Leasehold covenants and issues - Remedies for breach of leasehold covenants

Learning Outcomes

After studying this article, you will be able to: identify and define leasehold covenants; distinguish liability rules for pre- and post-1996 leases; explain the function of Authorised Guarantee Agreements (AGAs); and select and apply the main legal remedies for breach of leasehold covenants, including forfeiture, damages, specific performance, and Commercial Rent Arrears Recovery (CRAR), in line with SQE1 assessment requirements.

SQE1 Syllabus

For SQE1, you are required to understand leasehold covenants and remedies for breach from a practical standpoint. As you work through this article, focus your revision on:

  • The nature and types of leasehold covenants (positive and negative)
  • Liability for leasehold covenants in leases granted before and after 1 January 1996
  • The operation and effect of Authorised Guarantee Agreements (AGAs)
  • The main remedies available for breach of leasehold covenants, including forfeiture, damages, specific performance, Commercial Rent Arrears Recovery (CRAR), and debt actions
  • The procedural requirements and practical considerations for each remedy

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 of the following best describes the effect of an Authorised Guarantee Agreement (AGA) in a post-1996 lease?
    1. The outgoing tenant guarantees all future tenants
    2. The outgoing tenant guarantees the immediate assignee only
    3. The outgoing tenant is automatically released from all liability
    4. The landlord is released from all liability
  2. What is the primary statutory notice a landlord must serve before seeking forfeiture for breach of a non-rent covenant?
    1. Section 17 notice
    2. Section 146 notice
    3. Section 25 notice
    4. Section 19 notice
  3. Which remedy allows a landlord of commercial premises to seize and sell a tenant’s goods for unpaid rent?
    1. Debt action
    2. Forfeiture
    3. Commercial Rent Arrears Recovery (CRAR)
    4. Specific performance

  4. True or false? Under a pre-1996 lease, the original tenant remains liable for all tenant covenants for the entire lease term, even after assignment.

Introduction

Leasehold covenants are contractual promises in leases that set out the obligations and restrictions binding landlords and tenants. Understanding the types of covenants, who is liable for them over time, and the remedies available for breach is essential for SQE1 Property Practice.

Types of Leasehold Covenants

Leasehold covenants fall into two main categories: positive covenants and negative (restrictive) covenants.

Key Term: positive covenant
A promise in a lease requiring a party (usually the tenant) to do something, such as pay rent, repair the premises, or comply with statutory requirements.

Key Term: negative covenant
A promise in a lease not to do something, such as not to sublet without consent or not to use the premises for certain purposes.

Liability for Leasehold Covenants

Liability for leasehold covenants depends on when the lease was granted and whether the lease has been assigned.

Pre-1996 Leases (Old Leases)

For leases granted before 1 January 1996, the original tenant remains liable for all tenant covenants for the entire lease term, even after assigning the lease. This is due to privity of contract. Successive tenants are liable for covenants that "touch and concern" the land while they hold the lease (privity of estate).

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

Key Term: privity of estate
The legal relationship between a landlord and the current tenant, making the tenant liable for covenants that run with the land while they hold the lease.

Post-1996 Leases (New Leases)

The Landlord and Tenant (Covenants) Act 1995 changed the rules for leases granted on or after 1 January 1996. The original tenant is automatically released from future liability on lawful assignment, unless required to enter into an Authorised Guarantee Agreement (AGA).

Key Term: Authorised Guarantee Agreement (AGA)
An agreement where the outgoing tenant guarantees the immediate assignee’s performance of the lease covenants until the assignee lawfully assigns the lease or is released.

Remedies for Breach of Leasehold Covenants

When a tenant breaches a leasehold covenant, the landlord may have several remedies. The appropriate remedy depends on the nature of the breach, the lease terms, and statutory requirements.

Forfeiture

Forfeiture allows the landlord to terminate the lease early due to tenant default. This remedy must be expressly provided for in the lease (a forfeiture or re-entry clause). For non-payment of rent, forfeiture can be exercised after the rent is overdue for the period specified in the lease. For other breaches, the landlord must serve a section 146 notice under the Law of Property Act 1925, specifying the breach, requiring remedy (if possible), and demanding compensation.

Key Term: forfeiture
The landlord’s right to end the lease early if the tenant breaches a covenant, usually after following statutory notice procedures.

Damages

Damages are a monetary remedy for loss caused by the tenant’s breach. The landlord must prove actual loss and mitigate losses where possible. For breach of repairing covenants, damages may be limited by statute (e.g., s.18 Landlord and Tenant Act 1927).

Key Term: damages
A sum of money awarded to compensate for loss resulting from a breach of covenant.

Specific Performance

Specific performance is an equitable remedy ordering the tenant to comply with their obligations. It is only granted where damages are inadequate and the obligation is sufficiently clear.

Key Term: specific performance
A court order requiring a party to perform their contractual obligations under the lease.

Commercial Rent Arrears Recovery (CRAR)

CRAR allows landlords of commercial premises to recover rent arrears by seizing and selling the tenant’s goods. Strict statutory procedures apply, including notice and use of enforcement agents.

Key Term: Commercial Rent Arrears Recovery (CRAR)
A statutory process allowing commercial landlords to take control of and sell a tenant’s goods to recover unpaid rent.

Debt Action

A landlord can sue the tenant for unpaid rent or other liquidated sums due under the lease (e.g., service charges). This is a straightforward contractual claim.

Key Term: debt action
A court claim for recovery of a fixed sum owed under the lease, such as rent or service charges.

Pursuing Former Tenants and Guarantors

For old leases, the landlord can pursue the original tenant or any intermediate tenant who gave a direct covenant. For new leases, the landlord can pursue the outgoing tenant under an AGA, but only after serving a section 17 notice within six months of the arrears arising.

Key Term: section 17 notice
A statutory notice served by the landlord on a former tenant or guarantor of a new lease, required before recovering fixed sums (e.g., rent) from them.

Practical Considerations in Remedy Selection

The landlord should consider the seriousness of the breach, the tenant’s financial position, the cost and time involved, and the impact on the landlord-tenant relationship when choosing a remedy.

Worked Example 1.1

A landlord discovers that a tenant of a commercial unit has sublet the premises without consent, breaching a negative covenant. The lease contains a forfeiture clause.

Question: What steps must the landlord take before forfeiting the lease?

Answer: The landlord must serve a section 146 notice specifying the breach, requiring the tenant to remedy it (if possible), and demanding compensation. If the tenant fails to comply within a reasonable time, the landlord may proceed to forfeit the lease.

Worked Example 1.2

A tenant of a shop is six months in arrears with rent. The landlord wishes to recover the arrears quickly.

Question: What remedies are available, and what are the key procedural requirements?

Answer: The landlord may use CRAR (if the premises are wholly commercial), following the statutory notice and enforcement procedure. Alternatively, the landlord may bring a debt action for the arrears or, if the lease allows, forfeit the lease after the rent has been overdue for the required period.

Worked Example 1.3

A landlord of a pre-1996 lease wishes to recover unpaid rent from a former tenant who assigned the lease ten years ago.

Question: Is this possible, and what must the landlord prove?

Answer: Yes, the landlord can pursue the original tenant due to privity of contract. The landlord must show that the arrears arose during the lease term and that the original tenant has not been released.

Exam Warning

Forfeiture is only available if the lease expressly provides for it. For breaches other than non-payment of rent, a section 146 notice is required. Relief from forfeiture may be available to the tenant, so landlords should consider the likelihood of the tenant remedying the breach before proceeding.

Revision Tip

For SQE1, be able to distinguish between the remedies available for non-payment of rent and those for other breaches, and know the statutory notice requirements for each.

Key Point Checklist

This article has covered the following key knowledge points:

  • Leasehold covenants are promises in leases that may be positive or negative.
  • Liability for leasehold covenants differs for pre- and post-1996 leases.
  • Authorised Guarantee Agreements (AGAs) may be required on assignment of new leases.
  • Main remedies for breach include forfeiture, damages, specific performance, CRAR, and debt actions.
  • Forfeiture requires a valid clause and, for non-rent breaches, a section 146 notice.
  • Damages may be limited by statute for repairing covenants.
  • CRAR is available only for commercial premises and unpaid rent, following strict procedure.
  • Section 17 notice is required before pursuing former tenants or guarantors for fixed sums under new leases.

Key Terms and Concepts

  • positive covenant
  • negative covenant
  • privity of contract
  • privity of estate
  • Authorised Guarantee Agreement (AGA)
  • forfeiture
  • damages
  • specific performance
  • Commercial Rent Arrears Recovery (CRAR)
  • debt action
  • section 17 notice
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