Landlord and tenant law - Privity of contract and privity of estate

Learning Outcomes

This article explains the core principles of privity of contract and privity of estate within the context of landlord and tenant law. It outlines how lease covenants are enforced between original parties and their successors, both under the common law rules applicable to 'old' leases (pre-1996) and the statutory framework introduced by the Landlord and Tenant (Covenants) Act 1995 for 'new' leases (post-1996). Understanding these rules enables you to determine the liability and rights of landlords and tenants concerning lease obligations, which is essential for SQE1 assessments focusing on property practice and land law.

SQE1 Syllabus

For SQE1, you need a functional understanding of how relationships between landlords, tenants, and their successors affect the enforcement of lease covenants. Pay particular attention to how these principles operate in practice.

Remember to focus your revision on:

• The relationship between landlord and tenant in a lease.
• The principles of privity of contract and privity of estate.
• The rules governing the passing of the benefit and burden of leasehold covenants.
• The enforceability of different types of covenants against original parties and successors.
• The impact of the Landlord and Tenant (Covenants) Act 1995 on leases granted from 1 January 1996.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which doctrine ensures that the original tenant remains liable for lease covenants throughout the term of a lease granted before 1 January 1996, even after assignment?
   1. Privity of estate
   2. Privity of contract
   3. The rule in Spencer's Case
   4. The doctrine of surrender
2. Under the Landlord and Tenant (Covenants) Act 1995, which of the following statements is true regarding a tenant assigning a 'new' lease (granted on or after 1 January 1996)?
   1. The original tenant always remains liable for all covenants for the entire lease term.
   2. The assigning tenant is automatically released from the tenant covenants upon lawful assignment, unless an AGA is required.
   3. The assignee is liable only for breaches committed by themselves, not previous tenants.
   4. Personal covenants automatically pass to the assignee along with real covenants.
3. What is an Authorised Guarantee Agreement (AGA)?
   1. An agreement where the landlord guarantees the tenant's performance.
   2. An agreement where the original tenant guarantees the performance of their immediate assignee.
   3. An agreement transferring all lease liabilities to the new assignee permanently.
   4. An agreement automatically implied into all leases granted after 1 January 1996.

Introduction

When a landlord (L) grants a lease to a tenant (T), a legal relationship is formed based on both contract and property law. This relationship dictates how the promises, known as covenants, within the lease are enforced. Two key concepts govern this enforceability, especially when the original parties transfer their interests: privity of contract and privity of estate. Your understanding of how these concepts operate, particularly under the different rules for 'old' (pre-1996) and 'new' (post-1996) leases, is essential for addressing SQE1 questions.

Privity of Contract

Key Term: Privity of Contract
The legal doctrine stating that only the original parties to a contract can sue or be sued under it. In leases, this means the original landlord and original tenant are bound by all terms of the lease for its entire duration, unless released.

The original landlord (L1) and the original tenant (T1) who sign the lease agreement are bound by privity of contract. This means:

• All Covenants Enforceable: L1 and T1 can enforce all covenants in the lease against each other, whether they are related directly to the land ('real' covenants) or are purely personal promises.
• Continuing Liability: For leases granted before 1 January 1996, T1 remained contractually liable for the performance of all tenant covenants for the entire lease term, even after assigning the lease to someone else (T2). Similarly, L1 remained liable for landlord covenants.
• Post-1996 Changes: The Landlord and Tenant (Covenants) Act 1995 significantly altered this, largely abolishing continuing liability for T1 in 'new' leases upon lawful assignment.

Privity of Estate

Key Term: Privity of Estate
The legal relationship that exists between the current landlord and the current tenant linked by the tenure of the leasehold estate. This relationship allows them to enforce certain covenants related to the land.

When the original tenant (T1) assigns the lease to a new tenant (T2), the direct link between T1 and the landlord (L1) is broken in terms of property ownership, although contractual liability might remain (for old leases). A new relationship, privity of estate, is formed between L1 and T2 (and between any subsequent assignees of the reversion and the lease). Key aspects include:

• Current Landlord and Tenant: Privity of estate only exists between the parties who currently hold the position of landlord and tenant.
• 'Touch and Concern' Test: Traditionally (especially for old leases), only covenants that 'touch and concern' the land could be enforced under privity of estate. These are covenants related to the nature, quality, use, or value of the land itself, benefiting the landlord or tenant in their capacity as such.
• Automatic Transmission: For new leases under the LT(C)A 1995, the benefit and burden of most landlord and tenant covenants automatically pass to assignees, regardless of the old 'touch and concern' test (unless the covenant is expressed to be personal).

Key Term: Leasehold Covenant
A promise contained within a lease agreement, obliging either the landlord or the tenant to do, or refrain from doing, something in relation to the property or the lease terms.
Key Term: Assignment
The transfer of the tenant's entire remaining interest in the lease to a new tenant (the assignee). The assignee steps into the shoes of the assignor.
Key Term: Reversion
The interest retained by the landlord when they grant a lease for a term shorter than their own interest (e.g., the freehold reversion).

Interaction and Enforcement Pre-1996 ('Old Leases')

For leases granted before 1 January 1996, the enforcement rules were complex, relying heavily on the distinction between privity of contract and privity of estate.

Tenant Assigns Lease (T1 assigns to T2)

• L1 v T1: L1 could sue T1 for breaches by T2 (or any subsequent tenant) based on privity of contract. T1 remained liable for the whole term.
• L1 v T2: L1 could sue T2 for breaches of covenants that 'touch and concern' the land, based on privity of estate. T2's liability only lasted while they held the lease.
• T2 v L1: T2 could sue L1 for breaches of landlord covenants that 'touch and concern' the land, based on privity of estate.

Landlord Assigns Reversion (L1 assigns to L2)

• L2 v T1: L2 could sue T1 (original tenant) for breaches by the current tenant under privity of contract, as the benefit of tenant covenants generally passed with the reversion (LPA 1925, s.141).
• L2 v T2: L2 could sue T2 (current tenant) for breaches of 'touch and concern' covenants under privity of estate.
• T2 v L2: T2 could sue L2 for breaches of landlord covenants that 'touch and concern' the land, as the burden generally passed with the reversion (LPA 1925, s.142). L1 usually remained liable under privity of contract unless expressly released.

Key Term: Touch and Concern
A common law test determining if a covenant is so connected to the land that its benefit or burden can pass to successors in title under privity of estate. It must affect the land's nature, quality, use, or value.

Worked Example 1.1

In 1990, Landlord Ltd granted a 25-year lease of a shop to Tenant A. The lease contained a covenant for Tenant A to keep the shop front painted annually. In 1998, Tenant A assigned the lease to Tenant B. Tenant B failed to paint the shop front in 2000. Can Landlord Ltd sue Tenant A for this breach?

Answer: Yes. This is an 'old' lease (pre-1996). Tenant A, the original tenant, remains liable for all covenants throughout the lease term due to privity of contract, even after assignment. Landlord Ltd can sue Tenant A for Tenant B's failure to paint. Landlord Ltd could also potentially sue Tenant B under privity of estate, as the painting covenant likely 'touches and concerns' the land.

Worked Example 1.2

Using the same facts as Example 1.1, assume Tenant B assigns the lease to Tenant C in 2005. Tenant C fails to paint the shop front in 2007. Can Landlord Ltd sue Tenant B for Tenant C's breach?

Answer: Generally no. Tenant B's liability under privity of estate only exists while the lease is vested in them. Once Tenant B assigned to Tenant C, their privity of estate with Landlord Ltd ended. Landlord Ltd could sue Tenant A (original tenant, privity of contract) or Tenant C (current tenant, privity of estate). Tenant B would only be liable if they had entered into a direct contractual covenant with Landlord Ltd upon taking the assignment, which was common practice but not automatic.

The Landlord and Tenant (Covenants) Act 1995 ('New Leases')

The LT(C)A 1995 applies to leases granted on or after 1 January 1996 ('new leases'). It aimed to simplify the rules and abolish the ongoing liability of original tenants.

Key Changes for New Leases

• Automatic Release of Tenant: Upon a lawful assignment, the assigning tenant (T1) is automatically released from the burden of all tenant covenants (s.5). They also lose the benefit of landlord covenants. The incoming assignee (T2) takes the benefit and burden of all covenants, unless they are expressed to be personal (s.3).
• Authorised Guarantee Agreements (AGAs): To protect the landlord, the assigning tenant (T1) can be required to enter into an AGA, guaranteeing the performance of the tenant covenants by their immediate assignee (T2) only (s.16). If T2 later assigns to T3, T1's AGA liability ends. T2 might then be required to provide an AGA for T3.
• Landlord Release: Landlords (L1) are not automatically released upon assigning the reversion. They must serve notice on the tenant requesting release, and if the tenant objects, the landlord must apply to court (ss.6–8). However, landlords can (and often do) include a clause in the lease limiting their liability to the period while they own the reversion (known as an Avonridge clause).
• 'Touch and Concern' Abolished: The 'touch and concern' test is largely irrelevant for the passing of covenants in new leases. Most covenants pass automatically unless expressed to be personal (s.3).

Key Term: Authorised Guarantee Agreement (AGA)
An agreement, permitted under the LT(C)A 1995, where an outgoing tenant guarantees the performance of lease covenants by their immediate assignee. It is a condition a landlord may require for consent to assign a 'new' lease.

Worked Example 1.3

In 2005, Laura granted a 15-year lease of an office to Tom. In 2010, Tom lawfully assigned the lease to Anna, providing Laura with an AGA. In 2015, Anna assigned the lease to Ben. Ben fails to pay rent in 2017. Can Laura sue Tom for the unpaid rent?

Answer: No. This is a 'new' lease (post-1996). Tom was automatically released from tenant covenants when he assigned to Anna (s.5 LT(C)A 1995). Although he provided an AGA, this only guaranteed Anna's performance. When Anna assigned to Ben, Tom's liability under the AGA ended. Laura's recourse is against Ben (current tenant).

Exam Warning

Always check the date the lease was granted to determine whether the old rules or the LT(C)A 1995 apply. The date of assignment is irrelevant for this purpose. Misapplying the rules is a common mistake.

Summary Table: Old vs New Leases

Key Point Checklist

This article has covered the following key knowledge points:

• Privity of contract exists only between the original landlord and original tenant, binding them to all lease terms for the duration.
• Privity of estate exists between the current landlord and current tenant, allowing enforcement of covenants related to the land.
• For 'old' leases (pre-1996), original tenants had ongoing liability after assignment due to privity of contract. Assignees were liable under privity of estate for covenants touching and concerning the land.
• For 'new' leases (post-1996), the LT(C)A 1995 applies. Tenants are automatically released on lawful assignment unless an AGA is required.
• AGAs allow landlords to require an outgoing tenant to guarantee only their immediate assignee's performance.
• Landlords are not automatically released on assigning the reversion in new leases but can seek release via a statutory procedure or limit liability contractually.
• The 'touch and concern' test is largely abolished for the passing of covenants in new leases; most pass unless expressed as personal.

Key Terms and Concepts

• Privity of Contract
• Privity of Estate
• Leasehold Covenant
• Assignment
• Reversion
• Touch and Concern
• Authorised Guarantee Agreement (AGA)