Chapter 9: Covenants in leases Flashcards
- Lease anatomy
Assuming the essential requirements of a lease are present, we will now consider the traditional basic ‘anatomy’ of a lease. No two leases are the same, but as a rough guide the traditional basic ‘anatomy’ of a lease is as
follows.
1.1 Parties, date, definitions, interpretation provisions
Most leases usually start with the date of the lease and the names of the landlord and tenant and their addresses. As with any well drafted legal agreement, there will be a section giving guidelines on interpretation and definitions such as ‘premises’, ‘insured risks’ or ‘common parts’ of a building.
1.2 Demise and rents
These are the operative provisions of the lease where the landlord demises or grants the lease of
the premises to the tenant for a specified term in consideration of the rent paid and the covenants
entered into.
1.3 Tenant covenants
The basic rule is that a tenant may do all things that an owner of an estate can do unless the lease prohibits such actions. Leases are therefore drafted in a prohibitory or negative manner setting out what the tenant cannot do by way of a number of tenant covenants.
This section may either be in the main part of the lease or in a schedule to the lease, but will cover
issues such as the obligation to pay the rent, what the tenant can use the premises for, whether the tenant can make any alterations to the premises and whether the tenant will be permitted to assign or underlet the premises. If there is no mention of an action in a lease, the tenant is free to do it.
1.4 Landlord covenants
Again this section can often be in a schedule to the lease, though there tends to be far fewer covenants given than those by the tenant. If the lease is a lease of part of a building (eg a floor in an office block or unit on an estate) the
landlord may covenant to provide services, maintain common areas and to insure the building.
The most common is the covenant for quiet enjoyment. Quiet enjoyment is a landlord’s covenant
not to interfere with the tenant’s possession or enjoyment of the property during the term of the
lease. It covers the acts of the landlord and the lawful acts of anyone claiming under them.
Example: Breaches of the covenant for quiet enjoyment
These include:
* The erection of scaffolding hindering access to the property (Owen v Gadd [1956] 2 QB 99)
* Persistent intimidation of the tenant to induce him to leave (Kenny v Preen [1963] 1 QB 499)
1.5 Guarantor’s covenants
An individual or company guarantor may also be a party to the lease and will covenant to
guarantee payments that must be made under the lease and the performance of any other
obligations so that if the tenant defaults in payment, the landlord is able to call upon the guarantor.
1.6 Provisos, agreements and declarations
This section of the lease is a kind of miscellaneous section dealing with a number of matters. For example:
* Forfeiture
* What happens in the event of damage and destruction by insured risks
* Clauses dealing with the exclusion of security of tenure provisions in the Landlord and Tenant
Act 1954
Forfeiture
Forfeiture is the right of the landlord to bring the lease to an early end in the event of tenant breach.
Security of tenure
Security of tenure is a right for the tenant to remain in premises at the end of the lease term and to request the grant of a new lease.
1.7 Rights granted
The tenant may need a right of way to access the premises or a right to park cars in a nearby car park. These easements will need to be set out clearly in the lease.
Examples may include rights over other parts of the building (eg to use common parts and conducting media for utilities).
1.8 Rights excepted and reserved
The landlord may need to reserve rights for itself to access the tenant’s premises, perhaps to run
cables through it or to carry out repairs to the rest of the building
1.9 Other provisions
- Rent review (a mechanism to review the rent at regular intervals)
- Service charge (where the lease is of part of a property or an estate)
Service charge
Service charge is a sum of money charged by the landlord to tenants to cover costs of services to tenants within a property (such as an industrial estate, block of flats,
shopping centre). The charges cover costs to do with maintenance and repairs of exteriors (roofs etc) and common parts but exclude the tenant’s demised areas because the tenants will usually have agreed to repair those areas themselves in the lease.
1.10 Execution
The landlord and the tenant and any guarantor will need to execute the document in accordance with normal attestation rules. To be legal, a lease must be granted by deed (LPA 1925, s 52) unless it falls within the exception for short leases of three years or less under LPA 1925, s 54(2).
Prescribed lease clauses
When the Land Registration Act 2002 came into force more leases became registrable. The Land
Registry devised a method to speed up lease registration. Where you are granting a registrable lease, your lease must include a list of prescribed lease clauses at the front.
You will see that, in the majority of cases, the main areas to focus on will be:
Date of lease
* Landlord’s title number
* Parties
* Term
* Easements granted and reserved
1.11 Summary
- Most residential and commercial leases follow a basic structure which includes the following
provisions: - Parties, date, definitions, interpretation provisions
- Demise and rents
- Tenant covenants
- Landlord covenants
- Rights granted/excepted and reserved
- Execution
Summary
- A lease may also contain a forfeiture provision, a clause dealing with insured risks, and
provisions relating to security of tenure, rent review and service charge. - A tenant may do anything not expressly prohibited by the lease.
- A covenant for quiet enjoyment means a landlord must not interfere with a tenant’s possession.
- Covenants in leases
Leasehold covenant
A leasehold covenant is a promise contained in a lease given by a
landlord or a tenant.
Leasehold covenant
We will now explore four of the usual covenants found in most residential and commercial leases
(repair, alterations, user and alienation) and the different types of covenant you may encounter.
2.1 Repair
A lease will generally include a covenant by the tenant relating to repair. Under a general
repairing covenant, the tenant must, according to the Court of Appeal in Proudfoot v Hart (1890)
LR 25 QBD 42, keep the premises in the condition in which they would be kept by a reasonably
minded owner, having regard to
2.1 Repair
- The character and type of premises at the beginning of the lease - the obligation is neither
diminished nor increased by a change in the character of the neighbourhood; - The age of the premises; and
- The express words of the covenant.
2.1 Repair
Note. A covenant to keep the premises in repair also entails an obligation to put them in repair
first, if at the time of the letting they were out of repair. This can be a very onerous obligation if the premises are in a state of disrepair at the beginning of the term. A repair obligation can be limited by a schedule of condition (photographs and verbal description of the premises prepared by a surveyor annexed to the lease). The repair obligation would then state the tenant ‘is under no obligation to put the premises in any better state of repair than as evidenced by the schedule of condition annexed to the lease’.
2.1 Repair
A covenant to repair does not require renewal of the whole or substantially the whole of the
property. It is a question of degree whether the work involves repair or renewal, but if the works constitute ‘renewal’ rather than ‘repair’, they will not fall within the tenant’s repair obligation. Whether works are classed as ‘repair’ or ‘renewal’ depends upon whether the whole or substantially the whole needs to be replaced.
In Lurcott v Wakely [1911] 1 K.B. 905
The front external wall of a 200-year-old house had to be taken down to ground floor level and rebuilt. The defects were attributable to old age. The tenant
was held liable under his repairing covenant. The courts said ‘repair is restoration by renewal or
replacement of subsidiary parts. Renewal, as distinguished from repair, is reconstruction of the
entirety’.
Brew Brothers Ltd v Snax (Ross) Ltd [1970] 1 All ER 587
It was held that works required to the property did not fall within the scope of the repairing covenant because the cost to undertake the
works was only slightly less than the value of the premises.
2.2 Types of covenant
- Absolute covenant
If there is an absolute covenant the tenant is completely prohibited from doing something (eg ‘the Tenant shall not underlet part of the Premises’) and will be at the mercy of the landlord, who will be able to consider or ignore any request
- Qualified covenant
If there is a qualified covenant (eg ‘the Tenant shall not make any non-structural alterations to the Premises without the consent of the Landlord’) then the tenant can go and ask the landlord for its consent although the landlord does not have to give it!
- Fully qualified covenant
If there is a fully qualified covenant (eg ‘the Tenant shall not make any internal, non-structural alterations to the Premises without the consent of the Landlord, such consent not to be unreasonably withheld’) the landlord has to be reasonable if it is going to withhold its consent.
2.3 Fully qualified covenants – ‘reasonableness’
The courts have considered the test of ‘reasonableness’, especially in respect of cases on assignment, underletting and carrying out alterations. International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] stated the basic principles to be applied in determining the reasonableness of a landlord’s decision and made it
clear that a landlord is not entitled to refuse its consent on grounds which have nothing to do with
the landlord and tenant relationship.
Example: Reasonableness of a landlord’s refusal
It would not be reasonable for a landlord to refuse consent on the basis that it did not like the
proposed assignee or it supported a different football team. It must be something to do with, for example, the proposed assignee’s ability to pay the rent or bad references.
2.4 Statutory intervention with certain covenants
The statutes relating to user, alterations and alienation intervene with regards to such qualified
covenants and it is for you to work out what effect the statute has on the clause to understand what the landlord and the tenant can and cannot do.
2.5 Alteration covenants
Leases will normally allow the tenant to make some alterations to the premises. Unless the lease stipulates otherwise, the tenant is free to carry out any alterations to the premises, subject to the legal doctrine of ‘waste’ which prevents alterations which would devalue
the premises.
Landlord and Tenant Act (LTA) 1927, s 19(2)
The Landlord and Tenant Act (LTA) 1927, s 19(2) applies to ‘qualified’ alterations covenants. Where there is a qualified covenant against alteration then LTA 1927, s 19(2) implies into a qualified covenant against improvements a proviso that the landlord’s consent is not to be unreasonably withheld. It therefore converts a qualified covenant against alterations that amount to improvements into a
fully qualified one.
LTA 1927, s 19(2) only applies to alterations that amount to an improvement. What then constitutes an ‘improvement’?
The leading case is Lambert v FW Woolworth & Co Limited [1938] Ch 833 which held that ‘improvements’ are to be construed widely as works which improve the premises from the tenant’s perspective.
LTA 1927, s 19(2) allows the landlord to require as a condition of giving consent:
* Payment of compensation for loss in value to the reversion caused by the alterations;
* Reinstatement of the premises if reasonable (at the end of the lease term); and
* Payment of the landlord’s expenses in giving consent.
The above conditions would usually be set out in the Licence for Alterations (a deed documenting
the landlord’s consent) but, even if they are not, the landlord is still permitted to ask for them.
2.6 User covenants
A lease will often contain a tenant covenant relating to the use of the premises. A landlord will want control over what the tenant is to use the premises for eg for residential use or a specific
business purpose. A tenant may be able to change the use of the premises depending upon the type of covenant. LTA 1927, s 19(3) applies to ‘qualified’ user covenants.
2.6 User covenants
It does not imply a reasonableness proviso into qualified user covenants, but does prevent a
landlord demanding payment for granting its consent, unless the change of use also involves a
change to the structure of the property. If the change of use does involve a change to the structure, the landlord can increase the rent or charge the tenant a lump sum (in the statute referred to as a ‘fine’ or ‘premium’) in return for the
consent. The landlord will be entitled to recover its costs and expenses involved in the application for consent eg surveyor’s fees and legal fees.
2.7 Alienation covenants
Alienation: Is the term used to describe a method for the tenant disposing of the whole, or
part, of their interest in a leasehold property. In practice, this term is usually used to describe assignment, underletting and parting with possession although it does encompass charging/mortgaging the lease or surrendering it. Restrictions on alienation are very common in shorter leases.
2.7.1 Assignment of a lease
Assignment: An assignment is the transfer by the tenant of the remainder of their lease to
another party (the ‘assignee’).
2.7.1 Assignment of a lease
It is very common for a tenant to want to dispose of/sell the lease. It is a way of handing the lease
over to someone else. Perhaps a tenant has outgrown the leased property and needs to move to
bigger premises, or perhaps the tenant has no need for the property because it is too large.
The party to whom the lease is sold (called the ‘assignee’) then becomes the immediate tenant of the landlord but it is not necessary to amend the lease to show this.
In the case of a registered lease, the change of proprietor (ie the tenant) is shown in the proprietorship register of the leasehold title.
If the lease is silent as to assignment, then the benefit of a lease is freely assignable.
Most leases contain restrictions on assignment so that the landlord has to consent to the assignment and therefore has control over who ends up being the tenant.
The covenant is construed in the tenant’s favour so that:
* A covenant against assignment does not prohibit subletting of the whole or part (Church v
Brown (1808) 15 Ves Jr 258, 33 ER 752).
* A covenant against sub-letting the whole does not prohibit a subletting of part (Wilson v
Rosenthal (1906) 22 TLR 233).
A landlord’s consent is formally recorded in a deed called a licence to assign to which the landlord, tenant and assignee will all be parties.
2.7.2 Subletting of a lease
Subletting: This involves a tenant granting a lease out of its own lease. This lease is called an
underlease (or sublease). The lease out of which it was granted is now called the headlease (or superior lease).
Note. The terms in bold are used interchangeably in practice.
2.7.3 Why would a tenant sublet rather than assign?
Subletting would mean that the tenant would remain responsible for performing the covenants in
the lease and still be in the picture until the end of the lease term. Reasons could be that the tenant does not need the property for a temporary period so can earn an income from the undertenant for this period. Alternatively, the tenant may have tried to market the property for an assignment but found that no one came forward because the rent payable under the lease was too high against the backdrop of the current market rents. Perhaps underletting at a lower rent means the tenant at least goes some way to minimising its outgoings.
