Leases II: Assignment of Leasehold Interests

Assignment of Leasehold Interests

Introduction

  • This module discusses the circumstances under which obligations between a landlord and tenant are enforceable against third parties.
  • Focus is on express clauses in the lease agreement.

Terminology

  • Lessor: Landlord (e.g., Rachel).
  • Reversion: The landlord's interest.
  • Lessee: Tenant (e.g., Toby).
  • Leasehold Estate: The tenant's interest.

Assignment

  • Transfer of the entire interest of the tenant or landlord.
  • If a tenant assigns, the assignee replaces the original tenant.
  • If a landlord assigns, the reversion is transferred.

Sublease

  • Creates an additional, lesser leasehold estate.
  • The original tenant becomes a sub-lessor (or sub-landlord).
  • The sublease must be for a shorter period than the original (headlease).

Assignment of the Leasehold Estate: Example 1

  • Rachel (landlord) leases to Toby (tenant).
  • Express clause: Toby must pay rent.
  • Toby doesn't pay rent for three months.
  • Toby assigns the leasehold interest to Beth.
  • Question: Is Beth liable for the unpaid rent?

Assignment of the Reversion: Example 1

  • Rachel (landlord) leases to Toby (tenant).
  • Rachel assigns the reversion to Bob.
  • Toby fails to pay rent.
  • Question: Can Bob enforce the covenant to pay rent against Toby?

Assignment of the Reversion: Example 2

  • Rachel (landlord) leases to Toby (tenant).
  • Rachel assigns the reversion to Bob.
  • Rachel had covenanted to undertake improvements but hasn't.
  • Question: Can Toby enforce the covenant against Bob?

Assignment of the Leasehold Estate: Example 2

  • Rachel (landlord) leases to Toby (tenant).
  • Express clause: Rachel will undertake certain improvements.
  • Toby assigns the leasehold interest to Beth.
  • Rachel hasn't made the improvements.
  • Question: Can Beth require Rachel to make the improvements?

Covenants Against Assigning

  • Absolute: Strictly construed.
  • Qualified: Requires landlord's consent.
  • Breaching the covenant does not automatically void the lease/assignment.
  • The lease remains valid until the landlord elects to end it.
  • Accepting rent can constitute consent.

Qualified Covenants

  • If a clause is qualified, consent cannot be unreasonably withheld (CA ss 133B(1) and s 132).
  • Test: JA McBeath Nominees.
  • Considerations: Adverse effect on property interest, future letting, and whether a reasonable person would anticipate an adverse impact due to the transaction.

Enforceability of Covenants Against Third Parties

  • Privity of Contract: Covenant enforceable as a matter of contract law between original parties. (CA s 70A(1))
  • Privity of Estate: Covenant enforceable if it 'touches and concerns' the land.

Privity of Contract

  • Lease as both a contract and an estate.
  • Covenants enforceable between original parties based on contract law.
  • Privity survives assignment.
  • Parties remain bound by express (but not implied) covenants.
  • Parties cannot escape contractual obligations through assignment.

Privity of Estate

  • Derives from landlord/tenant relationship.
  • In the absence of privity of contract, covenants are enforceable where there is privity of estate
  • Requires that the covenant 'touches and concerns' the land (Rule in Spencer’s Case).
  • Common law concept; applicability to equitable leases is uncertain.

Touch and Concern

  • Covenant must relate to the land itself.
  • Swift Investments criteria:
    1. Affects the nature, quality, value, or use of the land.
    2. Benefits the lessee or reversioner for the time being.
    3. Not of a personal nature.
  • See also Gumland Property Holdings.

Examples of Covenants that Touch and Concern

  • Paying rent.
  • Repairing the property.
  • Insuring against fire.
  • Not assigning without consent.
  • Renewing the lease.
  • Using the property as residential.

RPA s 51: Leasehold Estate

  • Section 51 of the Real Property Act overrides the "touch and concern" requirement in Spencer’s Case.
  • Section 3(1)(a) defines 'transfer' to include a lease.
  • If the transfer is registered, the assignee of the lessee is liable for all covenants in the original lease, as long as assignee remains the tenant
  • Liability extends beyond covenants that merely 'touch and concern' the land (Karacominakis v Big Country Developments Pty Ltd).

Past Breaches: Tenant’s Breaches

  • The assignee is generally liable only when the estate is vested in them.
  • No liability for breaches prior to assignment.
  • However, the assignee may be liable for continuing breaches (e.g., failure to repair, improper use of premises).
  • The original tenant may remain liable due to privity of contract.

Right of Indemnity

  • If the landlord sues the original tenant, the original tenant has a right of indemnity against the assignee who caused the breach.
  • If the new tenant is liable for continuing breaches of the original tenant, the new tenant has a right of indemnity against the original tenant.

Assignment of the Leasehold Estate: Example 1 (Revisited)

  • Rachel (landlord) leases to Toby (tenant).
  • Express clause: Toby must pay rent.
  • Toby doesn't pay rent for three months.
  • Toby assigns the leasehold interest to Beth.
  • Question: Is Beth liable for the unpaid rent?

Assignment of the Reversion

  • CA section 117 (benefit of covenants).
  • CA section 118 (burden of covenants).
  • Subject matter of the lease = touch and concern
  • Applies to both legal and equitable leases because rights rely on statute, not privity of estate.

RPA s 51 and ‘subject matter of the lease’

  • Section 117 uses the phrase 'subject-matter of the lease'.
  • Key question: Does RPA s 51 override the 'subject matter of the lease' requirement, similar to how it overrides the "touch and concern" requirement?
  • Meaning, is 'subject-matter of the lease' unnecessary if assignment is registered??
  • The answer to that question is maybe

Past Breaches: Landlord’s breaches

  • If the landlord breaches and assigns the reversion, then s 118 will permit the tenant to sue where the breach is continuing.
  • If the landlord breaches and the tenant assigns, then the assignee can sue for continuing breaches.

Assignment of the Reversion: Example 1 (Revisited)

  • Rachel (landlord) leases to Toby (tenant).
  • Rachel assigns the reversion to Bob.
  • Toby fails to pay rent.
  • Question: Can Bob enforce the covenant to pay rent against Toby?

Assignment of the Reversion: Example 2 (Revisited)

  • Rachel (landlord) leases to Toby (tenant).
  • Rachel assigns the reversion to Bob.
  • Rachel had covenanted to undertake improvements but hasn't.
  • Question: Can Toby enforce the covenant against Bob?

Assignment of the Leasehold interest: Example 2 (Revisited)

  • Rachel (landlord) leases to Toby (tenant).
  • Express clause: Rachel will undertake certain improvements.
  • Toby assigns the leasehold interest to Beth.
  • Rachel hasn't made the improvements.
  • Question: Can Beth require Rachel to make the improvements?