Running of Covenants Flashcards by Rhys Brennan

Hua Chiao Commercial Bank Ltd v Chiphua Industries Ltd

Running of Covenants

Land

‘touch and concern’ land or ‘have reference to the subject matter of the lease’ defined as whether the covenants affect landlord and tenant in their roles as landlord or tenant as opposed to personally?

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Original Parties

Privity of Contract

Pre-1996

In leases created before 1 January 1996, the original tenant and landlord’s liability continues for the full duration of a lease term, even after an assignment of either the reversion (landlord’s interest) or the lease (tenant’s interest).
This is a result of privity of contract, express wording of the contract, and s79 LPA 1925

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Thursby v Plant [1690]

Original Parties

Privity of Contract

Pre-1996

Tenant is still liable having disposed of the lease

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Stuart v Joy [1904]

Original Parties

Privity of Contract

Pre-1996

Landlord is liable having disposed of freehold

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Privity of Estate

Running of Covenants

Leases

As the landlord and tenant are each owners of a legal estate in the 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.
Upon assignment of a lease, there will no longer be privity of estate between original landlord and tenant. It will now exist between current landlord and current tenant.

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Spencer’s Case [1583]

Assignees of a Lease

Privity of Estate

Running of Covenants

Leases

Assignee gets benefit and burden of all covenants if:
- Must be privity of estate between the parties
- A legal lease – Boyer v Warbey [1953]
- Legally assigned – Cox v Bishop [1857]
- Covenant must touch and concern land - Hua Chiao Commercial Bank Ltd v Chiphua Industries Ltd

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Examples of tenant covenants that’ touch and concern’ the land

To pay rent
to repair
to decorate
to use only in stipulated fashion
not to assign without consent
not to make alterations
to insure premises

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Examples of landlord covenants that’ touch and concern’ the land

renew the lease at end of term
supply premises with water
not to build on adjoining land

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Examples of covenants that have been held not to touch and concern land

not to employ certain persons
to give the lessee right of first refusal on adjoining land
sell the reversion to the lessee
pay the tenant compensation at the end of the lease if a new lease is not granted

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Estates Gazette Ltd v Benjamin Restaurant Ltd [1994]

Assignees of a Lease

Privity of Estate

Running of Covenants

Leases

Assignee’s liability only lasts whilst he is in position of tenant
Tenant will still be liable if he makes direct covenant with L for assignee’s breaches

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Moule v Garrett [1872]

Assignees of a Lease

Privity of Estate

Running of Covenants

Leases

A person is entitled to recover any money paid out from the person who’s defaulted on their legal responsibilities.
An original tenant can sue directly a subsequent assignee in respect of breaches committed by the assignee. Action cannot be taken against subtenants.

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LPA 1925 s77(1)(c)

Assignees of a Lease

Pre-1996

Privity of Estate

Running of Covenants

Leases

In respect of an unregistered lease, every assignment for valuable consideration shall be deemed to include a covenant by the assignee with the assignor to pay the rent and to perform all the covenants touching and concerning the land for the remainder of the lease.
Implies a direct covenant into the deed of the assignment and so the original tenant is able to sue his assignee under ordinary rules of contract.

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LRA 2002 Sch 12 para 20

Assignees of a Lease

Pre-1996

Privity of Estate

Running of Covenants

Leases

In respect of an registered lease, every assignment for valuable consideration shall be deemed to include a covenant by the assignee with the assignor to pay the rent and to perform all the covenants touching and concerning the land for the remainder of the lease.
Implies a direct covenant into the deed of the assignment and so the original tenant is able to sue his assignee under ordinary rules of contract.

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RPH Ltd v Mirror Group Newspapers and Mirror Group Holdings [1992]

Assignees of a Lease

Pre-1996

Privity of Estate

Running of Covenants

Leases

Suing the assignee is of limited practical value because if the assignee had money, the landlord would have sued him first instead of the original tenant.

Original tenant sued and held liable for £2m of unpaid rent – they were insolvent so not worthwhile

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LT(C)A 1995, SS17-20

Assignees of a Lease

Privity of Estate

Running of Covenants

Leases

Protect the original tenant much more ROBUSTLY
Apply to ALL leases whenever created
S.18: former T not liable for unforeseen variations to lease which were made after he assigned the lease and were not anticipated in the lease
S.17: warning notice of rent/fixed charge claim on former T to be served within 6 months of claim arising (landlord can only claim 6 months arrears this way)
S.19-20: former T can claim overriding lease within 12 months of paying out for rent/fixed charge claim ONLY

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LPA 1925, s141 and 142

Assignment of Landlord’s Reversion

Privity of Estate

Pre-1996

Running of Covenants

Leases

S.141 LPA 1925 passes the benefit of T’s covenants to new L (so he can sue)
S.142 LPA 192 passes the burden of L’s covenants to new L (so he can be sued)
Covenant must relate to the subject matter of the lease: personal covenants do not pass
Strange effect – If a landlord assigns his reversion, he can no longer sue the tenant for breaches committed before the date of the assignment: the right passes to the purchaser, who gains the right to sue the tenant even for breaches of covenant committed before the reversion was assigned to him.

Re King, Robinson & Gray

Assignment of Landlord’s Reversion

Privity of Estate

Pre-1996

Running of Covenants

Leases

a landlord proposing to assign the reversion should, if there are any rent arrears outstanding either:
- Collect those arrears from the new landlord directlty on assignment, leaving new landlord to collect the arrears on own behalf; or
- Arrange for the new landlord to collect the arrears on the outgoing landlord’s behalf as agent.

Arlesford Trading Company Ltd v Servansingh

Assignment of Landlord’s Reversion

Privity of Estate

Pre-1996

Running of Covenants

Leases

Confirmed decision in Re King

Landlord can sue the original lessee for outstanding rent.

Limitations of S142

Assignment of Landlord’s Reversion

Privity of Estate

Pre-1996

Running of Covenants

Leases

Although S142 automatically passes the burden of covenants which has ‘reference to subject matter of the lease’, a landlord’s covenant to renew the lease at the end of the term is classed as a separate interest in land, an ‘estate contract’.
Must be registered,
- Either as Class C(iv) land charge – unregistered land
- Or as Notice on Charges Register – registered land
In order to bind a purchaser of reversionary interest – Phillips v Mobil Oil Co Ltd

Head Landlords and Subtenants

Pre-1996

Running of Covenants

Leases

No legal relationship between subtenant and Head Landlord – no privity of contract or privity of estate
This means that a head landlord cannot usually enforce covenants against a subtenant. However, this can be circumvented.

LPA 1925, s 79

Indirect Enforcement

Head Landlords and Subtenants

Pre-1996

Running of Covenants

Leases

Original tenant covenants on behalf of himself, assignees and subtenant – head landlord can sue original tenant or more likely current tenant under Spencer’s Case and current tenant will recover from subtenant
Also, if landlord forefeits the head lease, sub-lease is automatically terminated

Hemingway Securities Ltd v Dunraven Ltd [1996]

Direct Enforcement

Head Landlords and Subtenants

Pre-1996

Running of Covenants

Leases

Where there are restrictive covenants in the head lease, these may be directly enforceable by the head landlord against a sub-tenant.
Subject to the rules in Tulk v Moxhay [1848]

Tulk v Moxhay [1848]

Direct Enforcement

Head Landlords and Subtenants

Pre-1996

Running of Covenants

Leases

The covenant is negative in nature
Covenant touches and concerns land
Original covenanting parties intended the burden to the run to successors (implied under LPA 1925, s79)
Sub-tenant has notice of the covenant

Hall v Ewin [1888]

Direct Enforcement

Head Landlords and Subtenants

Pre-1996

Running of Covenants

Leases

In unregistered land, on the grant of a sub-lease, a sub-tenant has the right to look at the provision of the lease from which the sub-lease is created. Therefore, deemed to have constructive notice.

Landlord and Tenant (Covenants) Act 1995 How do the benefit and burden pass? Post-1996 Running of covenants Leases

* **Applies to ALL leases made on or after 1.1.1996** * **S2**: **all covenants can pass - ‘touch & concerns land’ and ‘subject-matter of lease’ abolished** * **S3: Benefit and burden of ALL covenants pass – unless expressly personal**: Spencer’s case and ss141/142 LPA no longer apply * **Ss 23 & 24: outgoing L and T can still sue/be sued for breaches before assignment** – reverses re King etc – However, incoming landlord doesn’t inherit any burden or liability so much fairer

LT(C)A 1995, S5 Assignments of the Lease - how is the tenant affected? Post-1996 Running of covenants Leases

* **Automatically abolishes continuing liability of Original Tenant UNLESS…** * **assignment** itself is a **breach of covenant: s11** * or if **Outgoing Tenant has entered Authorised Guarantee Agreement – ss16 and 22** * or if **covenant** was **expressed** to be **personal to Outgoing Tenant – s3(6)** * **…or if breach of covenant was the OT’s own breach - still liable after assignment – s24**

LT(C)A 1995 Assignments of the Reversion - how is the landlord affected? Post-1996 Running of covenants Leases

* **LT(C)A 1995, s6 - NO AUTOMATIC release from liability when freehold sold** * **LT(C)A 1995, s8 -** Outgoing **Landlord must APPLY to be released from future liability** * **LT(C)A 1995, s24(1) -** If breach of covenant was the **outgoing Landlord’s own breach** - still **liable** **after freehold sold** * **LT(C)A 1995, s3(6) -** or if **covenant** was expressed to be **personal to outgoing Landlord**

London Diocesan v Phithwa [2005] LT(C)A 1995 Assignments of the Reversion - how is the landlord affected? Post-1996 Running of covenants Leases

* **Continuing liability may be excluded in lease** * **s25 says that you cannot contract out of the act**, **BUT** * London Diocesan says that **landlord can include a clause in the original lease that he won’t be liable for any breaches that occur after he signs the reversion**

LT(C)A 1995, s11 Assignments of the Reversion - how is the landlord affected? Post-1996 Running of covenants Leases

* Any **assignment to 3^rd party made in breach of covenant** will be **excluded from Act** and **defaulting party** will **not** be **released from obligations**.

LT(C)A 1995, s16 Authorised Guarantee Agreements (AGAs) Post-1996 Running of covenants Leases

* **Landlord** **can impose on outgoing tenant an Authorised Guarantee Agreements (AGAs)** as a condition of consenting to an assignment of a lease * **Outgoing T guarantees observance of covenants by assignee** * **T’s guarantee lasts ONLY as long as his assignee holds lease** * An AGA can be demanded from outgoing tenant in 2 situations: * **Where alienation covenant is qualified (tenant has to seek consent) AND demanding an AGA is reasonable** * **S.22 LT(C)A 1995**: **where alienation covenant is qualified and lease expressly says that Landlord may demand AGA as condition for giving consent**

* **Benefit and burden of all tenant and landlord covenants pass automatically , except for covenants ‘expressed to be personal’.** * In relation to a new lease, **LPA 1925, ss141 & 142 no longer govern whether an assignee of reversion can sue or be sued.** * Rule in **Spencer’s Case** and doctrine of **privity of estate no longer govern whether an assignee of the lease can sue or be sued.**

Edlington Properties v JH Fenner & Co Ltd [2006] LT(C)A 1995 Liability of Assignees Post-1996 Running of covenants Leases

* Confirms intention of the Act that **all parties remain liable for the breaches which occur during their period of occupation**

* Provisions of **LPA 1925, s 77(1)(c)** have been **abolished in respect of new leases** under **LT(C)A 1995, s14**. There is **no statutory chain of indemnity in respect of new leases.**

LT(C)A 1995, s3(5) Head Landlords and Sub-tenants Post-1996 Running of covenants Leases

* **Head Landlord can sue subtenant for breach of a restrictive covenant** * **Any restrictive covenant given by L or T can be enforced against any owner or occupier of premises** * **Statutory rule** has **replaced Tulk v Moxhay!**

* **Where a landlord wants to pursue a former tenant** who remains liable under terms of the lease for a fixed charge, **must service notice of potential claim on such tenants within 6 months of charge becoming due**.

* If **former tenant is called upon by landlord to pay rent or other fixed charges due from an assignee**, former tenant **can request from landlord** an **overriding lease**, thus **becoming immediate landlord of defaulting party – better able to ensure compliance from assignee**

* **Former tenants and guarantors** will **not** be **liable** for **any additional amounts owed in respect of variations made subsequent to assignment** which could **not** have been **anticipated when lease was entered into**