Leasehold covenants and issues - Leases granted before 1 January 1996

Learning Outcomes

This article explores the rules governing leases granted before 1 January 1996. After reading this, you should understand the principles of privity of contract and privity of estate, the continuing liability of the original tenant following an assignment, and how leasehold covenants are enforced between original parties and their successors in title under the 'old rules' regime. This knowledge is essential for addressing SQE1 assessment questions concerning pre-1996 lease scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the principles governing the enforceability of leasehold covenants in leases granted before 1 January 1996. This involves applying knowledge of common law rules relating to privity of contract and privity of estate to determine the liability of original parties and assignees.

As you work through this article, remember to pay particular attention in your revision to:

• The distinction between leases granted before 1 January 1996 ('old leases') and those granted on or after that date ('new leases').
• The concepts of privity of contract and privity of estate in the context of old leases.
• The continuing liability of the original tenant after assignment under an old lease.
• How the benefit and burden of leasehold covenants pass to successors in title under the old rules.
• Identifying who can sue and be sued for breaches of covenant in old leases.

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. Under a lease granted in 1990, which doctrine primarily ensures the original tenant remains liable for covenants throughout the lease term, even after assignment?
   1. Privity of estate
   2. Privity of contract
   3. The rule in Spencer's Case
   4. The doctrine of 'touch and concern'
2. Tenant A took a lease in 1992 and assigned it to Tenant B in 1998. Tenant B breached a repairing covenant in 2001. Can the landlord sue Tenant A for this breach?
   1. Yes, due to privity of estate.
   2. No, because Tenant B is the current tenant.
   3. Yes, due to privity of contract.
   4. No, because the assignment released Tenant A.
3. Which type of covenant's burden generally runs with the land under the principle of privity of estate in pre-1996 leases?
   1. All express covenants
   2. Only positive covenants
   3. Covenants that 'touch and concern' the land
   4. Personal covenants

Introduction

Leases granted before 1 January 1996 operate under a different legal framework regarding the enforceability of covenants compared to leases granted after this date. The commencement of the Landlord and Tenant (Covenants) Act 1995 (LT(C)A 1995) marked a significant shift, but understanding the 'old rules' remains essential for the SQE1 assessment, as these principles still govern leases predating the Act. This article focuses on these old rules, primarily the doctrines of privity of contract and privity of estate, and their implications for liability following the assignment of a lease term.

Governing Principles: Privity of Contract and Privity of Estate

The relationship between landlords, tenants, and their successors in title for leases granted before 1 January 1996 is determined by two core common law doctrines: privity of contract and privity of estate.

Privity of Contract

This doctrine establishes that only the original parties to a contract (the lease) can sue and be sued under it.

Key Term: Privity of Contract
The legal relationship that exists between the original parties who entered into a contract (in this context, the original landlord and original tenant of the lease). Under this doctrine, the original parties remain bound by the express covenants in the lease for the entire duration of the term, irrespective of whether they have transferred their interest.

This means the original tenant remains liable for all express covenants (eg, paying rent, repairing the property) throughout the entire lease term, even if they assign the lease to someone else. Similarly, the original landlord remains liable for their covenants.

Privity of Estate

This doctrine governs the relationship between the current landlord and the current tenant at any given time. It allows certain covenants to be enforced between parties who were not the original signatories, provided the covenant 'touches and concerns' the land.

Key Term: Privity of Estate
The legal relationship between the current landlord and the current tenant linked by the tenancy. This allows the enforcement of lease covenants that 'touch and concern' the land between parties who are not the original landlord and tenant but currently hold the respective interests (reversion and lease term).

The doctrine of privity of estate means that an assignee (a tenant who takes over the lease from a previous tenant) becomes liable for breaches of certain covenants committed while the lease is vested in them. Likewise, a landlord's assignee (someone who buys the freehold reversion) can enforce certain tenant covenants.

Liability of Parties under Pre-1996 ('Old') Leases

Understanding who is liable for covenant breaches requires applying the principles of privity of contract and privity of estate.

Liability of the Original Tenant

The most significant feature of old leases is the enduring liability of the original tenant. Due to privity of contract, the original tenant remains liable on all express covenants for the entire duration of the lease term, unless expressly released by the landlord (which rarely happened).

This means that if the original tenant assigns the lease, and the new tenant (the assignee) subsequently breaches a covenant (eg, fails to pay rent), the landlord can choose to sue:

• The current tenant (assignee) in possession, based on privity of estate (for covenants touching and concerning the land); OR
• The original tenant, based on privity of contract (for breaches of express covenants).

Key Term: Assignment
The transfer of the tenant's entire remaining interest in the lease to a third party (the assignee). The assignor is the transferring tenant.

Because of this continuing liability, an original tenant assigning an old lease would typically seek an indemnity covenant from their assignee. This indemnity obliges the assignee to reimburse the original tenant if the original tenant is sued by the landlord for breaches committed by the assignee.

Worked Example 1.1

Leo granted a 25-year lease of commercial premises to Tina in 1990. The lease contained a tenant covenant to keep the premises in good repair. In 1998, Tina assigned the lease to Alex with Leo's consent. In 2005, Alex failed to repair damage to the roof, breaching the repair covenant. Leo wants to recover the cost of repairs.

Against whom can Leo bring a claim?

Answer: Leo can pursue either Tina or Alex.

• Leo can sue Alex (the current tenant) based on privity of estate, as the repairing covenant 'touches and concerns' the land. Alex is liable for breaches committed during his period of ownership.
• Leo can also sue Tina (the original tenant) based on privity of contract. Tina remains liable for the express repair covenant for the entire lease term, even though she assigned the lease to Alex. If Leo sues Tina, Tina might be able to claim an indemnity from Alex if she obtained one upon assignment.

Liability of Assignees

An assignee (someone who takes the transfer of the lease) is liable for breaches of covenants that 'touch and concern' the land, committed while the lease is vested in them. This liability arises under privity of estate. Once the assignee lawfully assigns the lease to someone else, their liability under privity of estate ceases for future breaches, although they remain liable for breaches committed during their ownership.

Key Term: Touch and Concern
A covenant 'touches and concerns' the land if it affects the landlord in their capacity as landlord or the tenant in their capacity as tenant. It must affect the nature, quality, mode of use, or value of the land, and not be merely personal to the original parties. Examples include covenants to pay rent, repair, insure, or concerning the use of the premises.

However, landlords often required assignees of old leases to enter into a direct covenant with the landlord (usually within the licence to assign) to observe and perform all tenant covenants for the remainder of the term. This created privity of contract between the landlord and that specific assignee, making them liable for the entire remaining term, similar to the original tenant's liability. An assignee who gave such a direct covenant would also seek an indemnity from their own subsequent assignee.

Liability of Landlords and their Assignees

• Original Landlord: Remains liable for landlord covenants for the entire term (privity of contract), unless expressly released.
• Landlord's Assignee: Becomes liable for landlord covenants that touch and concern the land while the reversion is vested in them (privity of estate). The benefit of tenant covenants that touch and concern the land also passes to the landlord's assignee, allowing them to sue the current tenant.

Exam Warning

A common point of confusion is the difference between the liability regimes for 'old' leases (pre-1 Jan 1996) and 'new' leases (on or after 1 Jan 1996). Remember that for old leases, the original tenant's liability under privity of contract is key and continues after assignment. For new leases, the LT(C)A 1995 generally releases tenants automatically on lawful assignment (subject to AGAs). Ensure you apply the correct rules based on the date the lease was granted.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Leases granted before 1 January 1996 ('old leases') are governed by common law rules of privity of contract and privity of estate.
• Privity of contract binds the original landlord and original tenant to the lease covenants for the entire term.
• Privity of estate links the current landlord and current tenant, allowing enforcement of covenants that 'touch and concern' the land.
• The original tenant remains liable for all breaches of express covenants throughout the term, even after assignment, unless expressly released.
• An assignee is liable under privity of estate for breaches of covenants that 'touch and concern' the land, but only while the lease is vested in them.
• Landlords often required direct covenants from assignees in old leases, creating privity of contract and extending their liability.
• Landlord's assignees are bound by/can enforce covenants touching and concerning the land under privity of estate.

Key Terms and Concepts

• Privity of Contract
• Privity of Estate
• Assignment
• Touch and Concern