Landlord and tenant law - Rules for passing the benefit and burden of leasehold covenants and enforceability

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Overview

Understanding how leasehold covenants are transferred and enforced is vital in landlord and tenant law and a key part of the SQE1 FLK2 exam. These covenants outline rights and obligations related to property use and maintenance, affecting legal compliance, property management, and relationships between successive owners and occupiers. This article examines how these covenants are handled under UK law, with a focus on the Landlord and Tenant (Covenants) Act 1995, providing essential insights for SQE1 FLK2 candidates.

Historical Context and Legislative Framework

The development of leasehold covenant law in the UK highlights the balance between property rights and land use flexibility. Key legislative milestones include:

Law of Property Act 1925

Introduced to simplify property transactions, this Act established core principles for modern property law, creating a framework for property interests, including leasehold covenants.

Common Law Principles

Before 1996, the privity of contract principle in common law restricted covenant enforcement to original lease parties, causing issues for tenants who remained liable for covenants after assigning their lease.

Landlord and Tenant (Covenants) Act 1995

This important legislation transformed leasehold covenant law by:

  1. Removing privity of contract for new leases (post-1995).
  2. Establishing automatic transfer mechanisms for covenants.
  3. Introducing Authorized Guarantee Agreements (AGAs).

The Act distinguishes between "old" leases (before 1996) and "new" leases (after 1996), each with distinct rules.

Leasehold Covenants Overview

Leasehold covenants are contractual commitments in a lease, imposing duties or granting rights. They shape the landlord-tenant relationship and influence property use.

Types of Covenants

  1. Positive Covenants: Require certain actions.

    • Example: A covenant to keep the property in good condition.

  2. Negative Covenants: Prohibit certain actions.

    • Example: A covenant against subletting without landlord approval.

Benefits and Burdens

  • Benefits: Rights granted by a covenant.
  • Burdens: Obligations imposed by a covenant.

The "Touches and Concerns" Test

To determine if a covenant runs with the land, it must:

  1. Affect the land’s nature, quality, or value.
  2. Influence the way the land is occupied.
  3. Not be expressly personal.

Example: In P & A Swift Investments v Combined English Stores Group Plc (1989), a covenant to keep a shop open during regular hours was deemed to affect the land’s use and value.

Passing the Benefits of Covenants

Old Leases (Pre-1996)

For leases prior to 1996, common law applies:

  1. The covenant must affect the land.
  2. The benefit must be tied to the reversion.
  3. The assignee must have the relevant estate or interest.

New Leases (Post-1995)

Section 3 of the 1995 Act provides:

  1. All covenants affect the land unless stated as personal.
  2. Benefits transfer automatically to the assignee.
  3. No specific wording needed for the transfer.

Example: A covenant for shared garden use in a lease automatically benefits future landlords, enhancing property appeal.

Transferring Covenant Burdens

Old Leases (Pre-1996)

  1. Landlord's Covenants: Burdens pass if they affect the reversion.
  2. Tenant's Covenants: Burdens pass with the leasehold estate to successive tenants.

New Leases (Post-1995)

Sections 3, 5, and 6 of the 1995 Act state:

  1. Landlord's covenants automatically transfer to the assignee.
  2. Tenant's covenants transfer to the new tenant.
  3. The original tenant is released from liability upon assignment, subject to AGAs.

Authorized Guarantee Agreements (AGAs)

AGAs allow landlords to require outgoing tenants to guarantee performance. Key details:

  1. Lease must allow AGAs.
  2. Limited to the first assignment.
  3. Ends when the assignee reassigns.

Example: A tenant assigning to a less stable entity might provide an AGA, ensuring rent payments are covered for a set period.

Enforcing Covenants

The enforceability of covenants depends on their nature and the relationship between parties.

Positive Covenants

Historically, positive covenant burdens didn’t transfer at common law. In landlord and tenant law:

  1. Old leases allow positive covenants against successors due to privity of estate.
  2. For new leases, the 1995 Act ensures all covenants run with the land.

Restrictive Covenants

Under Tulk v Moxhay (1848), restrictive covenants are enforceable in equity if:

  1. The covenant is negative.
  2. Intended to run with the land.
  3. The enforcer has an interest in the land.

Statutory Impact

The 1995 Act changes covenant enforceability:

  1. Eliminates the distinction between positive and negative covenants for new leases.
  2. Treats all covenants as running with the land, unless stated otherwise.

Example: A covenant requiring contributions to common area upkeep is enforceable against future tenants under the 1995 Act.

Exam Relevance

Understanding leasehold covenant rules is essential for SQE1 FLK2 candidates:

  1. Old vs. New Leases: Understanding different legal treatments is crucial.
  2. AGAs: Know their use and limitations in commercial leases.
  3. "Touches and Concerns" Test: Key for assessing covenant types.
  4. Enforcement: Navigating enforcement strategies against successors is vital.
  5. 1995 Act Changes: Awareness of reforms and their impact on property management is important.

Conclusion

The transfer and enforcement of leasehold covenants is a complex area in landlord and tenant law. To succeed in the SQE1 FLK2 exam and future practice, candidates must understand:

  1. Differences between old and new leases.
  2. Automatic transfers under the 1995 Act for new leases.