Covenants in Leases Flashcards
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:
* 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.
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’.
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’.
In 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.
Types of covenant
In leasehold work you need to be able to distinguish between different 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.
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.
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.
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.
Figure 9.2: A qualified covenant against alternations will be upgraded to a fully qualified covenant
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.
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.
9: Covenants in leases 161
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.
Alienation covenants
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.
Formalities for subletting
Formalities
The procedure to grant an underlease is largely the same as for the grant of a new lease out of a
freehold, as it simply involves a new underlease document being drafted and entered into. The
9: Covenants in leases 163
KEY
TERM
general rule is therefore that the lease must be granted by deed (LPA 1925, s 52) which must be
registered if the term is for over 7 years (LRA 2002, s 27(2)(b)).
The headlease will generally require the tenant to obtain landlord’s consent to an underletting of
the premises. As with an assignment, this is formally recorded in a deed called a licence to underlet to which the landlord, tenant and undertenant will all be party
Statutory intervention with alienation covenants
Absolute covenants
No statutory provisions apply to an absolute prohibition against any particular dealing so there is
nothing that can aid a tenant here if it wanted to ask for landlord’s consent to deal.
However, just because there is an absolute covenant against something, it does not stop the
landlord wavering the prohibition as a ‘one-off’, but it is under no obligation to do so.
Leases nowadays generally contain an absolute prohibition against assignment of part of the
property. Where a property is not capable of being sub-divided, leases will also contain an
absolute prohibition of underletting of part of the property.
2.8.2 Qualified covenants
LTA 1927, s 19(1)(a) applies to all forms of alienation (so including assignment and underletting).
It assists tenants by converting a qualified covenant against alienation into a fully qualified
covenant (ie where landlord’s consent is required, it is not to be unreasonably withheld).
2.8.3 Fully qualified covenants
These types of covenants contain a proviso, be it expressly set out in the lease, or implied by LTA
1927 s 19(1)(a), to the effect that consent to an assignment or an underletting shall not be
unreasonably withheld.
Today leases generally contain a fully qualified prohibition against the assignment or underletting
of the whole of the property.
Fully qualified covenants: landlord’s statutory duty
The Landlord and Tenant Act 1988 (LTA 1988), s 1 applies to fully qualified covenants and to all
forms of alienation.
Where a tenant applies to the landlord in writing for consent, LTA 1988, s 1 provides that:
* The landlord must give written consent within a reasonable time (unless it is reasonable to
refuse).
* The burden is on the landlord to prove reasonable refusal – s 1(6), and written reasons must
be provided.
The landlord is entitled to be given sufficient information to enable it to reach a decision. A
‘reasonable time’ will not generally expire before this has been done but the landlord must ask for
further information if it requires it.
28 days from receipt of the application and references by the landlord was deemed to be a
reasonable period in Dong Bang Minerva (UK) v Davina [1996] 3 WLUK 117.
If a landlord does not comply with the LTA 1988, it may be liable for tortious damages for breach
of statutory duty.
New leases: pre-conditions for assignment
LTA 1927, s 19(1A) applies to any lease that has been granted on or after 1 January 1996.
In new leases, LTA 1927, s 19(1A) (inserted by s 22 Landlord and Tenant (Covenants) Act 1995)
states that:
* The landlord and tenant can agree the circumstances in which the landlord may withhold
consent to an assignment.
* The landlord and tenant can agree the conditions subject to which consent may be granted.
* Such circumstances or conditions will be automatically reasonable if imposed by the landlord
when giving consent to assign.
9: Covenants in leases 165
These circumstances and conditions are agreed in advance by including them in the lease when
it is drafted.
One of the common conditions attached to the landlord’s consent for an assignment under LTA
1927, s 19(1A) and one seen in most commercial leases, is that the outgoing tenant enters into an
authorised guarantee agreement (AGA) promising to perform the incoming assignee’s obligations
under the lease, if it defaults.
AGAs are a creation of Landlord and Tenant (Covenants) Act 1995 (LTCA 1995), s 16.
The original parties – privity of contract
Privity denotes the legal relationship between two or more parties to a contract. When a landlord
grants a lease to a tenant, the arrangement is a contract, and privity of contract exists between
them. The terms of the lease are enforceable under the rules of contract law.
The current landlord and tenant– privity of estate
A lease is not only a contract. Provided the formalities are complied with, a lease gives the tenant
a legal estate in the land.
Where the landlord and the tenant are each owners of a legal estate in the same property, there
is said to be privity of estate between them.
Privity of estate exists between any current landlord and current tenant of the property and lasts
only for the period while the lease is vested in the tenant.
Upon assignment of either the lease or the reversionary interest, privity of contract will remain
between the original landlord and the tenant, but there will no longer exist privity of estate
between them. This is because the leasehold or freehold estate has passed upon assignment from
the original contracting party to their successor in title. Consequently, privity of estate will now
exist between whomever is the current landlord and tenant.
3.2.1 The legal issue
When the tenant assigns its interest to a successor in title, there is no contractual relationship
between the landlord and the new tenant (the assignee).
9: Covenants in leases 167
Figure 9.8: The legal issue on assignment
Likewise, where the landlord sells its reversionary interest, there is no contractual relationship
between its successor in title (the reversioner) and the tenant.
Enforceability of leasehold covenants
Were covenants to be unenforceable for lack of a contractual relationship between the parties
currently in the position of landlord and tenant, then all covenants, when made, would have a
very limited lifespan. They would only remain enforceable while the original covenanting parties
remained landlord and tenant. They would come to an end as soon as these parties sold their
interests in the land. Such a short lifespan of a covenant would not always be convenient.
On the other hand, if every covenant entered into by the original parties were to bind successors
in title to these parties, irrespective of the absence of a contractual relationship, successors could
find themselves bound to perform all kinds of strange promises. This could potentially make the
land less attractive to buyers; an eventuality that courts strive to avoid.
The rules and principles are an attempt to strike a fair balance between the covenants potentially
having a short lifespan and the covenants binding all successors in title and potentially making
land less attractive to purchase.
There are two sets of rules which determine the enforceability of leasehold covenants. The old
system which relate to ‘old leases’ (granted before 1 January 1996) and the new system, which
relate to ‘new leases’ (granted on or after 1 January 1996).
Old leases
All leases created before 1 January 1996 (‘old leases’) (the date when the Landlord and Tenant
(Covenants) Act 1995 (‘LTCA 1995’) came into force) are governed by the old system of rules.
Privity of contract and privity of estate are very important in old leases.
In old leases, the liability of the original landlord and the original tenant continues for the full
duration of the lease term. This is the case even after an assignment of either the reversion
(landlord’s interest) or the lease (tenant’s interest). This means that the original tenant and the
original landlord of an old lease remain liable for the covenants they entered under the lease long
after the leasehold/reversionary interests have been sold or given away to others.
This continuing liability of the original contracting parties led to both absurdities and hardships
for the original parties. For example, many original tenants were held liable for rent payments or
for the costs of repairs years after they had assigned their leases.
168 Land Law
Figure 9.10: Old leases - original tenant liability
3.4.1 Old leases: privity of contract and estate
Privity of contract means the original landlord and tenant are liable for breaches of covenant by
their successors for the entire lease duration. The impact of this is greatest for tenants.
Privity of estate allows the tenant covenants that ‘touch and concern’ the land in an old lease to
be enforceable by and against successor landlord and tenants.
LTCA 1995
The law on the running of covenants in leases was reformed by the implementation of the LTCA
1995, which came into force on 1 January 1996.
The LTCA 1995 makes some fundamental changes to the running of covenants on assignment of a
lease/the reversion for new leases. This was in part to avoid some of the absurdities and hardships
for the original parties as a result of their continuing liability, and to endeavour to make the law
fairer.
Assessment focus point
It is the date of creation of the lease which is critical, not the date of any subsequent
assignment.
If the lease is granted on or after 1 January 1996, it is a new lease.
Note. The LTCA 1995 also introduced some provisions which are retrospective and apply to all
leases, both old and new. These retrospective provisions are explored in the final part of this
chapter.
3.6 LTCA 1995 - abolishing original party liability
The LTCA 1995 effectively abolishes privity of contract for all new leases. The effect of this is that
the original landlord and the original tenant are no longer liable for the covenants for the full
duration of the lease term.
Note. A party remains liable for breaches of covenant which occur during their period of
occupation (s 23(1)).
3.6.1 Tenants of new leases
A tenant with a new lease will (generally) obtain an automatic release (s 5) from the tenant’s
covenants upon assignment. Its liability for a breach of covenant caused by any subsequent
assignee ceases when it assigns the lease. The effect of this is that a tenant under a new lease will
only be liable for breaches of the covenants contained within the lease while it remains a tenant of
the property.
9: Covenants in leases 169
There is no automatic if the assignment is ‘an excluded assignment’ (s 11) ie in breach of the
alienation covenant. For example, if the tenant has assigned the lease without the permission of
the landlord in breach of the terms of the lease.
3.6.2 Landlords of new leases
There is no automatic release of the landlord upon assignment of the reversion of a new lease. The
landlord must apply for such a release from the tenant (s 6). A release is generally granted by the
tenant, but if the tenant refuses to release the outgoing landlord from their obligations, the
landlord can apply to the court (s 8).
