Learning Outcomes
After studying this article, you will be able to explain the main options for the term of a lease or underlease, distinguish between legal and equitable leases, and understand the effect of privity of contract and estate. You will also be able to identify how alteration covenants operate, and apply the relevant statutory and contractual rules to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the options for the term of a lease or underlease, and the legal implications of each. You should be able to distinguish between legal and equitable leases, explain privity of contract and estate, and apply the statutory rules relating to alterations and improvements.
As you work through this article, focus your revision on:
- The main types of lease term (fixed, periodic, tenancy at will) and their legal consequences
- The distinction between legal and equitable leases, and the requirements for each
- The operation of privity of contract and privity of estate in leases and assignments
- The effect of the Landlord and Tenant (Covenants) Act 1995 on lease assignments and guarantees
- The statutory and contractual rules governing alterations and improvements to leased property
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 are the main differences between a legal lease and an equitable lease?
- What is privity of contract and how does it affect liability after a lease is assigned?
- What statutory rule modifies an absolute covenant against alterations in a lease?
- What is the effect of an Authorised Guarantee Agreement (AGA) under the Landlord and Tenant (Covenants) Act 1995?
- What is the minimum formality required to create a legal lease for more than three years?
Introduction
When granting a lease or underlease, the parties must decide the term—how long the arrangement will last. The term chosen affects the legal status of the lease, the rights and obligations of the parties, and the formalities required. Understanding the available options, and the legal consequences of each, is essential for SQE1.
Types of Lease Terms
The term of a lease can be fixed, periodic, or at will. The choice of term affects the parties' flexibility, the statutory protections available, and the requirements for creation and registration.
Key Term: fixed term lease A lease granted for a specified period (e.g. 1 year, 10 years, 99 years), which ends automatically when the period expires.
Key Term: periodic tenancy A lease that continues from one period to the next (e.g. monthly, yearly) until terminated by notice.
Key Term: tenancy at will An arrangement where the tenant occupies with the landlord's consent, but either party can terminate at any time.
Fixed Term Leases
A fixed term lease gives certainty to both landlord and tenant. It may be for any length, from a few months to many years. At the end of the term, the lease ends automatically unless renewed.
Periodic Tenancies
A periodic tenancy continues indefinitely, renewing each period (e.g. monthly, yearly) until notice is given. It may arise expressly or by implication (e.g. where a tenant remains in occupation and pays rent after a fixed term expires).
Tenancy at Will
A tenancy at will is highly flexible but precarious. Either party can terminate at any time, and it does not provide security of tenure.
Worked Example 1.1
A landlord grants a lease to a tenant for a term of 18 months. The lease is silent on renewal. What happens at the end of the 18 months?
Answer: The lease ends automatically by effluxion of time. The tenant must vacate unless a new agreement is reached.
Legal and Equitable Leases
The distinction between legal and equitable leases is critical for enforceability and third-party rights.
Key Term: legal lease A lease created by deed (if for more than three years), which is capable of being registered and binds third parties.
Key Term: equitable lease A lease that arises where the formalities for a legal lease are not met, but there is a valid contract for a lease that equity will enforce.
Legal Lease Requirements
A legal lease for more than three years must be created by deed. If the lease is for more than seven years, it must also be registered at HM Land Registry to take effect as a legal estate.
Equitable Lease
If the parties have a valid contract for a lease, but do not use a deed, or fail to register a registrable lease, equity may still recognise the arrangement as an equitable lease. This is enforceable between the parties and may bind third parties if protected by registration.
Worked Example 1.2
A landlord and tenant agree in writing to a five-year lease, but do not execute a deed. The tenant moves in and pays rent. What type of lease exists?
Answer: The arrangement is not a legal lease (no deed), but may be an equitable lease if the contract is valid and enforceable.
Privity of Contract and Estate
When a lease is assigned, liability for lease covenants depends on privity of contract and privity of estate.
Key Term: privity of contract The legal relationship between the original parties to the lease, making them liable for the lease covenants.
Key Term: privity of estate The legal relationship between the current landlord and current tenant, making them liable for covenants that "touch and concern" the land.
Assignments and Continuing Liability
Under the Landlord and Tenant (Covenants) Act 1995, for leases granted on or after 1 January 1996, the original tenant is released from future liability on assignment, unless required to enter into an Authorised Guarantee Agreement (AGA).
Key Term: Authorised Guarantee Agreement (AGA) An agreement by which an outgoing tenant guarantees the immediate assignee's performance of the lease covenants.
Worked Example 1.3
A tenant assigns a commercial lease (granted in 2000) to a new tenant. The landlord requires the outgoing tenant to enter into an AGA. What is the effect?
Answer: The outgoing tenant guarantees the immediate assignee's performance of the lease covenants until the assignee assigns the lease or the lease ends.
Alterations and Improvements
Leases often restrict the tenant's ability to make alterations. The law distinguishes between absolute, qualified, and fully qualified covenants.
Key Term: absolute covenant A lease provision that prohibits an action (e.g. alterations) entirely, with no exceptions.
Key Term: qualified covenant A lease provision that allows an action (e.g. alterations) only with the landlord's consent.
Key Term: fully qualified covenant A lease provision that allows an action with the landlord's consent, and states that consent must not be unreasonably withheld.
Statutory Modification
Section 19(2) of the Landlord and Tenant Act 1927 upgrades a qualified covenant against improvements to a fully qualified covenant. The landlord's consent cannot be unreasonably withheld for improvements.
Section 1 of the Landlord and Tenant Act 1988 requires the landlord to give consent within a reasonable time and to provide reasons if consent is withheld.
Worked Example 1.4
A lease contains a qualified covenant: "The tenant shall not make structural alterations without the landlord's consent." The tenant requests consent to install a new shopfront. The landlord refuses without explanation. Is this lawful?
Answer: No. For improvements, the landlord's consent cannot be unreasonably withheld, and reasons must be given if consent is refused.
Exam Warning
For SQE1, be careful to distinguish between absolute, qualified, and fully qualified covenants. Statutory rules may upgrade a qualified covenant to a fully qualified one for improvements, but not for all alterations.
Summary
| Lease Type | Creation/Formality | Security of Tenure | Registration Required |
|---|---|---|---|
| Fixed term | Deed (if >3 years) | Yes (if >6 months) | Yes (if >7 years) |
| Periodic | Express/implied, writing | Yes (if >6 months) | No (unless expressly granted) |
| Tenancy at will | Oral or in writing | No | No |
| Legal lease | Deed (if >3 years) | Yes | Yes (if >7 years) |
| Equitable lease | Valid contract | Yes (if >6 months) | Should be protected by notice |
Key Point Checklist
This article has covered the following key knowledge points:
- The main options for the term of a lease are fixed term, periodic, and tenancy at will.
- Legal leases require a deed if for more than three years, and registration if for more than seven years.
- Equitable leases arise where a valid contract exists but legal formalities are not met.
- Privity of contract and estate determine liability for lease covenants after assignment.
- The Landlord and Tenant (Covenants) Act 1995 releases tenants from future liability on assignment, subject to AGAs.
- Alteration covenants may be absolute, qualified, or fully qualified; statutory rules may upgrade qualified covenants for improvements.
Key Terms and Concepts
- fixed term lease
- periodic tenancy
- tenancy at will
- legal lease
- equitable lease
- privity of contract
- privity of estate
- Authorised Guarantee Agreement (AGA)
- absolute covenant
- qualified covenant
- fully qualified covenant
