#5350 - Covenants - Land Law

COVENANTS

Commonhold was introduced in 2002 (Commonhold & Leasehold Reform Act), and is both a new term and a new concept in English law. It is best seen as a way of holding an area of land (or building) that is split into a number of units- the most obvious example being a block of flats. The use of leases to enforce covenants in this respect was thought to be unsatisfactory, partly because many people prefer to be owners rather than tenants and partly because management of flats by landlords has often been inefficient and a cause of friction. NB: it is still possible to use the old method.

Commonhold enables holders of units to enjoy fee simple ownership. Positive obligations can be enforced against purchasers of units. The commonhold will encompass both individual units and common parts. There will be a commonhold association (CA) which will be a limited company by guarantee, with all unit-holders a member of it. The common parts will be vested in the CA. There will be a commonhold community statement (CCS) which will determine the rights and duties of both the CA and the unit-holders. There is no reason why the commonhold should not include separate plots of land though flying freeholds are excluded. New developments will almost always be registered as commonhold prior to the disposal of units. However, it is more difficult for an existing lease to become a commonhold, but, if it does all former charges are extinguished. On transfer, the new unit-holder is liable on the CCS obligations, to the exclusion of the transferor. These obligations are enforceable by the CCS and other unit-holders.

A. LEASEHOLD COVENANTS

Landlord and Tenant (Covenants) Act 1995, ss 2, 3, 5-8, 16, 23, 25, 28

• Clarke [1996] CLP Pt I, pp 97-104, 109-114: Under the law as it stood before 1995, the original parties to a lease remain liable under it throughout the whole term. This is because a lease creates both a proprietary and contractual relationship between the original parties to it. Those of the terms which are proprietary become enforceable by and between privity of estate. However, the contractual terms are made impliedly by the promisor on behalf of himself and his successors in title. Thus, when the property interest is assigned, the assignee gets by virtue of assignment the benefit of the contract and the rights and obligations making up the proprietary interest, but the assignor retains liability under the contract. So, if one party to the lease assigns, and his assignee commits a breach of term referable to that interest, the other party can choose who he wishes to sue.

  • The consequences of the continuing liability rule for tenants can be disastrous given the tendency to grant 99 year leases; or 15-25 year leases where commercial premises are concerned.

  • This liability may also be extended by rent review/increase, and extension on the original term,

  • Although the original tenant usually has implied indemnity from the assignee, this will always depend upon the solvency of the latter.

  • Contracting out of such continuing liability is rare, although possible. That is because landlords often require the original tenant to provide sureties in case of default by an assignee. Further, in private relations there was/is general ignorance as to this rule.

What the new Act does is provide that in all ‘new tenancies’ the benefit and burden of the covenants in the lease (other than those made personal to) will pass on any assignment of the lease or reversion to the assignee. If it is the landlord who assigns, he can request permission from the tenant to be absolved from future liability. With the following exception, neither the original tenant nor any assignee will be made liable under a tenancy agreement after they have parted with their interest in it. The exception is that the landlord and tenant will in some circumstances be entitled to enter into an authorised guarantee agreement on assignment by the tenant; these circumstances are listed in s16(3). However, where those conditions are not satisfied, there can be no post-assignment liability.

• One point which is not exactly clear is whether the landlord may require a tenant to enter into an authorised guarantee as a condition of granting consent to an assignment.

• Expresses regret that the Act will only have prospective effect; two schemes being doomed to co-exist for the foreseeable future.

• Law Com No 174:

  • Proposals for reform recognised importance of following two principles:

    • A landlord or a tenant should not continue to enjoy rights nor be under any obligation arising from the lease once he has parted with all interest in the property:

    • All the terms of a lease should be regarded as a single bargain for letting the property. When the interest is transferred then should take the complete bargain rather than just parts of it.

  • Summary of Recommendations:

    • T who assigns a lease should generally cease to be liable with the lease covenants and should generally cease to have the benefit of the lease; assignee should take benefits & burdens.

    • When consenting to assignment landlord can request that T guarantees performance;

    • L who assigns his reversion should escape liability by serving notice of assignment to T;

    • Incoming L should also be liable, if the old is also liable then liability will be joint;

    • The distinction between covenants which touch and concern the land and those which do not should be abolished;

    • Only lawful assignments (not equitable) should affect the liabilities;

    • Should not be able to subvert the application of the Act by contractual agreement;

• Bridge, [1996] CLJ 313: The transmission of the benefit and burden of leasehold covenants has been governed for centuries by rules contained in part in the common law and in part in statute. Underpinning all these rules is the requirement for transmissibility that the covenant in question "touch and concern" the land, or, as statutorily expressed, that the covenant "have reference to the subject-matter of the lease." Under the new principles, the benefit and burden of all leasehold covenants will automatically pass on an assignment of the reversion or the lease. Only if a covenant is expressed to be personal to any person will it not be enforceable by or against any other person."' Where a covenant requires to be registered as a land charge to be effective against successors in title, registration continues to be necessary.

  • The pivotal provision of the new legislation is section 5, which deals with the privity of contract principle as it applies to tenants. The relative purity of the Law Commission proposals has been tainted by the Parliamentary process; although the assigning tenant is released from the covenants on assignment, it is almost certain that the quid pro quo for release will be a requirement to guarantee the liability of the immediate assignee.

  • The success of the Act will be determined by how well it deals with the problems in the old law.

B. INTER-RELATIONSHIP BETWEEN FREEHOLD AND LEASEHOLD COVENANTS

• London & South Western Railway Co v Gomm (1882) 20 Ch D 562 at 582-3: Conveyance of land contained a covenant which provided that upon payment of a sum, the land would be re-conveyed to the original owner so that he could develop it. D purchased land without notice of the covenant; C tried to enforce. Jessel MR:

  • Cannot be enforced in contract as no privity; can only be enforceable in equity if runs with the land.

  • The doctrine of Tulk v Moxhay ought not the be extended; that case appears either to be an extension in equity of the doctrine in Spencer’s Case (those covenants which touch and concern the land will run with it) to another line, or an extension in equity of the doctrine of negative easements.

    • See above (Maudsley & Burn) for submission on the answer to this point.

  • The covenant in Tulk v Moxhay was affirmative in its terms, but held to imply a negative. Where there is a negative covenant expressed or implied, e.g. not to build so as to obstruct a view, or not to use a piece of land otherwise than as a garden, the Court interferes on one or other of the above grounds.

  • This is an equitable doctrine, establishing an exception to the rules of Common Law which does not treat such a covenant as running with the land, and it does not matter whether it proceeds on analogy to a covenant running with the land or on analogy to an easement.

  • The doctrine is not an authority for the proposition that an equitable estate or interest may be raised at any time, notwithstanding the rule against remoteness.

• Re Nisbet & Potts' Contract [1906] 1 Ch 386 at 402-4, 405-6: N purchased land from squatters. Restrictive covenants had previously been imposed on the land which N did not know about; he would have discovered them had he insisted on 40 years title, and made proper enquiries. P claimed that N could not produce good title because of the covenants. N claimed that covenants had no effect on title acquired be adverse possession.

  • Collins MR:

    • Unless and until the right of the covenantee has been in some way infringed, so that it becomes necessary for him to enforce that right, there is no reason, either in principle or in fairness, why his right should be in any way affected.

    • The person who stands simply with the benefit of a negative easement is certainly not put upon the assertion of his right unless and until that right has been interfered with in some way; it is a matter of absolute indifference to him what person is the owner of the land over which that right exists until that land...