Landlord and tenant law - Rules for passing the benefit and ...

Learning Outcomes

This article outlines the rules for passing the benefit and burden of leasehold covenants and their enforceability in landlord and tenant law, including:

• Privity of contract and privity of estate, and liability and standing to sue at any point in time under a lease
• Distinction between old leases (granted before 1 January 1996) and new leases (granted on or after that date), and the correct enforcement regimes
• Real covenants that “touch and concern” the land; running with the lease or reversion under pre-1996 rules
• The LTCA 1995 statutory framework: automatic passing of covenants, tenant and landlord releases, and the role of AGAs
• Landlord remedies for breach of covenant, including s 17 LTCA 1995 default notices and the former tenant’s right to an overriding lease
• Passing of the benefit and burden on assignment of the lease or reversion; operation of LPA 1925 ss 141–142 (old leases) and LTCA 1995 s 3 (new leases)
• Enforcement of headlease restrictive covenants against subtenants or occupiers, including the special rule under LTCA 1995 s 3(5)

SQE1 Syllabus

For SQE1, you are required to understand the enforceability of leasehold covenants and the rules for passing the benefit and burden of those covenants when leases or reversions are assigned, with a focus on the following syllabus points:

• the distinction between old leases (pre-1996) and new leases (post-1995)
• how the benefit and burden of leasehold covenants pass to assignees of the lease or reversion
• the role of privity of contract and privity of estate
• the effect of the Landlord and Tenant (Covenants) Act 1995 (LTCA 1995)
• the enforceability of covenants, including Authorised Guarantee Agreements (AGAs)
• the requirement that covenants must "touch and concern" the land to run with the lease or reversion
• the impact of LPA 1925 ss 141–142, and LTCA 1995 ss 3, 5, 6–8, 16–19 on enforcement pathways
• the use and effect of s 17 LTCA 1995 default notices and the right to an overriding lease

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. What is the main difference between the enforceability of leasehold covenants in leases granted before and after 1 January 1996?
2. Which of the following best describes privity of estate? a) A relationship between the original landlord and original tenant only
   b) A relationship between any two parties to a contract
   c) A relationship between the current landlord and tenant of a legal lease
   d) A relationship between a landlord and a subtenant
3. When can a landlord require an outgoing tenant to enter into an Authorised Guarantee Agreement (AGA)?
4. True or false? Under the LTCA 1995, the original tenant is always liable for breaches of covenant after assigning the lease.

Introduction

Leasehold covenants are promises made by landlords and tenants in a lease. Understanding how these covenants are enforced, and how their benefit and burden pass to successors, is essential for SQE1. The rules differ depending on whether the lease was granted before or after 1 January 1996, due to major reforms introduced by the Landlord and Tenant (Covenants) Act 1995.

Key Term: leasehold covenant
A promise made by a landlord or tenant in a lease, which may be positive (to do something) or restrictive (not to do something).

Key Term: privity of contract
The legal relationship between the original parties to a lease, making them liable for all covenants throughout the lease term.

Key Term: privity of estate
The legal relationship between the current landlord and tenant of a legal lease, allowing covenants that "touch and concern" the land to be enforced while they hold their respective interests.

Key Term: real covenant
A covenant that “touches and concerns” the land and is not merely personal. The test (from P & A Swift Investments v Combined English Stores Group plc) is whether it benefits owners for the time being, affects the nature/quality/mode of user or value of the land, and is not expressed to be personal.

Key Term: default notice (s 17 LTCA 1995)
A statutory notice that must be served within six months of a fixed charge (e.g., rent) falling due before a landlord can recover that fixed charge from a former tenant or AGA guarantor.

Key Term: overriding lease
A lease granted to a former tenant under s 19 LTCA 1995 after they pay sums demanded under a valid s 17 default notice in full. It slots the former tenant between the current landlord and defaulting assignee, enabling enforcement against the defaulting tenant.

Leasehold Covenants: Types and Enforceability

Leasehold covenants can be positive (e.g., to repair) or restrictive (e.g., not to sublet). Their enforceability depends on whether the parties are the original landlord and tenant, or successors.

Express covenants are those written into the lease. Some obligations may be implied by law (e.g., LPA 1925 s 79 implies that a covenant relating to land is deemed made by the covenantor on behalf of themselves and their successors unless a contrary intention is expressed). It is important to identify whether a covenant is “real” (touches and concerns the land) or personal, as only real covenants can run with the lease or reversion in the old regime. In the new regime, all covenants run automatically unless expressed to be personal.

Key Term: privity of contract
The legal relationship between the original parties to a lease, making them liable for all covenants throughout the lease term.

Key Term: privity of estate
The legal relationship between the current landlord and tenant of a legal lease, allowing covenants that "touch and concern" the land to be enforced while they hold their respective interests.

Old Leases (Pre-1996): Common Law Rules

For leases granted before 1 January 1996, the common law rules and the Law of Property Act 1925 apply. The key principles are:

• The original landlord and tenant remain liable for all lease covenants for the entire lease term due to privity of contract.
• When the lease or reversion is assigned, privity of estate arises between the current landlord and tenant, but only covenants that "touch and concern" the land can be enforced between them.
• Assignment of the reversion transfers the benefit and burden of landlord covenants that touch and concern the land to the assignee by statute (LPA 1925 ss 141–142).
• Sub-tenants are not in privity of estate with the head landlord; however, a restrictive covenant may be enforceable against a subtenant in equity (by analogy to Tulk v Moxhay) or via terms of the sublease.

Key Term: touch and concern the land
A covenant affects the nature, value, or use of the land itself, rather than being personal to the parties.

Key Term: assignment
The transfer of a lease or reversion to a new tenant or landlord.

Worked Example 1.1

Scenario:
In 1990, Landlord A grants a 30-year lease to Tenant B. In 2000, B assigns the lease to C, and A sells the reversion to D. C fails to repair the property as required by the lease.

Answer:
D (the new landlord) can sue C (the current tenant) for breach of the repair covenant if it "touches and concerns" the land, as there is privity of estate between them. A (the original landlord) can also sue B (the original tenant) due to privity of contract.

Under the old regime, a former tenant (or former landlord) may seek protection if sued for covenants breached by a later assignee:

• Common law recovery: a former tenant who pays for a breach caused by a current tenant can recover from the current tenant under Moule v Garrett (restitutionary indemnity).
• Statutory indemnity: s 77 LPA 1925 implies an indemnity from assignees of a lease for value, enabling former tenants to recoup losses from their assignees.
• Landlord’s benefit and burden transmission: ss 141–142 LPA 1925 automatically transmit the benefit and burden of landlord covenants touching and concerning the land on assignment of the reversion.

Exam Warning

For pre-1996 leases, the original tenant remains liable for all lease covenants, even after assigning the lease, unless released by the landlord. This is a common source of confusion.

Enforcement against former tenants: s 17 and the overriding lease

LTCA 1995 applies retrospectively to enforcement against former tenants and guarantors in relation to fixed charges:

• A landlord must serve a s 17 default notice within six months of the fixed charge falling due to recover it from a former tenant or guarantor (including under an AGA for new leases).
• If the former tenant pays the sum demanded in full, they may request an overriding lease under s 19. The overriding lease places the former tenant as landlord to the defaulting assignee, permitting direct enforcement (including forfeiture) and recovery of sums going forward.

Worked Example 1.2

Scenario:
In 1995, L grants a 35-year lease to T. In 2010, T assigns to A. A is in a year’s rent arrears. L serves a s 17 notice on T on 1 July 2011 claiming rent due in the past year.

Answer:
L can recover only fixed charges that fell due within the six months preceding service of the s 17 notice. The older arrears cannot be recovered from T under s 17. If T pays the sums demanded in full, T can request an overriding lease under s 19, enabling T to take control and enforce against A, including forfeiture if appropriate.

New Leases (Post-1995): The Landlord and Tenant (Covenants) Act 1995

The LTCA 1995 applies to leases granted on or after 1 January 1996. It introduced major changes:

• When a tenant lawfully assigns the lease, they are automatically released from future liability for tenant covenants (s 5).
• When a landlord transfers the reversion, they are released from future liability for landlord covenants only if they follow the release mechanism in ss 6–8 (notice to tenants and no successful objection), or if their lease includes a valid “liability ends on disposal” clause (Avonridge Property Co Ltd v Mashru).
• All covenants (except those expressed to be personal) automatically bind assignees of the lease or reversion (s 3), regardless of privity of estate and without needing the “touch and concern” test.
• Restrictive covenants in the headlease can be enforced by the landlord directly against an occupier or subtenant (s 3(5)).

Key Term: landlord and tenant (covenants) act 1995
The statute that reformed the rules for passing and enforcing leasehold covenants in new leases (from 1 January 1996).

Key Term: authorised guarantee agreement (AGA)
An agreement where the outgoing tenant guarantees the immediate assignee's performance of tenant covenants, if required by the landlord as a condition of assignment.

A few critical refinements for the new regime:

• A tenant’s release does not extend to breaches that occurred before assignment; the outgoing tenant remains liable for pre-assignment breaches.
• “Excluded assignments” (e.g., assignments in breach of covenant or assignments by operation of law such as bankruptcy) defeat tenant release (s 11).
• AGA liability is a primary obligation and only covers the immediate assignee. It ceases when the assignee assigns again (s 16(4)). In insolvency, a landlord may require a former tenant to take a new lease if the existing lease is disclaimed.
• s 17 default notices still apply to new leases and to recovery from former tenants and guarantors of fixed charges.

Worked Example 1.3

Scenario:
In 2005, Tenant X assigns a 20-year lease to Tenant Y. The landlord requires X to enter into an AGA. Y later defaults on rent.

Answer:
X is released from liability for tenant covenants except to the extent of the AGA. If Y defaults, the landlord can enforce the AGA against X, but X is not liable for breaches after Y assigns the lease again.

Enforcement against subtenants and occupiers

Under s 3(5) LTCA 1995, landlords can enforce restrictive covenants directly against subtenants or occupiers when appropriate. This offers a direct route to restrain breaches of negative covenants (e.g., user restrictions) without relying solely on the headtenant.

Worked Example 1.4

Scenario:
A 2018 headlease contains a covenant “not to use the premises for any business other than a hairdresser.” The headtenant grants a sublease. The subtenant operates a tattoo studio.

Answer:
The landlord can enforce the restrictive covenant against the subtenant under s 3(5) LTCA 1995, seeking an injunction and/or forfeiture under the headlease if the breach persists.

Revision Tip

For SQE1, always check the date the lease was granted. The rules for passing and enforcing covenants are different for old and new leases.

Passing the Benefit and Burden of Leasehold Covenants

Passing the Burden

• In old leases, the burden of real covenants (those that “touch and concern” the land) passes to the assignee of the lease or reversion while they hold the interest (privity of estate).
• In new leases, the burden of all covenants (except personal covenants) passes automatically to the assignee, regardless of privity of estate.

Passing the Benefit

• In both old and new leases, the benefit of covenants passes to the assignee of the lease or reversion. For old leases, this requires that the covenant “touches and concerns” the land; for new leases, all covenants run unless expressed to be personal.

Worked Example 1.5

Scenario:
A lease contains a covenant by the tenant not to sublet without the landlord's consent. The lease is assigned to a new tenant, who sublets without consent.

Answer:
The landlord can enforce the covenant against the new tenant if the lease is a new lease (post-1995), as the burden and benefit pass automatically. In an old lease, the landlord can enforce the covenant if it "touches and concerns" the land and there is privity of estate.

For assignment of the reversion (old leases), LPA 1925 s 141 (benefit) and s 142 (burden) transmit landlord covenants that touch and concern the land to the assignee landlord. This enables the new landlord to sue the original tenant via privity of contract for earlier breaches and the current tenant via privity of estate for ongoing breaches.

Worked Example 1.6

Scenario:
An old lease contains a landlord’s covenant to “maintain the roof.” The reversion is assigned. The roof is defective.

Answer:
The burden of the landlord’s repair covenant passes to the assignee landlord under LPA 1925 s 142. The current tenant can enforce the covenant against the new landlord. If the original landlord had breached before assignment, the tenant might have a claim for past breaches against the original landlord.

Authorised Guarantee Agreements (AGAs)

Under the LTCA 1995, a landlord can require an outgoing tenant to enter into an AGA as a condition of consenting to assignment. The AGA makes the outgoing tenant guarantee the immediate assignee's performance of tenant covenants. The AGA ends when the assignee assigns the lease again.

AGA requirements and limits:

• The lease must contain a qualified covenant against assignment (not an absolute prohibition).
• The landlord’s consent cannot be unreasonably withheld or delayed (LTA 1988), but for commercial leases granted post-1995, the parties can pre-agree circumstances and conditions for consent (including requiring an AGA) under LTA 1927 s 19(1A). Those pre-agreed conditions are not subject to a separate reasonableness test.
• An AGA is a primary obligation: the landlord may pursue the former tenant without suing the assignee first.
• The AGA is limited to the immediate assignee. It ceases when that assignee assigns again (s 16(4)).

Worked Example 1.7

Scenario:
Tenant M wishes to assign a lease. The landlord requires an AGA. The assignee defaults, and the landlord seeks payment from M.

Answer:
If the AGA was validly required, M is liable for the default of the immediate assignee, but not for further assignees.

Enforceability: Key Points

• For old leases, original parties remain liable for the whole term unless released. Enforceability against current parties depends on privity of estate and the covenant “touching and concerning” the land.
• For new leases, liability ends on lawful assignment for tenants (s 5), and landlords can obtain release if statutory conditions are met (ss 6–8). All covenants run automatically unless expressed to be personal (s 3).
• Only covenants that "touch and concern" the land (old leases) or are not personal (new leases) run with the lease or reversion.
• AGAs must be validly required via a qualified covenant against assignment and in accordance with LTA 1988 obligations and, for commercial leases, any s 19(1A) pre-agreed conditions.
• s 17 default notices are a prerequisite to recovery of fixed charges from former tenants and guarantors in both old and new leases, and payment in full can trigger a right to an overriding lease (s 19).
• Restrictive covenants may be enforced directly against subtenants or occupiers under s 3(5) LTCA 1995 in new leases.

Exam Warning: Grant vs Assignment

Do not confuse the date of assignment with the date the lease was granted. The LTCA 1995 applies only to leases granted on or after 1 January 1996, not to assignments of older leases.

Key Point Checklist

This article has covered the following key knowledge points:

• The distinction between old leases (pre-1996) and new leases (post-1995) is critical for passing covenants.
• Privity of contract binds original parties for the whole term in old leases; privity of estate binds current landlord and tenant for covenants that "touch and concern" the land.
• The LTCA 1995 introduced automatic release for outgoing tenants (s 5) and a release mechanism for landlords (ss 6–8), and automatic transmission of covenants (s 3) unless expressed to be personal.
• The benefit and burden of leasehold covenants pass to assignees if the covenant "touches and concerns" the land (old leases) or is not personal (new leases).
• AGAs allow landlords to require outgoing tenants to guarantee the immediate assignee's performance, but only for that assignee, and only where properly required under a qualified covenant and LTA 1988/LTA 1927 s 19(1A).
• LPA 1925 ss 141–142 transmit landlord covenants touching and concerning the land on assignment of the reversion in old leases.
• s 17 LTCA 1995 default notices must be served within six months of the fixed charge falling due; payment in full may lead to an overriding lease under s 19.
• Restrictive covenants may be enforced directly against subtenants/occupiers in new leases under s 3(5) LTCA 1995.
• A “real covenant” is one that touches and concerns the land; identifying real covenants is essential to determine whether covenants run in old leases.

Key Terms and Concepts

• leasehold covenant
• privity of contract
• privity of estate
• touch and concern the land
• real covenant
• assignment
• landlord and tenant (covenants) act 1995
• authorised guarantee agreement (AGA)
• default notice (s 17 LTCA 1995)
• overriding lease