Learning Outcomes
After studying this article, you will be able to explain the legal framework for leasehold covenants in leases granted on or after 1 January 1996, including the effect of the Landlord and Tenant (Covenants) Act 1995, the operation of automatic release for tenants and landlords, the use and requirements of Authorised Guarantee Agreements (AGAs), and the main enforcement and practical issues arising from leasehold covenants for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the legal regime for leasehold covenants in leases granted on or after 1 January 1996, 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.
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.
- What is the effect of the Landlord and Tenant (Covenants) Act 1995 on a tenant’s liability for lease covenants after a lawful assignment?
- In what circumstances can a landlord require an outgoing tenant to enter into an Authorised Guarantee Agreement (AGA)?
- What is the main difference between a user covenant and a repair covenant in a lease?
- 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”). This Act fundamentally changed the rules on liability for leasehold covenants, introducing automatic release for tenants and landlords on assignment or transfer of reversion, and regulating the use of Authorised Guarantee Agreements (AGAs). Understanding these changes is essential for SQE1, as they affect the rights and obligations of both parties and the enforcement of leasehold covenants in modern leases.
Leasehold Covenants: The 1995 Act Regime
The Scope of the 1995 Act
The 1995 Act applies to all leases (including underleases and subleases) granted on or after 1 January 1996. The Act does not apply retrospectively to leases granted before that date. The Act covers all covenants in the lease, whether positive or negative, unless expressly stated to be personal.
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.
Automatic Release of Tenants on Assignment
A key feature of the 1995 Act is that a tenant is automatically released from liability for leasehold covenants upon a lawful assignment of the lease. This means that, after assignment, the outgoing tenant is no longer liable for breaches of covenant occurring after the assignment, unless an AGA is in place.
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.
Authorised Guarantee Agreements (AGAs)
To protect landlords from the risk of default by an incoming tenant, the 1995 Act allows landlords to require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) as a condition of giving consent to assignment, provided this is reasonable or expressly required by the lease.
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 released.
An AGA must only relate to the immediate assignee and cannot extend to future assignees. It must be executed as a deed and comply with any statutory requirements.
Release of Landlords on Transfer of Reversion
The 1995 Act also provides for the automatic release of landlords from liability for landlord covenants upon a lawful transfer of the reversion (the landlord’s interest), provided the correct notice procedure is followed.
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.
A landlord seeking release must serve notice on the tenant before or within four weeks of the transfer. If the tenant objects, the landlord may apply to court for a declaration that release is reasonable.
Main Types of Leasehold Covenants
Leasehold covenants regulate the use, occupation, and management of the premises. The most common types are:
User Covenants
User covenants restrict the use of the premises to a particular purpose (e.g., “as a shop” or “as offices only”). Breach of a user covenant may entitle the landlord to remedies, including forfeiture.
Key Term: user covenant
A leasehold covenant restricting the permitted use of the premises.
Repair Covenants
Repair covenants require the tenant (or sometimes the landlord) to keep the premises in a specified state of repair. The standard of repair is determined by the wording of the covenant and the condition of the premises at the start of the lease.
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 control the tenant’s ability to assign, sublet, or otherwise dispose of the lease. Most leases require landlord’s consent for assignment or subletting, and may specify conditions (such as providing an AGA).
Key Term: alienation covenant
A leasehold covenant restricting or regulating the tenant’s ability to assign, sublet, or otherwise deal with the lease.
Enforcement and Remedies
Enforcement Against the Tenant
The landlord can enforce leasehold covenants directly against the current tenant. If an AGA is in place, the landlord may also enforce against the outgoing tenant for breaches by the immediate assignee during the period covered by the AGA.
Enforcement Against the Landlord
The tenant may enforce landlord covenants (such as to repair or insure) against the current landlord. After a transfer of reversion, the outgoing landlord is released from future liability if the statutory notice procedure is followed.
Remedies for Breach
Remedies for breach of leasehold covenants include:
- Damages for loss suffered.
- Specific performance (rare, usually for repair).
- Injunctions (to prevent ongoing or future breaches).
- Forfeiture (termination of the lease), usually for serious or persistent breaches.
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.
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 for breaches by the immediate assignee during the period 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 notice and the tenant does not object within four weeks, the outgoing landlord is automatically released from future landlord covenants.
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.
Practical Implications for Lease Drafting and Transactions
- Lease drafting must clearly state any conditions for assignment, including whether an AGA is required.
- On assignment, the outgoing tenant should be aware of the extent and duration of any guarantee given under an AGA.
- Landlords should follow the statutory notice procedure to obtain release on transfer of reversion.
- Both parties should understand the remedies available for breach of leasehold covenants, including the limitations on forfeiture and the requirements for relief.
Revision Tip
For SQE1, focus on the sequence of liability: tenant is released on assignment unless an AGA is given; landlord is released on transfer of reversion if notice is served and not objected to; AGAs only cover the immediate assignee.
Key Point Checklist
This article has covered the following key knowledge points:
- The 1995 Act applies to leases granted on or after 1 January 1996 and changes the rules on liability for leasehold covenants.
- Tenants are automatically released from future liability on lawful assignment, unless an AGA is given.
- Landlords can be released from future liability on transfer of reversion if the statutory notice procedure is followed.
- AGAs must only cover the immediate assignee and must be executed as a deed.
- Main types of leasehold covenants include user, repair, and alienation covenants.
- Remedies for breach include damages, specific performance, injunctions, and forfeiture.
- For SQE1, always check the lease date and the requirements for AGAs and landlord release.
Key Terms and Concepts
- leasehold covenant
- assignment
- Authorised Guarantee Agreement (AGA)
- reversion
- user covenant
- repair covenant
- alienation covenant
- forfeiture
