Leasehold covenants and issues - Leases granted on or after ...

Learning Outcomes

This article examines leasehold covenants in leases granted on or after 1 January 1996, including:

• The legal framework under the Landlord and Tenant (Covenants) Act 1995
• Operation of “new leases” and the allocation of covenant liability
• Automatic release of tenants on lawful assignment
• Release procedure for landlords on transfer of the reversion
• Scope and restrictions of Authorised Guarantee Agreements (AGAs)
• Enforcement mechanisms and practical drafting considerations in modern leases
• s17 default notices and overriding leases
• Lawfulness of assignments as a condition for statutory release
• Absolute, qualified and fully qualified covenants
• Remedies for breach, including CRAR, forfeiture with s146 notices, damages, injunctions, and specific performance

SQE1 Syllabus

For SQE1, you are required to understand the regime for leasehold covenants in leases granted on or after 1 January 1996 under the Landlord and Tenant (Covenants) Act 1995, with a focus on the following syllabus points:

• The effect of the Landlord and Tenant (Covenants) Act 1995 on liability for leasehold covenants.
• The rules on automatic release of tenants and landlords on assignment or transfer of reversion.
• The use, requirements, and effect of Authorised Guarantee Agreements (AGAs).
• The main types of leasehold covenants (e.g., user, repair, alienation) and their enforcement.
• Remedies for breach of leasehold covenants, including the impact of AGAs and the role of forfeiture.
• The practical implications for drafting, assignment, and enforcement of leasehold covenants in modern leases.
• The requirement to serve s17 default notices before pursuing former tenants/guarantors for fixed sums under the 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 effect of the Landlord and Tenant (Covenants) Act 1995 on a tenant’s liability for lease covenants after a lawful assignment?
2. In what circumstances can a landlord require an outgoing tenant to enter into an Authorised Guarantee Agreement (AGA)?
3. What is the main difference between a user covenant and a repair covenant in a lease?
4. How can a landlord enforce a leasehold covenant against an outgoing tenant after assignment if an AGA is in place?

Introduction

Leases granted on or after 1 January 1996 are governed by the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”). The Act fundamentally changed the rules on liability for leasehold covenants by creating a new regime for “new tenancies” (i.e., tenancies granted on or after 1 January 1996, subject to limited statutory exclusions). It introduced automatic release for tenants on a lawful assignment, a statutory procedure for landlord release on transfer of the reversion, and carefully controlled use of Authorised Guarantee Agreements (AGAs). An anti-avoidance provision prevents parties from contracting out of the Act. Understanding these changes is essential, as they determine who is liable for covenant breaches over time and how remedies can be deployed.

Key Term: leasehold covenant
A promise in a lease imposing an obligation or restriction on the landlord or tenant, such as to pay rent, repair, or use the premises in a certain way.

Leasehold Covenants: The 1995 Act Regime

The Scope of the 1995 Act

The 1995 Act applies to “new tenancies” granted on or after 1 January 1996. It does not apply retrospectively to leases granted before that date (which remain subject to privity of contract and estate rules). Under the Act, liability for covenants is designed to follow the current parties to the lease, not to remain indefinitely with former parties.

A key feature is that many rules no longer turn on whether a covenant “touches and concerns” the land. For “new leases”, an assignee of the lease takes the burden of tenant covenants except those expressed to be personal to the original tenant, and the assignee of the reversion takes the burden of landlord covenants, subject to the statutory release mechanism.

Key Term: assignment
The transfer of a tenant’s leasehold interest to a new tenant (assignee), with the landlord’s consent if required by the lease.

Automatic Release of Tenants on Assignment

Under s5 of the 1995 Act, a tenant under a “new lease” is automatically released from future liability for tenant covenants upon a lawful assignment of the whole of the lease. The release covers obligations arising after the assignment; the outgoing tenant remains liable for breaches occurring before assignment. The release does not operate where the assignment is unlawful (e.g., in breach of an alienation covenant) or where the lease passes “by operation of law” rather than a consensual assignment (e.g., certain transmissions).

The Act includes anti-avoidance: any contractual provision attempting to circumvent the statutory release or otherwise undermine the regime is void.

Key Term: Authorised Guarantee Agreement (AGA)
A deed by which the outgoing tenant guarantees the immediate assignee’s performance of tenant covenants until the assignee lawfully assigns the lease or is otherwise released under the 1995 Act.

Authorised Guarantee Agreements (AGAs)

To mitigate the risk posed by automatic tenant release, s16 of the 1995 Act allows landlords to require an AGA as a condition of consenting to assignment, provided the condition is lawful and reasonable. An AGA may also be pre-agreed in a commercial lease as a condition of assignment. The core points are:

• The guarantee can only relate to the immediate assignee. It cannot extend to future assignees or perpetuate liability beyond the immediate successor.
• An AGA cannot impose obligations more onerous than those in the lease. It should mirror the tenant’s covenants.
• AGA liability ends when the guaranteed assignee lawfully assigns the lease onward (or is otherwise released under the Act).
• Anti-avoidance: landlords cannot lawfully require “repeat guarantees” or devices designed to bypass the immediate-assignee limitation.

An AGA is typically executed as a deed because it is a guarantee of another party’s obligations. The lease or licence to assign will usually specify the form and timing of the AGA. In residential contexts, imposing an AGA may only be lawful if it is a reasonable condition in the circumstances.

Release of Landlords on Transfer of Reversion

The 1995 Act provides a route for landlord release on transfer of the reversion. The benefit and burden of the landlord’s covenants otherwise pass to the new landlord. For a release:

• The outgoing landlord must seek release by serving notice on the tenant before, or within four weeks of, the transfer of the reversion.
• If the tenant does not object within the statutory period, release takes effect automatically for future liabilities.
• If the tenant objects, the outgoing landlord may apply to court for a declaration that release is reasonable.

This procedure concerns future liabilities. Existing breaches and accrued rights are dealt with under the Act’s allocation rules (e.g., the new landlord typically handles post-transfer performance and enforcement, while pre-transfer liabilities remain focused on the party in office at the time).

Key Term: reversion
The landlord’s interest in the property, which entitles the landlord to the return of possession at the end of the lease.

Main Types of Leasehold Covenants

Leasehold covenants regulate use, occupation, repair, disposal, insurance and management of premises. In “new leases”, careful drafting of covenant type and strength (absolute, qualified or fully qualified) affects assignability, alterations, and change of use.

User Covenants

User covenants restrict or guide permitted use (e.g., “as offices only”). They may be absolute (no change at all), qualified (change only with consent), or fully qualified (consent not to be unreasonably withheld). In commercial leases, a landlord can reasonably refuse consent where use would harm the building, breach planning, or conflict with an established tenant-mix policy.

Key Term: user covenant
A leasehold covenant restricting the permitted use of the premises.

Repair Covenants

Repair covenants set out the tenant (or landlord) obligations to maintain the premises. Drafting distinctions matter:

• “Keep in repair” is less onerous than “put into repair.”
• Reference to “good condition” may exceed mere repair.
• Liability for fair wear and tear and damage caused by insured risks is usually excluded for tenants.

The standard of repair is assessed against the lease terms and the property’s condition at grant. At the end of the term, damages for disrepair are limited by statute to the reduction in the value of the reversion attributable to the breach (s18(1) Landlord and Tenant Act 1927).

Key Term: repair covenant
A leasehold covenant requiring the tenant or landlord to maintain or repair the premises to a specified standard.

Alienation Covenants

Alienation covenants regulate assignment, subletting, sharing occupation or parting with possession. They are usually qualified or fully qualified in modern commercial leases; consent must be given within a reasonable time and cannot be unreasonably withheld. Reasonable conditions can include:

• Financial vetting of the assignee/subtenant.
• Rent deposits or third-party guarantees.
• Provision of an AGA by the outgoing tenant (commercial leases).
• Compliance with user covenants and planning.

Key Term: alienation covenant
A leasehold covenant restricting or regulating the tenant’s ability to assign, sublet, or otherwise deal with the lease.

Key Term: qualified covenant
A covenant allowing a prohibited act (e.g., assignment, alterations, change of use) if the landlord’s prior consent is obtained, with consent often required not to be unreasonably withheld.

Enforcement and Remedies

Enforcement Against the Tenant

In “new leases”, the landlord enforces covenants against the current tenant. If an AGA is in place, the outgoing tenant can be pursued for the immediate assignee’s breaches within the AGA’s scope. For fixed monetary sums (e.g., rent, service charges), additional statutory steps apply when pursuing former tenants or guarantors (see s17).

Key Term: default notice (s17)
A statutory notice under s17 of the 1995 Act, served within six months of the sum falling due, required before a landlord can recover fixed sums (e.g., rent, service charge) from a former tenant or guarantor.

If a landlord intends to recover a fixed sum from a former tenant/guarantor (whether under pre-1996 privity or under an AGA), a s17 notice must first be served within six months of the payment becoming due. Payment by the former tenant triggers an entitlement to request an overriding lease (see below).

Key Term: overriding lease
A concurrent lease granted to a paying former tenant under s19 of the 1995 Act, placing that former tenant between the landlord and defaulting tenant and enabling remedies such as forfeiture against the defaulting tenant.

Enforcement Against the Landlord

The tenant enforces landlord covenants (e.g., to insure or to repair common parts) against the current landlord. On transfer of reversion, the outgoing landlord may be released from future liabilities if the statutory notice procedure is followed; otherwise the burden is carried forward to the successor.

Remedies for Breach

Remedies depend on the nature of breach and the covenant breached:

• Damages for loss suffered (including statutory limits for repair at end of term).
• Specific performance (exceptional; may be granted for clear obligations).
• Injunctions (to restrain ongoing breaches such as unauthorised user or alterations).
• For breaches of repairing covenants during the term, leases often include a self-help clause (sometimes called a “Jervis v Harris clause”), allowing the landlord to enter, carry out works and recover the cost as a debt.
• Forfeiture (termination of the lease) for material breaches, often subject to statutory notices and opportunities to remedy.

Key Term: forfeiture
The landlord’s right to terminate the lease for tenant default, usually after serving notice and allowing an opportunity to remedy the breach.

Key Term: s146 notice
A notice under s146 Law of Property Act 1925 that specifies a breach (other than non-payment of rent), requires remedy within a reasonable time (if capable of remedy), and may require compensation; a prerequisite to forfeiture for most breaches.

For non-payment of rent, forfeiture may be available (often without an s146 notice), alongside other options:

Key Term: Commercial Rent Arrears Recovery (CRAR)
A statutory procedure allowing landlords of purely commercial premises to take control of and sell certain tenant goods to recover rent arrears, subject to notice and statutory safeguards. CRAR does not apply to mixed-use premises or to sums other than rent.

Additional enforcement routes include:

• Debt actions for unpaid rent or other liquidated sums.
• Calling on rent deposits.
• Pursuing guarantors directly under their guarantees (subject to statutory limits and anti-avoidance).

Worked Example 1.1

A tenant assigns a lease to a new business owner. The landlord requires the outgoing tenant to enter into an AGA as a condition of giving consent. The new tenant defaults on the repair covenant. Can the landlord pursue the outgoing tenant?

Answer:
Yes, if an AGA is in place, the landlord can enforce the repair covenant against the outgoing tenant insofar as it guarantees the immediate assignee’s performance. Liability under the AGA ends when the immediate assignee lawfully assigns on; the outgoing tenant remains liable for breaches that occurred during the assignee’s tenure covered by the AGA.

Worked Example 1.2

A landlord sells the reversion to a new landlord and serves notice on the tenant seeking release from future landlord covenants. The tenant does not object. Is the outgoing landlord released?

Answer:
Yes, if the landlord serves the statutory notice and the tenant does not object within the statutory four-week window, the outgoing landlord is automatically released from future landlord covenants. The new landlord becomes bound for future performance.

Worked Example 1.3

A landlord wants to recover six months’ rent arrears from a former tenant who gave an AGA when assigning the lease two years ago. What must the landlord do first?

Answer:
The landlord must serve a s17 default notice on the former tenant within six months of each missed rent payment. Without a timely s17 notice, the landlord cannot recover those fixed sums from the former tenant or guarantor. If the former tenant pays, they may require the grant of an overriding lease (s19).

Worked Example 1.4

A tenant assigns in breach of an absolute covenant against assignment. They argue the 1995 Act still releases them automatically. Is the release effective?

Answer:
No. Automatic tenant release applies only to lawful assignments. An assignment in breach of the alienation covenant is unlawful, so the outgoing tenant is not released under s5 and may remain liable for post-assignment breaches.

Exam Warning

For SQE1, always check the date of the lease. The 1995 Act regime applies only to leases granted on or after 1 January 1996. Leases granted before that date follow different rules for liability and release. Also check whether an assignment is lawful; automatic release only follows a lawful assignment.

Practical Implications for Lease Drafting and Transactions

• Draft alienation provisions clearly, specifying whether consent is required and any reasonable conditions (e.g., financial covenants, rent deposit, and where lawful, an AGA for commercial leases). Ensure conditions do not breach the Act’s anti-avoidance rules.
• On assignment, ensure the process is lawful and in accordance with the lease to trigger automatic tenant release. If an AGA is required, verify it relates only to the immediate assignee and mirrors tenant obligations.
• When seeking to recover fixed sums from a former tenant/guarantor, serve s17 notices within six months of the sums falling due and diarise deadlines. If payment is made, be prepared for a request for an overriding lease.
• Landlords selling the reversion should plan the statutory release process, serve notices within four weeks and consider tenant objections. Tenants acquiring the reversion should verify which landlord covenants they will inherit.
• Consider practical enforcement tools: CRAR for rent arrears in purely commercial premises; forfeiture (with attention to waiver risks and statutory notices); self-help for repairs where included; and tailored injunctions/specific performance for ongoing breaches.
• Tenants should understand the scope of user and alterations covenants and the implications of absolute vs qualified restrictions. Obtain consent and ensure it is reasonable in timing and substance.

Revision Tip

Focus on liability sequencing: tenant is released on a lawful assignment unless an AGA is given; landlord may be released on transfer of reversion if the statutory notice is served and no objection is raised; AGAs only cover the immediate assignee; s17 notices are required before fixed sums can be recovered from former tenants/guarantors.

Key Point Checklist

This article has covered the following key knowledge points:

• The 1995 Act applies to “new leases” granted on or after 1 January 1996 and changes liability rules for leasehold covenants.
• Tenants are automatically released from future liability on a lawful assignment of the whole lease, unless an AGA is given; unlawful assignments do not trigger release.
• AGAs must only cover the immediate assignee, be executed as a deed, and cannot impose obligations more onerous than the lease covenants; anti-avoidance rules prevent repeat guarantees and similar devices.
• Landlords can be released from future liability on transfer of reversion if the statutory notice procedure is followed and the tenant does not object (or the court finds release reasonable).
• s17 default notices are mandatory before recovering fixed sums (e.g., rent, service charge) from former tenants/guarantors; payment may entitle the payer to an overriding lease.
• Main types of leasehold covenants include user, repair, and alienation covenants; understand absolute, qualified, and fully qualified structures and reasonableness in consent.
• Remedies for breach include damages, specific performance (rare), injunctions, self-help for repairs where drafted, CRAR for rent arrears in purely commercial premises, and forfeiture (with s146 notices for most breaches).
• Always check lease date, lawfulness of assignment, AGA requirements, and landlord release notices when analysing liability.

Key Terms and Concepts

• leasehold covenant
• assignment
• Authorised Guarantee Agreement (AGA)
• reversion
• user covenant
• repair covenant
• alienation covenant
• qualified covenant
• forfeiture
• s146 notice
• Commercial Rent Arrears Recovery (CRAR)
• default notice (s17)
• overriding lease