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Leasehold Covenant: Enforcement

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  • tenants may assign lease & landlord may assign freehold reversion, question: extent to which successor in title able to enforce covenants?
  • whether benefit & burden of covenant passes will depend on whether tenant is allowed to assign lease (when granting lease landlord may restrict tenant's ability to deal with leasehold interest) & there is no restriction on landlord's ability to sell freehold reversion Landlord and Tenant (Covenants) Act 1995 (LTCA) made changes to leases granted after 1 January 1996 (new leases) & old leases were made prior to this date

Enforcement of covenants: old leases

  • lease creates estate in land (creates privity of estate - landlord & tenant relationship) & is also contract ( privity of contract between parties, enforceable throughout duration by parties)
  • privity of contract & privity of estate allow for parties to sue if breach occurs
  • if original tenant/landlord assigns lease:
    privity of contract between original tenant & landlord not ended
    privity of estate between original tenant & landlord ended
    no privity of contract between landlord & assignee
    privity of estate between landlord & assignee
    same rules apply if landlord assigns reversion
  • if both original parties assign interest:
    privity of contract between original parties
    privity of estate between assignees
  • if original tenant sublease to subtenant:
    privity of contract & estate remain between tenant & landlord
    privity of contract & estate exist between tenant & subtenant
    no privity of contract & estate between subtenant & landlord

Old leases: benefit

  • L (covenantor) & T (covenantee) original landlord & tenant & T subleases to ST
    L in breach of covenant entered into with T & covenant would benefit ST & ST wishes to enforce
  • if T also assigned benefits of covenants entered into by L: ST can sue L to enforce
  • ST may be able to rely on s.78 LPA 1925
    • s.78: deemed to be made with the covenantee... and the persons deriving title under him or them

    Smith & Snipes Hall Farm v River Douglas Board [1949] 2 KB 500

    • tenant was able to enforce covenant made with freeholder
  • for parties who enter into lease on or after 11 May 2000 may be assisted by Contracts (Rights of Third Parties) Act 1999 & lease or sublease may expressly state third parties (subtenant or superior landlord) have benefit of covenants entered into with tenant

Old leases: burden

  • T entered into covenant with L:
    ST (in occupation of premises) is person who caused covenant breach
    no privity of contract or estate between L & ST
    can burden pass to ST so L can enforce directly?
  • burden of covenant ( positive or negative) does not run at common law
  • burden of positive covenant does not run in equity
  • burden of negative or restrictive covenant may run in equity

    Tulk v Moxhay (1848) 2 Ph 774

    • burden of negative or restrictive covenant may run in equity if:
      covenant benefits land of covenantee
      & parties intend burden to run
      (purchaser acquiring land with notice of covenant will be bound by it)

    Hall v Ewin (1887) 37 ChD 74

    • principle in Tulk v Moxhay applies if underlessee acquires an underlease with notice of covenants contained in head lease
    • confirmed in Hemingway Securities v Dunraven (1994) 71 P & CR 30
  • if registered title & restrictive covenant:
    • s.29(1): if purchase of the registered title for value (registrable disposition for valuable consideration) completed by registration any right not protected as described under s.29(2) not binding
    • s.29(2): priority of an interest is protected if -
      s.29(2)(b): in case disposition of leasehold estate, if the burden of interest is incident to the estate
  • under s.29 LRA 2002: restrictive covenant binding on ST as he takes land subject to all implied & express covenant's incident to the leasehold estate
  • indirect enforcement: L can sue T, who in turn may sue ST or if forfeiture clause L will be able to forfeit head lease & end ST's underlease, subject to availability of relief
  • L granted lease to T (containing covenants by both L & T) & L has assigned reversion to L1 & T assigned lease to T1
  • lease between L & T creates privity of contract & privity of estate between them
  • for covenants entered into by L & T to be effective: necessary capable being enforced by L1 & T1, law imprints contractual obligations on the estate (but may not imprint all covenants)
  • at common law

    Spencer's Case (1583) 5 Co Rep 16a

    • covenants that touch & concern the land:
      benefit of L's covenants with T will run with land (pass to T1)
      & burden of T's covenants with L also runs with term (bind T1)
  • by statute
    • in relation to covenants having reference to the subject matter of the lease
    • s.141(1): benefit of T's covenants with L will runs with reversion (pass to L1)
    • s.141(2): benefit of L's covenants with T will runs with reversion (bind L1)

Old leases: touching & concerning

  • in principle L1 & T1 are bound by obligations entered into by original parties but may be limited
  • complexity of matter noted

    Grant v Edmondson [1931] 1 Ch 1

    • In connection with the subject of covenants running with the land, it is impossible to reason by analogy. The established rules concerning it are purely arbitrary and the distinctions for the most part quite illogical.
  • question: whether covenant touches & concerns the land or has reference to the subject matter of the lease
  • meaning of touch & concern the land developed through case law

    Congleton Corporation v Pattison (1808) 10 East 130

    • must either affect the land itself during term (such as those which regard the mode of occupation) or affect the value of the land at the end of the term (not merely from collateral circumstances)

    P & A Swift Investments v Combined English Stores [1989] AC 632

    • landlord (L) was a lessee & granted underlease to tenant (T)
    • T was a subsidiary of the defendant (D) & D entered into covenant with L guaranteeing performance by T of covenants
    • reversion assigned to claimant (C) with no express assignment of benefit of D's guarantee
    • T defaulted in paying rent & went into liquidation
    • was C entitled to benefit of the guarantee given by D?
    • s.141 LPA 1925 applies to covenants by lessee & provides that benefit is annexed to & goes with reversionary estate
    • covenant not entered into by lessee (T) but by parent company (D):
      privity of contract between D & L but no privity of estate
      no privity of contract or privity of estate between C & D
    • no express assignment of benefit of contract statutory rules could not apply
    • depends whether benefit ran under common law (C required legal estate & covenant had to touch & concern the land
    • House of Lords: T's covenants touched & concerned the land & therefore D's guarantee must also
    • guidance for covenants that touch & concern:
      1. benefits only the reversioner for the time being & if separated from the reversion, ceases to be of benefit to the covenantee
      2. affects the nature, quality, mode of user or value of the land of the reversioner
      3. not expressed to be personal (specific to reversioner or tenant)
      4. paying of sum of money not prevent form touch & concern land, providing 1 - 3 are satisfied & covenant is connected with something to be done on or in relation to the land
  • option: to buy an estate or renew lease, gives person entitled right to compel owner to sell or grant estate, but he is free to exercise option or not
  • covenants containing options may be included in leases
  • X granted A a lease with option for to purchase freehold reversion. X sold freehold reversion to Y & A assigned lease to B (with no mention of option). B wants to exercise option.
  • for B to enforce option against Y: he has to show he has benefit of it & burden has passed to Y
    covenant was contained in lease between X & A (between whom there was privity of contact)
    no privity of contract between Y & B but there is privity of estate
    covenants will be enforceable between Y & B if touch & concern the land

    Woodall v Clifton [1905] 2 Ch 257

    • option to purchase freehold: not touch & concern land
    • option to renew a lease: does touch & concern land
    therefore benefit & burden not pass automatically
  • other ways benefit may pass to B:
    covenant is an estate contract & capable of being expressly assigned: assignment to B did not do so
    if in original lease A was described as lessee & term was described as including successors & assigns: argument B lessee & therefore right to exercise option

    Griffith v Pelton [1958] Ch 205

    • the mere assignment of the term operates to assign the benefit of the option
  • other ways burden may bind S:
    if registered title: estate contract is an interest affecting a registered estate & should be protected by entry notice on charges register (s.27 LRA 2002) & notice would bind Y if not would take free
    however as B in actual occupation option gives him proprietary right & he can claim overriding interest under sch.3 para.2 LRA 2002 (s.29 LRA 2002) & enforce option against Y

Old leases: assigning & subletting

  • landlord's may seek control, though covenants, over the tenant's ability to deal with the lease
  • lease may contain covenant by the tenant that imposes a restriction on the tenant's ability to alienate the lease
  • absolute covenant: tenant cannot assign or sublet
  • qualified covenant: tenant cannot assign or sublet without landlord's prior written consent
  • fully-qualified covenant: tenant cannot assign or sublet without landlord's prior written consent & consent cannot be unreasonably withheld
  • qualified covenants are converted to fully-qualified by statute
    • s.19(1)(a): if lease contains qualified covenant proviso implied that consent cannot be unreasonably withheld
  • landlord has statutory duties regarding consent
    • s.1(3)(a): in reasonable time consent must be provided unless unreasonable to do so
    • s.1(3)(b): in reasonable time written notice of decision specifying if consent is subject to conditions or reasons if consent is withheld
    • s.1(4): reasons for withholding consent must not be unreasonable
    • s.1(6): person who duty under s.1(3) should be able to demonstrate that gave consent within reasonable time, if he placed conditions that they were reasonable, if he refused consent that it was reasonable & that he served notice within a reasonable time
    • s.4: breach of duty under this Act gives rise to civil proceedings (claim in tort for breach of statutory duty)
  • duty further interpreted through case law

    International Drilling Fluids v Louisville Investments [1986] Ch 513

    • consent may not be withheld on grounds that he may has nothing to do with the landlord & tenant relationship

    West Layton v Ford [1979] QB 593

    • refusal of consent on grounds that subtenant will acquire the protection of the Landlord and Tenant Act 1954 (security of tenure as business tenant) but tenant does not have that protection: may be valid

    Norwich Union v Shopmoor [1999] 1 WLR 531

    • refusal of consent must within reasonable time: failure to give a valid written reason for refusal within a reasonable time, places landlord under duty to give consent
  • case law also developed in relation to effect of transactions

    Milmo v Carreras [1946] KB 306

    • granting sublease for term equal to or greater than the term of the lease takes effect as an assignment of the lease

    Old Grovebury Manor Farm v W Seymour Plant Sales (No. 2) [1979] 1 WLR 1397

    • if tenant proceeds with the transaction without applying for consent: assignment will be effective & assignee will be new tenant
    • if tenant does not apply for consent: will have breached covenant & landlord may seek to forfeit the lease
    • s.144: no fine or sum of money in the nature of a fine is to be payable for the giving of consent (s.144 may be expressly excluded in lease)

Enforcement of covenants: new leases

  • new lease is granted on after 1 January 1996 (except if pursuant to contract or court order made before - remain old leases)
  • original tenant under old leases may face liability despite years having passed
  • Pre- 1996:
    L granted lease to T
    L assigned reversion to L1, who has assigned reversion to L2
    T assigned lease to T1, who has assigned lease to T2
    T2 has failed to pay rent & is in breach of repairing covenant
  • L2 has benefit of all covenants to extent they reference subject matter to the lease (rent & repairs included) (s.141 LPA 1925)
    L2 only person with benefit & who can enforce

    Re King [1963] Ch 459

    • once benefit of covenants pass under s.141 LPA 1925 original assignor can no longer sue if breach occurs, right passes to reversion assignee
  • L2 may sue T2:
    T2 is current tenant & L2 current landlord (there is privity of estate between them)
    >burden of covenants will have passed to T2 on assignment to extent they touch & concern land (Spencer's Case)
  • L2 may also sue T:
    T was originally bound by all tenant's covenants
    privity of contract between L & T & T remains liable under contract throughout entire term of lease
    benefit of L's contract with T has now passed to T2
  • changes introduced by Landlord and Tenant (Covenants) Act 1995 (creating new leases & enforcement)
    • s.2(1): Act does not distinguish between:
      covenants which have reference to the subject matter of the lease & those that do not
      or whether covenant is express or implied
    • s.3(1): benefit & burden of all landlord & tenant covenants passes to successors in title
    • s.3(2): on assignment burden of tenant's covenants will pass except where:
      s.3(2)(a)(i): assignor was no longer bound by it at the date of the assignment
      s.3(2)(a)(ii): covenant falls to be complied with in relation to a part of the leased property that is not comprised in the assignment
    • s.3(2)(b): benefit of landlord's covenants will pass
    • s.3(6)(a): covenant will not pass to successor in title if it was expressed to be personal
    • s.5(2)(a): tenant released from burden of tenant's covenants when assigns lease
    • s.5(2)(b): tenant no longer entitled to benefit from landlord's covenants when assigns lease
    • s.16(1): tenant who assigns lease may be required to enter into an Authorised Guarantee Agreement (AGA)
    • s.16(3): landlord can require an AGA if lease subject to an absolute or qualified covenant against assignment & condition of AGA imposed on consent
    • s.16(4): AGA can only impose obligation to guarantee the liability of his immediate assignee & can only last as long as lease vested in immediate assignee
    • s.6(2)(a): landlord must apply to tenant for release from burden of covenants on assigning the reversion
    • s.8(1): landlord serves notice on tenant, either before or within four weeks beginning with the date of the assignment (telling tenant of the assignment & requesting release)
    • s.8(2): landlord only released if tenant agrees or fails to respond within four weeks of service of notice or court declares release reasonable
  • landlord may enforce certain covenants directly against subtenant
    • s.3(5): landlord may enforce restrictive covenants as to user directly against a subtenant (as an occupier of the land)
  • landlord's can still rely on Tulk v Moxhay to enforce other types of restrictive covenants
  • landlords of commercial premises objected to provisions when the Bill was proposed as they were losing some security of being able to pursue original tenant (chosen by them), as a result s.22 Landlord and Tenant (Covenants) Act 1995 was added to amend s.19 Landlord and Tenant Act 1927
    • s.22: introduces subsections to s.19 LTA 1927 (1A - 1E)
      apply to assignment of qualifying lease: new tenancy of property not used wholly or mainly as a single private residence
      landlord can agree with tenant circumstances when consent to an assignment may be withheld & state conditions subject to which consent to assignment will be given
      if landlord refuses consent on already specified grounds, tenant cannot use s.19(1)(a) LTA 1927 to argue unreasonable

Old leases: protecting former tenant

  • Landlord and Tenant (Covenants) Act 1995 provides some protection for former tenants under old leases
    • s.17(1): former tenant after assignment bound by covenant liable for fixed charge (old lease or AGA)
    • s.17(2): former tenant only if served with notice within 6 months of charge becoming due
    • s.17(6): fixed charge includes rent & service charges
    • s.19: if notice served & arrears recovered from former tenant tenant entitled to claim overriding lease
      lease granted out of landlord's reversion for the unexpired term of the original lease plus three days
      (effect: former tenant landlord of current tenant & may forfeit lease & recover possession of premises
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