Leases Assignments and Subletting PDF

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Leases Assignments and Subletting...

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Lecture 11- Leases Assignments and Subletting  Will finish off with leases, talking about leases, assignment and subletting

Assignment and Subletting  We had identified the issue of the enforceability of covenants in leases, after subletting or assignment, and in particular had given the basic rule that covenants in a lease are enforceable between the landlord and tenant of that lease We looked at the 2 principle forms of alienation: - Subletting - Assignment Covenants are enforceable between the Landlord and Tenant- even after a Sublease; L can enforce against T; and T can enforce against S - The way that this basic rule that covenants in a lease are enforceable between a landlord and tenant of that lease; for example if L grants a lease to T and T is subletting to S, even after the subletting, there is a headlease between L and T, and the covenants are enforceable between the landlord and tenants of that lease, so L can enforce covenants against T, and in terms of the sublease (although deritive of the headlease), T can enforce covenants against S.

Subletting- Reservation of Rent

 You can see this in the landlord’s example of the reservation of rent- rent under the headlease will be paid from T to L, and rent under the sublease will be paid from S to T, and there is no direct connection from L to S, which is the main principle for subletting.

Assignment- Covenants Enforceable Against L and A Directly as there is only one Lease and that has been Assigned  In the case of assignment, there is only one lease, the lease that has been assigned from T to A, and the covenants are enforceable between L and A directly. For example, if someone sells the flat, or if TYAC moved to new premises, this would be an example of the assignment of a lease.

This Rule has been in Place from the 16th Century: -

The rule has been in place from the end of the 16th Century, but has gone through various manifestations and variations Traditionally, the basic rule that covenants are enforceable between landlord and tenant is called privaty of estate.

Privaty of Estate- Covenants are Enforceable between the Landlord and Tenant:

The tenant is liable on the covenants, provided that two tests are satisfied: 1. There is privaty of estate between the landlord and tenant. This originally meant the parties holding the legal estate (the original landlord and tenant), but this principle has been extended to assignee tenants and landlord. (s141, LPA 1925) 1. The covenants ‘touching and concerning the land; (Spencers case); e.g. covenants to pay rent, user covenants

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Privity of estate • Spencer’s Case • s141 and 142 LPA • ‘touching and concerning the land’ / ‘having reference to the subject matter of the lease’ 

This means a landlord and tenant relationship

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For example, an assignee is in a landlord and tenant relationship with a lessor, albeit she is not in a contractual relationship with a lessor Privaty of estate is an extremely convenient proposition; even after the assignment, the landlord can get the rent out of the new tenant, and the proposition is usually derived from Spencer’s Case, at the end of the 16th Century

Spencer's Case (1583): The covenants must touch and concern the land to be enforceable

 In certain instances, the basic rule of privaty of estate, covenants enforceable between landlord and tenant, has had more recently has been put on a more statutory basis:

Sections 141 and 142 of the Law of Property Act 1925- The Assignment of Reversion 

In 1925, in Sections 141 and 142 of the Law of Property Act, the basic rule was put on a statutory basis, but only with regard to the assignment of the reversion, not assignment of the lease.

The Other Possible Assignment: the Assignment of Reversion: 

The basic rule in s141/142 LPA 1925, is the other possible assignment which is the assignment of reversion, and this since 1925 has been on a statutory basis in sections 141 and 142

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Where enforceability of a covenant is dependant on a privaty of estate relationship, in the absence of the contract (after an assignment, after an assignment of the lease or the reversion that an assignee will be in a landlord and tenant relationship, although not in a contractual relationship), where there is no privaty of contract, there’s a technical limit on the range of covenants which are enforceable, and this is in Spencer’s Case

The Landlord may be Liable to Tenant 2 Under Section 142:  The landlord can enforce covenants which have reference to the subject matter of the lease’ (S 141, LPA 1925)  This term means fundamentally the same as the common law term ‘touch and concern’ and is a useful guide in cases involving tenants covenants

141.— Rent and benefit of lessee's covenants to run with the reversion. (1) Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject-matter thereof, and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein contained, shall be annexed and incident to and shall go with the reversionary estate in the land, or in any part thereof, immediately expectant on the term granted by the lease, notwithstanding severance of that reversionary estate, and without prejudice to any liability affecting a covenantor or his estate. (2) Any such rent, covenant or provision shall be capable of being recovered, received, enforced, and taken advantage of, by the person from time to time entitled, subject to the term, to the income of the whole or any part, as the case may require, of the land leased. (3) Where that person becomes entitled by conveyance or otherwise, such rent, covenant or provision may be recovered, received, enforced or taken advantage of by him notwithstanding that he becomes so entitled after the condition of re-entry or forfeiture has become enforceable, but this subsection does not render enforceable any condition of re-entry or other condition waived or released before such person becomes entitled as aforesaid. (4) This section applies to leases made before or after the commencement of this Act, but does not affect the operation of— (a) any severance of the reversionary estate; or (b) any acquisition by conveyance or otherwise of the right to receive or enforce any rent covenant or provision; effected before the commencement of this Act.

142.— Obligation of lessor's covenants to run with reversion. (1) The obligation under a condition or of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by

the lease, be annexed and incident to and shall go with that reversionary estate, or the several parts thereof, notwithstanding severance of that reversionary estate, and may be taken advantage of and enforced by the person in whom the term is from time to time vested by conveyance, devolution in law, or otherwise; and, if and as far as the lessor has power to bind the person from time to time entitled to that reversionary estate, the obligation aforesaid may be taken advantage of and enforced against any person so entitled. (2) This section applies to leases made before or after the commencement of this Act, whether the severance of the reversionary estate was effected before or after such commencement: Provided that, where the lease was made before the first day of January eighteen hundred and eighty-two, nothing in this section shall affect the operation of any severance of the reversionary estate effected before such commencement. This section takes effect without prejudice to any liability affecting a covenantor or his estate.

Spencer’s Case- Only Covenants which ‘Touch and Concern the Land’ are Enforceable 

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Under Spencer’s case, it is normally said that where there is privaty of estate (landlord and tenant relationship), but not privaty of contract, it’s only those covenants which ‘touch and concern’ the land which are enforceable The statutory language in sections 141 and 142, is covenants having reference to the subject matter of the lease In most circumstances, obviously most covenants in a lease has reference to the subject matter of the lease, and in most circumstances, that limitation of the covenants that are enforceable in the privaty of contract is no big deal, but where there is another deal going on at the same time, sometimes that limitation is import So the basic rule of the enforceability between landlord and tenant even where there is no contractual relationship, has historically been a question of the common law question of privaty or estate, and has been put on a statutory footing, for an assignment of the reversion in 1925.

Modern Leases are Governed Under the Landlord and Tenant Covenants Act 1995  (Leases entered into on or after the first of January 1996, are governed instead by section 3 of the Landlord and Tenant Covenants Act 1995  Therefore, the basic rule that we used to call privaty of estate we now call section 3 of the Landlord and Tenant Covenants Act 1995

Privaty of Estate is now Section 3 of the Landlord and Tenant Covenants Act 1995 ‘the benefit of all landlord and tenant covenants of a tenancy…shall in accordance with this section pass on an assignment of the whole or any part of the premises or the reversion of them’

 In these marginal cases where you’ve got some arrangement between the landlord and tenant, which isn’t directly to do with the lease, then the range is set a bit more widely by Section 3, when it talks about landlord and tenant covenants, rather than covenants touching the land. (These cases are marginal)  The headline rule is that it used to be called privaty of estate, nut is now on a statutory footing in section 3

3.— Transmission of benefit and burden of covenants. (1) The benefit and burden of all landlord and tenant covenants of a tenancy— (a) shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and

(b) shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them. (2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee— (a) becomes bound by the tenant covenants of the tenancy except to the extent that— (i) immediately before the assignment they did not bind the assignor, or (ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and (b) becomes entitled to the benefit of the landlord covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises. (3) Where the assignment is by the landlord under the tenancy, then as from the assignment the assignee— (a) becomes bound by the landlord covenants of the tenancy except to the extent that— (i) immediately before the assignment they did not bind the assignor, or (ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and (b) becomes entitled to the benefit of the tenant covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises. (4) In determining for the purposes of subsection (2) or (3) whether any covenant bound the assignor immediately before the assignment; any waiver or release of the covenant which (in whatever terms) is expressed to be personal to the assignor shall be disregarded. (5) Any landlord or tenant covenant of a tenancy which is restrictive of the user of land shall, as well as being capable of enforcement against an assignee, be capable of being enforced against any other person who is the owner or occupier of any demised premises to which the covenant relates, even though there is no express provision in the tenancy to that effect.

(6) Nothing in this section shall operate— (a) in the case of a covenant which (in whatever terms) is expressed to be personal to any person, to make the covenant enforceable by or (as the case may be) against any other person; or (b) to make a covenant enforceable against any person if, apart from this section, it would not be enforceable against him by reason of its not having been registered under the [Land Registration Act 2002]1 or the Land Charges Act 1972. (7) To the extent that there remains in force any rule of law by virtue of which the burden of a covenant whose subject matter is not in existence at the time when it is made does not run with the land affected unless the covenantor covenants on behalf of himself and his assigns, that rule of law is hereby abolished in relation to tenancies.

Who Bears the Risk of Tenant Default (who takes the burden if the rent is not paid)  It is the tenant who must pay the rent, and if he does not, then who takes the burden?  Landlords look to other people to bear the risk of the tenants default:

The Contractual Principle, does not act as the saviour in this case:  Contract law has a different kind of privaty- privaty of contract  If you take that assignment example, there is still the principle of privaty of contract

Pre-1996 Leases: Assignment- You Could get out of Contract by Assigning:  The privaty of contract principle says that the tenant has entered into an obligation for the period of the lease, and there is a contract between L and T, and therefore the contract says they must observe the covenants in the lease for this period The Period of Contract Relationship (you cannot get out of a contract just by assigning)

o The contract lawyer will say that you have entered into that obligation for the period, there is no getting out of the contract by assigning premises; you’re still liable, because of the privaty of contract principle, even after you assign o Assigning isn’t an excuse, and both lawyers and landlords say this o The landlord will look around for someone to bear the risk of the tenant not paying

With pre 1996 Leases, this Logic was Allowed  The contracting tenant before 1996, remains liable even after the assignment, which was the consequence of privaty of contract principles, on the basis of privaty of contract  It was possible for the tenant to get the money back, for example if the assignee did not pay, the tenants obligation was just to recover the rent and bear the risk of default  This was covered by a series of indemnities that could be covered by the original tenant against wither the immediate assignee, or the holder of the lease at the time of the breach

The Tenant can Recover the Money from the Assignee under the Following Principles: Schedule 12 of the Land Registration Act 2002- There is a Contractual Indemnity Implied into Each Contract:

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The Statute, latterly being Schedule 12 of the Land Registration Act 2002, there is a contractual indemnity (insurance) implied into each contract of assignment

Moule v Garrett (1872): The tenant can recover from the holder of the lease at the time (a quasi-contractual indemnity); the claimant can therefore recover the loss through the contractual indemnity

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The common law rule in Moule v Garret, which is called a quasi-contractual indemnity, allows T to recover from the holder of the lease at the time of the breach. So if there had been two assignments, from t to a, and a to b, and it was b who broke the terms of the lease.

It seems just that the tenant can recover the money from the assignee, but is impractical, because if the assignee had the money, they would have given it to the landlord in the first place.

Where you have multiple assignments, the tenant may therefore be able to recover the loss through the contractual indemnity.

Post- 1996 Leases Reform of Post Assignment Liability The Landlord and Tenants Covenants Act 1995 tried to Abolish Post Assignment Liability 

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In 1995, there was a Reform of Post Assignment Liability, in the Landlord and Tenant Covenants Act 1995. This act did not, abolish privaty of contract What it did however attempt to get rid of, was the consequence of privaty of contract, and the fact that the original tenant could remain liable post-assignment With the volatile commercial market of the 1980’s, problems arose

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The Law Commission, in Report 174 in 1988, said they would take the view

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that post-assignment liability be abolished, and that the landlord should take the risk in his business like everybody else does What happened in response to this was that a number of landlords organisation pulled back this principled reform

reform  no post-assignment liability – s5 LT(C)A 1995

The Problem is the Post-Assignment Liability on the Privaty of Contract, of the Original Tenant after Assigning to A

Once you Have Assigned, You are No Longer Liable: The Principle Reform- The Principle Abolition of Post Assignment Liability is in Section 5 of the Landlord and Tenants Covenants Act   

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In the case of a lease contract, once you have assigned, you should not be liable anymore (although there are certain exceptions) These exceptions are called in the act ‘excluded assignment.’ If you assign in breach of a term in this lease, you should not be able to exclude your liabilities Most believe that the liability of the tenant should cease with the tenants occupancy, and that principled reform, is contained in Section 5 of the Landlord and Tenant Covenants Act 1995 Therefore, section 5 is ‘no-post assignment liability’

5.— Tenant released from covenants on assignment of tenancy. (1) This section applies where a tenant assigns premises demised to him under a tenancy. (2) If the tenant assigns the whole of the premises demised to him, he— (a) is released from the tenant covenants of the tenancy, and (b) ceases to be entitled to the benefit of the landlord covenants of the tenancy, as from the assignment. (3) If the tenant assigns part only of the premises demised to him, then as from the assignment he—

(a) is released from the tenant covenants of the tenancy, and (b) ceases to be entitled to the benefit of the landlord covenants of the tenancy; only to the extent that those covenants fall to be complied with in relation to that part of the demised premises. (4) This section applies as mentioned in subsection (1) whether or not the tenant is tenant of the whole of the premises comprised in the tenancy.

Landlords and Tenants Can However Contract out of the Reform  

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This is what you get with the guarantee agreement under section 16 This agreement was not in the original Law Commission Proposals, this was added as a part of landlords lobbying, and it is now possible, where the landlord controls assignment , be it through an absolute or qualified covenant, then it is possible for the landlord to impose, as a condition of consent to assign, a requirement for the tenant to enter into an agreement with the landlord guaranteeing a performance of the immediate assignee The best way to do this is to stipulate in the lease that you need the landlords permission to assign, and it may be made conditional on entering into a guarantee agreement

Can Contract so that the Assignee (original tenant still bears the risk of default): Section 19 1 (A) of the Landlord and Tenant Act 1927 Act:  Provided that this is expressed in the lease, then you have an authorised guarantee agreement, meaning that the tenant still has to bear the risk of default  To this extent, it goes back to where we started, with regards to Post Assignment Liability

Section 19 1 (A...