Enforceability of Leasehold Covenants

Leasehold covenants enforceability

Issue is whether covenants bind successors after assignment of lease or reversion

Privity of contract

Exists between original landlord and tenant → all covenants enforceable between them

Effect

Original parties remain liable under contract

Privity of estate

Exists between current landlord and current tenant → only while both hold estates

Effect

Allows enforcement of covenants that run with land

After assignment

Original parties → retain privity of contract New parties → have privity of estate only (no contract)

Problem

Need rules to balance enforceability vs fairness to successors

Old leases

Leases before 1 Jan 1996 → old rules apply

Key rule

Original landlord and tenant remain liable for full lease term

Effect

Liability continues even after assignment

Privity of estate

Allows covenants that “touch and concern” land to bind successors

Problem

Harsh on original tenant (liable long after assignment)

New leases

Leases from 1 Jan 1996 → governed by Landlord and Tenant (Covenants) Act 1995

Abolition of privity of contract

Original parties not liable for entire term anymore

Tenant assignment (s5)

Automatic release of tenant on assignment. Tenant only liable while in possession

Exception

AGA or excluded assignment

Landlord assignment (s6)

No automatic release of landlord Must apply to tenant for release within 4 weeks

If refused → apply to court

Continuing liability (s23)

Party remains liable for breaches occurring during their ownership period

Transmission of covenants (s3)

Benefit and burden of all covenants pass automatically on assignment

Applies to both landlord (reversion) and tenant (lease)

Exception (s3(6))

Covenants expressed to be personal do not pass

Effect

Assignee tenant → bound by and can enforce covenants. Assignee landlord → bound by and can enforce covenants

Suing former tenant

Former tenant not liable if released under s5. If AGA given → landlord can sue former tenant as guarantor

AGA

Outgoing tenant guarantees immediate assignee’s obligations only

AGA ends when assignee assigns lease further

Landlord’s choice

Can sue current tenant (for performance) Or sue former tenant under AGA (damages only)

Indemnity

Assignee promises to reimburse outgoing tenant for losses

Purpose

Protects outgoing tenant if sued under AGA

Moule v Garrett

Common law indemnity → former tenant can recover losses from defaulting assignee

Sublease

No privity between head landlord and subtenant

Effect

Landlord cannot directly enforce covenants against subtenant

Exception (s3(5))

Restrictive covenants enforceable against occupiers (including subtenants)

Positive covenants not enforceable

Protection mechanisms

Tenant makes subtenant covenant to comply with head lease

Landlord may require direct covenant from subtenant

Forfeiture effect

If head lease forfeited → sublease also ends

Core exam rule

New leases → covenants run automatically, liability limited to period of ownership, tenant released, landlord not automatically released