5. Leases

Question 1

Lease

Answer 1

A lease (or tenancy) is a right for a person to occupy and use land for a term with a fixed commencement date and a fixed maximum duration. This includes fixed-term leases and periodic tenancies that automatically renew themselves at the end of each period of the tenancy.

Question 2

Leases:

Formalities

Answer 2

A legal lease must be made by deed.
- However, a legal lease may be created orally or in writing if it is for a term of three years or less and takes effect immediately, reserving the best rent reasonably obtainable (s54(2) LPA 1925).
- If not legal, the tenant will have an equitable interest provided the lease complies with s2 of the Law of Property (Miscellaneous Provisions) Act 1989; namely, it is in writing, contains all the agreed terms and is signed by the parties.

The tenant (or lessee) must hold a term that is shorter than that held by the landlord (or lessor).

Although quite normal, payment of rent is not an essential element of a lease.

The tenant must have exclusive possession; that is, the right to use the premises to the exclusion of all others, including the landlord (Street v Mountford [1985] 2 All ER 289). If not, the agreement will not create a legal interest in land and be merely a licence.

A lease for a term of more than seven years is compulsorily registrable at the Land Registry. If such a lease is granted on or after 19 June 2006 it must contain prescribed clauses

Question 3

Leashold Covenants

Answer 3

Leasehold covenants are the obligations of the landlord and tenant under the lease.

Typical landlord covenants are to allow the tenant quiet enjoyment of the premises and to repair and maintain the exterior of a building where part of it is let.

Typical tenant covenants include payment of rent, not to assign the lease without the landlord’s consent and not to use the premises except as authorised by the lease.

There is privity of contract between the original parties to the lease so there is little problem with enforcement if the lease or reversion has not been assigned.

If assignment of the lease or reversion has taken place, then one set of rules applies to ‘old’ leases granted before 1 January 1996 (LPA 1925) and another set of rules applies to ‘new’ leases granted on or after that date (Landlord and Tenant (Covenants) Act 1995).

Question 3

Rules for ‘old leases’

Answer 3

• An assignee of an old lease (T2) is liable for breaches of covenant under the principle of ‘privity of estate’ (ie the relationship between the current landlord and the current tenant).
• For the burden to run, however, the covenant must ‘touch and concern’ the land (ie relate to the land itself (Spencer’s Case (1583) 5 Co Rep 16a)). This applies to most tenants’ covenants in leases.

The original tenant (T1) will remain liable throughout the term of the lease for any breach of covenant by their successor (T2). Thus, the original tenant can still be sued by the landlord even after the original tenant has assigned their lease. If the current tenant has disappeared or been made bankrupt, the landlord can therefore pursue the original tenant.

The original landlord (L1), after assigning its reversion, also continues to remain liable under the landlord’s covenants.

Question 4

Rules for ‘new leases’

Answer 4

Under privity of estate rules for new leases, the ‘touch and concern’ test no longer applies. The burden of all covenants will pass to the assignee of the lease (T2) unless in the lease the covenants are expressed to be personal only.

The key difference for new leases is that once the original tenant (or assignee) has assigned their lease they are released from the tenant’s covenants and cannot be sued by the landlord.

However, the landlord may, where the landlord’s consent to the assignment is required, require the tenant to enter into an authorised guarantee agreement. Under an AGA the tenant agrees to guarantee their immediate assignee’s performance of the covenants.

Landlords are not released automatically from their covenants when they assign their reversion. However, they can apply to their tenant to be released or, failing that, to the court.

Question 5

Sub-leases

Answer 5

There is no privity of contract or privity of estate between a head landlord (L1) and a sub- tenant (ST) so on the face of it neither can sue the other directly. However, restrictive covenants in a head-lease may be enforced against a sub-tenant if the sub-tenant has notice of them. This is based on the old doctrine of notice (Tulk v Moxhay (1848) 2 Ph 774).

Question 6

Termination of leases

Answer 6

Leases can be brought to an end by:
- forfeiture: Landlord’s right to forfeit a lease is not implied at common law - must be expressly in contract
- effluxion of time (or expiry)
- notice to quit
- surrender: Surrender occurs when the tenant, with the landlord’s agreement, gives up the leasehold estate to the landlord. Can be by express deed or operation of law (eg the lessor takes back possession and agrees that the lessee will be under no further liability)
- merger: takes place when the lessee acquires the immediate reversion to the lease or a third party acquires both the lease and the reversion. The lease effectively ‘merges’ into the reversionary estate.
- disclaimer
- repudiation
- frustration