Leasehold covenants and issues - Termination of a lease

Learning Outcomes

This article outlines leasehold covenants and termination of a lease, including:

• Absolute, qualified, and fully qualified leasehold covenants, and statutory reasonableness in consent provisions
• Landlord remedies for breach of covenant, including forfeiture, damages, specific performance, injunction, self‑help, CRAR, and actions against former tenants and guarantors
• Common law termination routes (effluxion of time, notice to quit, surrender, merger, forfeiture) versus statutory business tenancy routes under the Landlord and Tenant Act 1954, including s25 and s26 procedures, grounds of opposition, compensation and renewal terms
• Procedures and safeguards for forfeiture (s146 LPA 1925), limits on repair damages (LTA 1927 s18), the Leasehold Property (Repairs) Act 1938, relief from forfeiture, and typical break clause conditions and pitfalls

SQE1 Syllabus

For SQE1, you are required to understand leasehold covenants and the legal processes for terminating a lease, with a focus on the following syllabus points:

• The main types of leasehold covenants (absolute, qualified, fully qualified), and how statutory reasonableness modifies some consent clauses (LTA 1927, LTA 1988)
• The legal remedies available for breach of covenant (forfeiture, damages including the s18 cap for repair, specific performance, injunction, self-help via Jervis v Harris)
• Remedies and tools for rent arrears (CRAR, forfeiture for non-payment, waiver risks)
• Pursuit of former tenants and guarantors (LT(C)A 1995 s17 notices, overriding leases, AGAs)
• The statutory and contractual methods for terminating a lease (surrender, notice to quit, break clauses, forfeiture, frustration in exceptional cases)
• The requirements and procedures under the Landlord and Tenant Act 1954 for terminating business leases (s25 notices, s26 requests, grounds of opposition, compensation, renewal terms, contracting out)
• The effect of leasehold covenants on termination and renewal rights, and typical break clause conditions (vacant possession, payment of sums, compliance obligations)

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 difference between an absolute covenant and a fully qualified covenant in a lease?
2. What must a landlord do before forfeiting a lease for breach of covenant (other than non-payment of rent)?
3. Name two statutory routes for terminating a business lease protected by the Landlord and Tenant Act 1954.
4. True or false? A break clause in a lease can be exercised by either party at any time, regardless of the lease terms.

Introduction

Leasehold covenants are contractual promises in a lease that set out the obligations and rights of both landlord and tenant. The termination of a lease brings the contractual relationship to an end, either by agreement, by operation of law, or by statutory procedure. Being able to analyse the type of covenant, choose the appropriate remedy for breach, and follow the correct termination process is central to resolving lease disputes. In business tenancies, the Landlord and Tenant Act 1954 often prevails over common law termination, and requires strict compliance with notice procedures and grounds of opposition. For repairing breaches, statutory provisions limit damages and can restrict enforcement, and for rent arrears, commercial landlords have both forfeiture and a statutory recovery regime alongside other tools.

Types of Leasehold Covenants

Leasehold covenants regulate the conduct of the parties during the lease term. They may restrict or permit certain actions by the tenant or landlord.

Key Term: absolute covenant
An absolute covenant is a lease provision that completely prohibits a specified action, with no exceptions or possibility of landlord consent.

Key Term: qualified covenant
A qualified covenant prohibits a specified action unless the landlord gives consent. The landlord has discretion to grant or refuse consent.

Key Term: fully qualified covenant
A fully qualified covenant prohibits a specified action unless the landlord gives consent, but the lease expressly states that consent must not be unreasonably withheld or delayed.

Most commercial leases contain a mix of these covenants. Statute may imply a requirement of reasonableness into qualified covenants relating to assignment, underletting, or improvements. In particular, the Landlord and Tenant Act 1927 upgrades certain qualified alienation covenants to require consent not to be unreasonably withheld; and the Landlord and Tenant Act 1988 imposes duties on landlords to deal with written consent applications within a reasonable time, to give written reasons if refusing, and to ensure any conditions imposed are themselves reasonable. Modern leases often stipulate conditions to consent—e.g., delivery of references, a rent deposit, or an Authorised Guarantee Agreement under the 1995 Act—some of which may be expressly stated to be reasonable and are then easier to justify if challenged.

The concept of “improvements” is viewed from the tenant’s position, and statutory rights may allow a tenant, in limited circumstances, to seek authorisation to carry out improvements despite an absolute prohibition against alterations.

Worked Example 1.1

A lease states: "The tenant shall not assign the lease without the landlord's prior written consent, such consent not to be unreasonably withheld." What type of covenant is this?

Answer:
This is a fully qualified covenant, as it requires landlord consent and expressly states that consent cannot be unreasonably withheld.

Remedies for Breach of Covenant

When a tenant breaches a leasehold covenant, the landlord may have several remedies, depending on the nature of the breach and the lease terms.

Forfeiture (Remedy)

Forfeiture is the landlord's right to terminate the lease early due to tenant default.

Key Term: forfeiture
The landlord's right to end the lease and recover possession following a tenant's breach of covenant, subject to statutory procedure.

To forfeit for breach (other than non-payment of rent), the landlord must serve a section 146 notice under the Law of Property Act 1925, specifying the breach and, if capable of remedy, requiring the tenant to remedy it. The tenant may apply for relief from forfeiture, and the court has discretion to grant relief.

Key Term: relief from forfeiture
The court’s discretionary remedy allowing the tenant to have a forfeited lease reinstated, typically on terms (e.g., payment of arrears and costs and remediation of breach).

For non-payment of rent, no section 146 notice is required; however, accepting rent with knowledge of a breach can amount to waiver and prevent immediate forfeiture for that breach. Peaceable re-entry (without force) can be used for commercial premises where appropriate, but possession of dwelling houses must be obtained by court order under the Protection from Eviction Act 1977.

If the breach relates to internal decorative repair, the court may grant statutory relief on reasonableness grounds (LPA 1925 s147). For repairing breaches in longer leases with more than three years unexpired, special protections can apply (see below).

Commercial Rent Arrears Recovery (CRAR)

Key Term: CRAR
A statutory regime enabling a commercial landlord to recover rent arrears by taking control of a tenant’s goods after giving prescribed notice, without court proceedings.

CRAR applies only to pure rent under a written commercial lease. It requires:

• At least seven days’ rent outstanding at service of the enforcement notice and at the time goods are taken
• Seven clear days’ notice of entry
• Use of an authorised enforcement agent
• Limits on items that can be taken (e.g., certain business essentials up to a value threshold)
• Sale (generally by public auction) after giving at least seven clear days’ notice of sale

CRAR cannot be used to recover service charge, insurance rent, or other sums unless expressly reserved as “rent” in the lease and meeting statutory definitions. It can be effective to prompt payment without court action but may strain landlord–tenant relations and negatively impact the tenant’s trading position, so proportionality and timing matter.

Damages

Damages compensate the landlord for loss caused by the breach. The landlord must prove actual loss and mitigate that loss. For repairing breaches, damages are limited by the statutory “diminution in value of the reversion” cap (LTA 1927 s18): the measure is the reduction in the landlord’s freehold or superior leasehold reversion value owing to the disrepair. If the landlord intends to carry out works (e.g., redevelopment) which would render the repairs irrelevant, damages may be reduced accordingly.

Certain long leases with at least three years unexpired are subject to the Leasehold Property (Repairs) Act 1938. When a landlord serves a s146 notice for repairs in such leases, the tenant may counter-notice within 28 days, which typically prevents proceedings (including forfeiture or damages claims) without court leave. The court will only grant leave in specified circumstances (e.g., urgent works needed to prevent substantial diminution in reversionary value).

Specific Performance

Specific performance is an equitable remedy compelling the tenant to comply with a positive covenant. It is only available where damages are inadequate and the obligation is sufficiently clear. While supervision concerns can make orders rare for ongoing repair programs, courts have granted specific performance in exceptional cases. For landlord obligations to repair (common in multi-let buildings), statute may assist; in particular, a court can order specific performance of a landlord’s repairing covenant under the Landlord and Tenant Act 1985.

Injunction

An injunction may restrain the tenant from breaching a negative covenant or require the tenant to take specific action. Where a breach is ongoing or anticipated (e.g., unlawful user, unauthorised assignment), interim injunctive relief can be valuable to prevent worsening loss while a claim is resolved.

Self-Help

Some leases include a self-help clause (often called a Jervis v Harris clause) allowing the landlord to enter the premises, remedy the breach, and recover the cost as a debt.

Key Term: Jervis v Harris clause
A lease provision allowing the landlord to enter, carry out repairs if the tenant fails to do so, and recover the cost as a debt, avoiding statutory limits on damages.

Recovering costs under a self-help clause as a debt avoids the s18 cap on repair damages and may be quicker and more certain than litigating quantum.

Pursuing former tenants and guarantors

Under the Landlord and Tenant (Covenants) Act 1995 (for “new” leases), a landlord seeking to recover fixed charges (e.g., rent, service charge) from a former tenant or former guarantor must first serve a s17 notice within six months of the sum falling due. Payment under a s17 notice may entitle the payer to call for an overriding lease within 12 months, interposing them as immediate landlord of the defaulting tenant and enabling further control (including potential forfeiture and re-letting). Where the outgoing tenant gave an Authorised Guarantee Agreement (AGA), recovery may be possible from that guarantor until the next lawful assignment.

Worked Example 1.2

A tenant fails to repair the roof as required by the lease. The lease contains a Jervis v Harris clause. What can the landlord do?

Answer:
The landlord can serve notice, enter the premises to carry out the repairs, and recover the cost as a debt from the tenant.

Worked Example 1.3

The landlord has not received rent for two months under a written commercial lease. What immediate remedies might be available alongside forfeiture?

Answer:
The landlord may consider CRAR by serving the prescribed enforcement notice and appointing an authorised enforcement agent to take control of goods. Forfeiture for non-payment can also be pursued (no s146 notice required), subject to avoiding waiver and ensuring any peaceable re-entry is lawful.

Exam Warning

Forfeiture for breach of covenant (other than non-payment of rent) requires strict compliance with section 146 LPA 1925. Failure to serve a valid notice may invalidate the forfeiture. Accepting rent after knowledge of a breach may waive the right to forfeit for that breach.

Termination of a Lease

A lease may be terminated in several ways, either by agreement, by operation of law, or by statutory procedure.

Surrender

Surrender is the mutual agreement between landlord and tenant to end the lease before its expiry.

Key Term: surrender
The consensual termination of a lease before its contractual end, usually by deed.

Surrender may be express (by deed) or implied (by conduct, such as the tenant yielding up possession and the landlord unequivocally accepting it). Where no deed is executed but the landlord accepts possession at the tenant’s request, an estoppel can arise preventing either party from denying the surrender. On surrender of a headlease, any subtenancy will usually drop away; however, where the headlease is surrendered, subtenants generally become direct tenants of the head landlord on the same sublease terms.

Notice to Quit

A periodic tenancy may be terminated by either party serving a valid notice to quit, complying with statutory notice periods and common law rules (typically at least one full period expiring at the end of a period, with six months for yearly tenancies). Dwellings may require minimum statutory periods and compliance with residential regimes.

Break Clause

Key Term: break clause
A contractual provision giving one or both parties the right to terminate the lease early on specified dates, subject to any conditions.

A break clause allows either party to terminate the lease early, but only in accordance with the lease terms (e.g., notice period, form and service, and any conditions precedent). Common break conditions include payment of all “rent due” to the break date, delivering vacant possession, and compliance with covenants up to the break date. Conditions are strictly construed: failure to satisfy them can invalidate the break even if the notice itself is validly served.

Frustration

Frustration is rare in leases. It may apply if an unforeseen event makes performance impossible, but courts are reluctant to find frustration in leasehold cases. Most leases allocate risk (e.g., via insurance and rent suspension provisions) to avoid frustration operating.

Forfeiture

As above, forfeiture is a landlord remedy for tenant breach, ending the lease and recovering possession where properly exercised.

Statutory Termination – Landlord and Tenant Act 1954

For business leases protected by the Landlord and Tenant Act 1954, termination is governed by statute.

Key Term: Landlord and Tenant Act 1954
Legislation granting business tenants security of tenure and setting out procedures for termination and renewal of business leases.

A protected business tenancy does not end at expiry but continues until terminated by one of the statutory methods:

• Landlord's section 25 notice (specifying termination date and, if opposed, grounds for refusal)
• Tenant's section 26 request (requesting a new tenancy)
• Surrender or forfeiture
• Tenant's notice to quit (periodic tenancy)
• Tenant ceasing occupation at expiry (fixed term: s27(1A))

Key Term: section 25 notice
Landlord’s notice to terminate a protected tenancy, either proposing terms for a new tenancy (non-hostile) or opposing renewal on statutory grounds (hostile), specifying a termination date at least six and not more than twelve months ahead.

Key Term: section 26 request
Tenant’s notice requesting a new tenancy of a protected business lease, specifying a proposed commencement date at least six and not more than twelve months ahead, which must not be earlier than the common law termination date.

The landlord may oppose renewal only on specific statutory grounds (e.g., tenant’s failure to repair or other substantial breach, persistent delay in paying rent, suitable alternative accommodation, landlord’s intention to occupy, or to demolish/reconstruct). Ground (g) (intention to occupy) is subject to the “five-year rule”: the landlord must have owned the superior interest for at least five years when the existing tenancy ends. Ground (f) (redevelopment) requires genuine intention and ability to carry out substantial works and proof that possession is reasonably required to implement them; a tenant may resist under s31A if the landlord could reasonably carry out the works with appropriate rights of entry without obtaining possession and without substantially interfering with the tenant’s use.

A non-hostile s25 notice or a s26 request starts a timetable within which court applications must be made to safeguard rights; the parties may agree extensions before the deadline. If renewal proceeds, the court will set terms (including rent) under the Act.

Key Term: compensation (LTA 1954)
Statutory payment due to a tenant when renewal is refused on specified “no-fault” grounds (e.g., redevelopment or landlord’s intention to occupy), calculated by reference to the property’s rateable value; “double compensation” is payable if the tenant has been in occupation for 14 years or more.

Worked Example 1.4

A business lease protected by the Landlord and Tenant Act 1954 expires. The landlord serves a section 25 notice opposing renewal on the ground of redevelopment. What must the landlord show?

Answer:
The landlord must prove a genuine intention and ability to redevelop the premises, and that possession is reasonably required to carry out the works. The tenant may resist if reasonable works could be done without obtaining possession (s31A).

Terms of renewal

If a renewal lease is granted, the term must be reasonable and may not exceed 15 years. The rent is assessed on an open market basis, disregarding the tenant’s occupation and goodwill, voluntary improvements, and certain licences, and may include rent review provisions. Changes to other terms compared to the existing lease will only be allowed if fair and reasonable in all the circumstances; the party seeking a departure bears the burden of justifying new clauses or more onerous variations.

Contracting out of the 1954 Act

Business tenants can waive security of tenure but only by following the prescribed “contracting out” procedure before the lease is granted or before the tenant becomes contractually bound to take it. The landlord must serve the statutory warning notice, and the tenant must make the appropriate declaration (simple or statutory depending on timing). If correctly executed, the lease will end on the contractual expiry date without statutory rights.

Worked Example 1.5

A tenant wants to exercise a break clause requiring “all rent due up to the break date to be paid, vacant possession, and compliance with covenants.” The tenant has underpaid a small amount of insurance rent reserved as “rent.” Will the break be effective?

Answer:
If the clause requires payment of “all sums reserved as rent,” a shortfall in insurance rent may prevent the break operating, even if the underpayment is small. Break conditions are construed strictly; tenants should reconcile and pay all rent items well before the break date and address any disputed sums appropriately.

Worked Example 1.6

A tenant serves a section 26 request proposing a new tenancy start date 10 months ahead. Two weeks later, the landlord serves a hostile section 25 notice. What is the effect?

Answer:
The tenant’s s26 request takes precedence. The landlord must oppose renewal by serving a counter-notice within two months of the s26 request and then pursue opposition in court. The parties can agree extensions of the application deadline, but if not, the tenant must apply before the proposed s26 commencement date.

Worked Example 1.7

A landlord successfully opposes renewal on ground (g) (intention to occupy) for a tenant in continuous occupation for 16 years. Is compensation payable?

Answer:
Yes. Ground (g) is a mandatory “no‑fault” ground and attracts compensation. Because the tenant has been in occupation for more than 14 years, double compensation is payable, calculated by reference to the property’s rateable value.

Revision Tip

Always check whether a business lease is contracted out of the 1954 Act. If so, the tenant has no statutory right to renewal or compensation.

Summary Table: Lease Termination Methods

Key Point Checklist

This article has covered the following key knowledge points:

• Leasehold covenants may be absolute, qualified, or fully qualified; consent duties are shaped by LTA 1927 and LTA 1988.
• Remedies for breach include forfeiture, damages (with s18 cap for repair), specific performance, injunction, and self-help.
• CRAR allows recovery of pure rent arrears under written commercial leases without court action, subject to statutory safeguards.
• Forfeiture for breach (other than non-payment of rent) requires a valid section 146 notice; accepting rent may waive the right to forfeit for a known breach.
• Repair enforcement in certain long leases may be restricted by the Leasehold Property (Repairs) Act 1938; tenants can counter-notice.
• Landlords can pursue former tenants or guarantors, but must serve a s17 notice (LT(C)A 1995) within six months; payment may trigger rights to an overriding lease.
• Leases may be terminated by surrender, notice to quit, break clause, forfeiture, frustration in rare cases, or statutory procedure.
• The Landlord and Tenant Act 1954 governs termination and renewal of business leases, including s25 notices, s26 requests, grounds of opposition, compensation, and renewal terms.
• Contracting out of the 1954 Act requires strict pre-grant notices and declarations.
• Break clauses are construed strictly; satisfy all conditions (rent, vacant possession, compliance) to ensure efficacy.

Key Terms and Concepts

• absolute covenant
• qualified covenant
• fully qualified covenant
• forfeiture
• relief from forfeiture
• Jervis v Harris clause
• CRAR
• surrender
• section 25 notice
• section 26 request
• compensation (LTA 1954)
• Landlord and Tenant Act 1954
• break clause

Worked Example 1.8

Following a tenant’s assignment, the new tenant fails to pay rent. The lease is a “new lease” (post‑1995) and the outgoing tenant gave an AGA. What must the landlord do to recover arrears from the former tenant or guarantor?

Answer:
The landlord must serve a s17 notice (LT(C)A 1995) within six months of each fixed charge falling due. If the former tenant or guarantor pays, they can demand an overriding lease within 12 months, making them immediate landlord of the defaulting tenant.