Comprehensive Notes on Express Lease Covenants and Property Transactions and the Doctrine of Privity
Workshop Guidance and Mid-Year Test Strategy
The instructor notes that students are currently progressing through the workshop period and addresses several queries that have arisen regarding the nature of the materials provided. It is important to remember that the scenarios presented in the workshops are intentionally vague and may seem difficult to answer because they contain less information than what will be found in the mid-year test or final exam questions. These workshop scenarios are specifically designed to simulate a client interview, which is characterized by large gaps in information and is formatted as a bulleted list rather than a full narrative. Students should not be concerned that the test in a few weeks will follow this format, as previous tests and exams for this course demonstrate a more formal narrative structure similar to what is expected in legal practice.
Regarding the mid-year test preparation, the instructor confirms that sample structures for responding to essay-type questions will be covered during the review sessions scheduled for next week. If the class completes the materials on leases and residential tenancies quickly enough, there is a possibility of extending the review to two full days if desired. A specific concern was raised regarding a tutor's advice in a workshop suggesting that students should perform a knowledge dump in their test responses. This advice is fundamentally incorrect and should be disregarded entirely. The instructor emphasizes a policy of quality over quantity. Because the test is open-book, the focus is not on the volume of information but on the quality of the response, specifically the ability to identify relevant issues in a fact pattern and analyze them effectively through the application of law to the specific details of the hypothetical scenario. If any advice to the contrary was received from anyone other than Tony or the lecturer, it should be ignored in favor of issue-based analysis.
Express Covenants and the Property Law Act
The lecture continues with the discussion of express covenants in leases, building upon the foundation of implied covenants. Under the Property Law Act, which governs the universe of non-residential leases, certain agreements are implied into all leases by default. However, express covenants included explicitly by the parties are extremely flexible in a non-residential context. These express provisions can negative, vary, or extend the statutory covenants implied by the Property Law Act. This flexibility is rooted in the policy rationale of preserving freedom of contract for commercial parties, allowing them to determine their own rights and obligations as they see fit. While certain core rights, such as the right to quiet enjoyment, are inherently limited in how much they can be contracted out of, most implied covenants are subject to modification based on the parties' preferences. This provides a stark contrast to residential tenancies where, under the Residential Tenancies Act, there is an assumed unequal bargaining power between landlords and tenants. In the residential context, the ability to modify implied covenants is significantly restricted to protect the tenant who is perceived to have less bargaining power.
The Covenant to Pay Rent and Mechanisms of Abatement
The covenant to pay rent is one of the most common express covenants seen in practice. While rent is not strictly essential for the existence of a lease, as rent-free leases are legally possible, most commercial agreements require payment. The critical requirement for an express rental covenant is that the amount of rent must be certain, even if the value is subject to fluctuation or changes over the duration of the lease term. Express covenants also typically include provisions for rental abatement, which allows for the suspension or pausing of rent payments under specific circumstances. Abatement generally occurs if the property is destroyed or if the lessee's ability to enjoy their rights is jeopardized by a breach on the part of the lessor, specifically a breach of a repairing covenant.
Further nuances of the rental covenant involve the concept of eviction. If a lessor effectively evicts a lessee, such as by installing a fence and gate to which the lessee has no key, the lessee is not liable for rent or the performance of any other covenants during that period of exclusion. Eviction can be direct and physical, or it can manifest as an act where the lessor interrupts or interferes with the lessee's enjoyment of the premises, often overlapping with a breach of quiet enjoyment. In situations where a lessee is evicted from only a portion of the property—for instance, if they rent several units in a commercial building and the lessor takes one unit back for themselves—the liability for rent is abated proportionally according to the section of the property from which the lessee was excluded.
Repairing Covenants in Non-Residential Leases
Repair obligations are another significant area where express covenants modify default legal positions. While the Property Law Act implies covenants requiring a lessee to keep premises in repair and not to commit waste or alter buildings without consent, it is standard practice to expand these provisions through express terms. In non-residential leases, any express repairing covenant will override the implied statutory version to the extent of any inconsistency, reflecting the goal of party autonomy. These repairing obligations typically extend beyond just the buildings to the land itself. For example, a lease for a building used as a doctor's office would require the lessee to maintain the garden, such as watering the lawn during the summer to prevent it from dying. Contrastingly, in residential tenancies, the onus of repair is shifted away from the tenant and onto the landlord for issues like plumbing or appliance failures. Furthermore, the standard for repair is subject to reasonable wear and tear, which is a contextual determination. The level of wear and tear deemed reasonable for a jewelry store or a fine clothing boutique will differ significantly from that allowed for an indoor kids playground, where messier conditions are anticipated based on the contemplated use of the premises by children.
Alienation and Covenants Not to Assign
The right to assign a lease is an inherent proprietary right that characterizes a leasehold interest as an estate in land. This right facilitates the alienation of property, a principle that courts generally protect against excessive restraint. Because this right is inherent, any limitation on the ability to assign, sublet, or part with possession must be explicitly stated in an express covenant. Such covenants are strictly construed against the lessor, as they act against the lessee's interest in freely transacting their property. Prohibitions on assignment can be absolute, where the lessee may not assign at all, or qualified, where assignment requires the lessor's consent. In non-residential leases under the Property Law Act, absolute prohibitions are permissible, and if a lessee breaches them, the assignee may still obtain an estate in the land, though the lessor may then choose to leave the arrangement as is or cancel the lease. This is entirely different from residential tenancies, where any provision in an agreement preventing a tenant from assigning the tenancy is of no effect.
In the case of a qualified prohibition, the Property Law Act mandates certain communication standards, including written notice periods for seeking consent for these transactions. The lessor must not unreasonably withhold consent for an assignment, and the burden of proving that a refusal was unreasonable lies entirely with the lessee. These rules reflect the different policy interests at play between commercial and residential settings, where residential law emphasizes housing as a human right and seeks to balance the power between the parties more aggressively than in commercial negotiations where parties are assumed to be sophisticated.
Lease Transactions: Renewal and Purchase of the Reversion
Transactions with leases involve actions such as renewal, which is common in fixed-term leases. A right of renewal allows the parties to continue the lease under the same terms at the end of a current period, whether that period is month, year, or years. This right can be structured as a covenant the lessor must honor or an option the lessee may exercise, though the functional outcome is identical. It is necessary for the lease to indicate how many renewed terms the lessee is entitled to, ranging from a one-off occurrence to a specified number like times, or even a perpetual right. Rights of renewal are generally subject to writing requirements unless the lease is a short-term lease. Conditions may be attached to the renewal, such as requiring the lessee to have performed all covenants during the initial term of the lease.
Another transaction is the purchase of the reversion, where the lessee acquires the lessor's future interest in the property. Property ownership can be viewed as a bundle of rights; while the lessee has the right to exclusive possession during the lease, the lessor retains the reversionary interest, meaning the property returns to them when the lease ends. If a lessee purchases this reversion, they become the owner in fee simple. This is common in ground leases—leases of land only without buildings—such as land in South Canterbury used for growing Lucerne hay for cattle. Provisions for purchasing the reversion in a lease are considered unilateral offers rather than full contracts initially. However, the existence of such an option creates an immediate equitable interest for the lessee that can sustain a caveat to protect their interest against third parties, which Tony will discuss later in the year.
Assignment, Subleasing, and the Doctrine of Privity
The distinction between assignment and subleasing relies on the extent of the interest transferred and the resulting legal relationships known as privity. Assignment involves the transfer of the entire leasehold interest to a third party. For example, if a lessee running a cafe transfers their five-year lease in its entirety to another person, an assignment has occurred. This creates a duality in the relationship between parties: privity of estate and privity of contract. Privity of estate refers to the proprietary connection between parties through tenure in the land, such as the relationship between the head lessor and the new assignee. Privity of contract refers to the obligations established by the original lease agreement. In an assignment from party to party , the original privity of estate between lessor and lessee is broken, but the privity of contract between and remains. This means remains liable for rent and covenants even though they no longer possess the land. If defaults, can sue either or , though cannot recover more than the amount owed (no windfall). This liability for the original lessee continues even through lease renewals, making it a precarious position unless the lessor expressly releases them from their obligations. Liability only ceases if there is a surrender and regrant or the expiry of the lease followed by an entirely new grant.
By contrast, a sublease occurs when the original lessee transfers less than their entire interest, retaining a reversionary interest for themselves. For example, if a person going overseas for an internship subleases their apartment for part of the term but intends to return, they have not assigned the lease. In a sublease, the original lessee maintains both privity of contract and privity of estate with both the head lessor and the sublessee . However, there is no privity of any kind between the head lessor and the sublessee . Consequently, the head lessor cannot directly enforce covenants against the sublessee unless those benefits were specifically assigned in the sublease agreement. Finally, the law prioritizes substance over form; whether an arrangement is legally an assignment or a sublease depends on whether the original lessee retained any interest, regardless of the terminology used in the contract. If no reversionary interest is retained, the arrangement is an assignment even if the parties call it a sublease.