#4638 - Running Of Covenants - GDL Land Law

• Need to establish whether the covenants entered into by the original parties, can be enforced or against new parties

• Between the original parties – the landlord (L) and (T) enter into a contractual relationship, but where either interest is assigned to successors in title, there is no contractual relationship

• Law on running of covenants in leases reformed by the Landlord and Tenant (Covenants) Act 1995 (LT(C)A): applied only to new leases (post 1 January 1996) – old leases are still governed by the old laws

Pre January 1996

• Privity of Contract

  • Original Parties have privity of contract and they remain liable on the lease for the whole term (so original T remains liable after assignment of lease, and original L after assignment of the reversion

    • Continuing liability of original T confirmed in Thursby v Plant

    • Continuing liability of original L confirmed in Stuart v Joy

    • Continuing liability of original parties reinforced by s79 LPA 1925

    • Original liability or original parties resulted in absurdities – why should original parties remain liable when they no longer have the ability to ensure adherence to covenants?

• Privity of Estate

  • Exists between any current landlord and current tenant of the property

  • So between original L and original T there is both privity of estate and contract because they have a proprietary relationship as well as a contractual one

  • Upon assignment privity of contract will remain but privity of estate will end – and will exist between the current L and the current T

  • So enforcement of covenants may be possible beyond the original parties – but privity of estate is not itself sufficient – other conditions must be met

Assignment of the Lease (New T (T1))

• Following Spencer’s Case: there are four requirements for covenants to be enforced by and against an assignee of the lease (T1)

1. There must be privity of estate (as above)

2. A legal lease

   • Boyer v Warbey: confirmed that provided the lease complies with the necessary formalities for it to be legal, the covenants will pass under Spencer’s Case (doesn’t necessarily have to be by deed for short leases)

3. Which has been legally assigned

   • The assignment must itself be legal (Cox v Bishop) i.e. by deed and registration

   • A purely equitable assignment therefore cannot pass the burden of covenants, but the benefit of such covenants may be passed under the ordinary rules of contract

4. The covenant must touch and concern the land

• Must affect the parties in their capacity as L/T and cannot be personal

• Look to see if the courts have previously ruled on an particular covenant or else take instruction from the judgement of Lord Oliver in P & A Swift v Combined English Stores (adopted in Caerns Motor Services v Texaco)

• Hua Chiao Commercial Bank v Chiaphua Industries:

  • ‘if it affects the landlord in his normal capacity as landlord or the tenant in his normal capacity as tenant, it may be said to touch and concern the land’ (per Lord Oliver)

  • Here, a covenant to pay a deposit guaranteeing the fulfilment of tenant covenants did NOT touch and concern the land

• Examples:

  • T covenants which touch and concern the land – To pay rent; to repair; to decorate; to insure the premises

  • L covenants which touch and concern the land – To renew the lease at the end of the term; to supply the premises with water

  • Covenants which DO NOT touch and concern the land – Not to employ certain persons; to pay the T compensation at the end of the lease if a new lease is not granted

• Duration of liability: privity of estate only lasts for the period that the lease is vested in the T – T is not liable for breaches of his predecessor, and will not be liable for breaches once he himself assigns the lease

  • Will continue however to be liable for breaches which occurred during his tenancy

  • And will be liable if he has covenanted directly with the L (Estates Gazette v Benjamin Restaurants)

• Liability of the original T:

  • At common law: privity of contract so original T remains liable at common law for the entire term of the lease

  • But the original T can seek to recover damages paid due to the actions of a defaulting assignee

    • At common law: the rule in Moule v Garrett – where someone is compelled to pay damages due to the legal default of another, the former is entitled to recover damages from the defaulting party – thus the original T can sue his successor (T1)

    • By statute: In unregistered land - s77 LPA 1925 creates an implied chain of indemnity and in registered land, the original T may rely on schedule 12, para 20 LRA 2002

    • Express covenants: there may be an express chain of indemnity covenants – this will be necessary in case of a gift of a lease in unregistered land, to which s77 does not apply

    • But: indemnity route is unsatisfactory in practice – if the successor (T1) was worth suing, then the L would have gone after them in the first place!

Assignment of the Reversion

• Rules in s141 (passes the benefit) and 142 LPA 1925 (passes the burden) – similar to Spencer’s Case - covenants must have ‘reference to the subject matter of the lease’ (treated synonymously with requirement

• Re King: new L can sue for pre-existing breaches, and the old L loses the right to sue – confirmed in Arlesford Trading v Servansingh – new L can sue the original T even though there never privity of contract OR estate

• Limits on s142 LPA 1925: L’s covenant to renew the lease at the end of the term is classed as a separate interest in land (estate contract) and thus must be registered (Class C (iv) land charge or notice on the charges register for registered land)

Sub-Tenants

• No privity: there is no privity of estate and no privity of contract between the head landlord and a sub-tenant – so the head landlord cannot usually enforce vs. a sub-tenant

• Ways around this:

1. Indirect Enforcement: s79 LPA 1925 – head L can sue the original T for damages or forfeit the head lease (thus terminating sub-lease)

2. Restrictive Covenants in the head lease – restrictive covenants may be directly enforceable by head landlord vs. sub-tenant (Hemingway Securities v Dunraven) – subject to the rules in Tulk v Moxhay:

1. Covenant is negative in nature

2. Touches and Concerns the Land

3. Original covenanting parties intended burden to run (implied by s79 LPA 1925)

4. Sub-tenant had notice of the covenant

   • Unregistered land: sub-tenant deemed to have actual or constructive notice of covenants contained in head lease (Hall v Ewin)

   • Registered land: same rule under s29(2)(b) LRA 2002

3. Direct Covenants with the Landlord: sensible head landlord will ensure the sub-tenant covenants directly with him, creating contractual relationship and allowing direct enforcement

Options

To renew

• Burden passes on an assignment of the reversion under s142 LPA 1925 – but this is subject to s4 LCA 1972 in unregistered land (option should be registered vs. the landlord as a Class C (iv) land charge in order to be effective vs. a new L (Phillips v Mobil Oil)

• Registered land – protection through notice in the charges register

To purchase the freehold

• Falls outside the doctrine of privity of estate as if exercised it destroys the L/T relationship

• Burden will not pass upon assignment of the reversion – must be registered vs. the grantor if it is to bind a purchaser (Midland Bank Trust v Green)

• As with an option to renew however, T may have an overriding interest if in occupation (Webb v Pollmount)

• Benefits of such a term should be assigned directly to new T – unless the lease defined ‘lessee’ as including successors in title (Griffith v Pelton)

The above was all in reference to legal leases

• For an equitable lease, the burden of covenants does not pass on assignment (Purchase v Lichfield Brewery) – liability remains with the original T

• Benefit passes to assignee on assignment (Spencer’s Case)

Post-Jan 1996

The Landlord and Tenant (Covenants) Act 1995

• Applies to all leases after this date

Liability of Original Parties (Privity of Contract)

• Privity of contract is essentially abolished for new leases

• Assignment of the lease

  • S4 abolishes continuing liability of original T after assignment of the lease

  • T under a new lease will only be liable for breaches occurring while they remain a T

• Assignment of the reversion

  • S6: no automatic release of the original L upon assignment, but L may apply to be released

  • s8: procedure for applying to be released - original L may be released upon successful application to the current T within 4 weeks of the assignment

    • If the T refuses, the L may apply to the court to be released (will be permitted if reasonable)

  • S7: a former landlord who has made an unsuccessful application for release is allowed to have another go at being released when there is a further assignment

• Excluded assignments

  • S11: an assignment which is made in breach of covenant (i.e. without necessary consent from L) will be excluded for the purposes of that assignment, and the original (defaulting) party will not be released from liability

    • S11(2)(b): next time there is a lawful assignment, the original T will be released from liability

Authorised Guarantee Agreements (AGA)

• S16 LT(C)A 1995: exception to the rule that a T under the new law will obtain an automatic release from liability upon assignment – tis is a concession to landlords

• L may require outgoing T to guarantee performance by their successors – L can make the signing of an AGA a condition of consent for the assignment

• Old T may only be liable for his immediate successor, not for anybody further down the line

• Commercial leases: L of a new lease is also able under s19 LTA...