils Tulk v Moxhay [1848] requirements:

    • 1. negative;

    • 2. touches + concerns the land;

    • 3. original parties intend for burden to run (implied – s79 LPA 1925).

    • 4. sub-tenant has notice (assumed – unregistered land: Hall v Ewin [1888]; registered land: s29(2)(b) LRA 2002).

• direct covenant with landlord: in practice, L may insist on sub-tenant entering into direct covenants with L to perform covenants in head lease as condition of consent to sub-letting contractual rel. between L + S.

Options in Leases

- Options to renew.

• benefit passes to assignee of lease under Spencer’s Case: clearly touches + concerns land.

• burden passes to purchaser of reversion under s142 LPA 1925.

  • but must be registered:

    • unregistered land: s4 LCA 1972 – Class C(iv) land charge – Phillips v...